Startable - Healy Jones’ & Prasad Thammineni’s Blog

Entrepreneurs need to know more about their industry than the VC they are meeting. I’m sure this sounds pretty obvious, but you might be surprised at the number of times I’m in a meeting and I somehow know more about the companies that have failed in a space than the entrepreneur who is pitching me an idea. It’s really bad when the idea is exactly the same business plan as a company that crashed a year or two before - and the CEO hasn’t heard of the company and can’t imagine how or why they might have failed. Or that I happen to know that a major player has recently launched a competitive product and the CEO doesn’t…

I’m not sure how this happens, since like most young VCs I don’t really know that much and I don’t consider myself particularly knowledgeable in most areas. Even if I spend 1/3 of my time in particular industry (the amount of time I can reasonably focus at any given time on an industry given my other responsibilities) an entrepreneur, spending 100% of their time on a space should know much, much more than me.

I guess there are two potential issues that could cause a venture capitalist to know more than an entrepreneur:

1. The entrepreneur hasn’t done enough research or doesn’t know the space well enough. This leads to some pretty disappointing conversations. 
2. The venture capitalist doesn’t know as much as they think they do. This means you are dealing with a blow-hard VC… and if you think they know it all in a pitch, wait until they are on your board!

There is the possibility that the venture capitalist knows more than the entrepreneur because the VC used to be a good entrepreneur in that space. In this case, the entrepreneur should be very aware of the venture capitalist’s background before walking into the meeting. The entrepreneur really really needs to be able to articulate the market need, product value proposition and have good information on the market’s ability to pay.

If you find yourself in this situation, the only other advice that I could give if you are in this situation is to not seem defensive but to use the meeting as a learning exercise. If you seem like you are going to be a fast learner, and you hit the 3 points in the above paragraph, then you may still have a chance to convince that VC to take a serious look at your business.

Is Facebook on its way to becoming the next Yahoo? Once again, the fastest growing segment on the service is older users. Inside Facebook is reporting that “The fastest growing demographic on Facebook is still women over 55 - there are now nearly 1.5 million of them active on Facebook each month.”

Facebook audience growth - source: InsideFacebook.com

It makes sense that FB has saturated the younger demo, so growth should have to come from older demographics. I find it interesting that women are leading the charge, but I’d imagine it is because they are seeking to keep in touch with their children.

Here are some questions I have around how the greying of Facebook will change the service:

1. What will this mean for how families communicate? I’d imagine that family conversations have different needs than than college buddies posting pictures at the keg party. 
2. Will kids want to shield their parents from some of their activities? Probably. How can this be achieved without having them leave Facebook for a more private service?
3. Is this going to drive smart phone usage by older adults? As in, will they want to access FB from a mobile device?
4. Will different FB apps become popular? I can’t imagine that too many adults want to give each other virtual drinks. By adults, I mean people in their 50’s. People like me definitely want to give each other virtual drinks.
5. Advertising - This seems to continue to be FB’s preferred revenue model. Older users tend to be richer users. Will a different set of advertisers migrate to the system? I mean, will anyone start advertising on Facebook? Hard to say. 

Would love readers’ opinions.

Here are two links on raising venture capital that might interest you:

Spark Capital announces new seed program

Start at Spark

Spark, one of the better Boston area early stage internet investors, has announced the formation of a new seed funding program called Start@Spark. The goal of the fund is to promote very early ventures in Boston and New York. Spark is known for backing several hot internet properties, such as Twitter, KickAps and tumblr. The team over there is smart and quite connected. I had a quick email exchange with one of their investors on the program – they are looking to put about $250k into businesses and are hoping to back founders who can execute well off of their idea. I love the idea of venture funds doing seed deals (most of my 1st investments @Atlas Venture have been seed or seed sized investments.) It’s a great way to help an entrepreneur prove out an idea while being an appropriately conservative investor. Let’s hope the Spark team can find some great local talent!

Brian Shin on getting venture funding

Brian asks the question about your startup: “Are you a chicken or egg?” This is a pretty humorous analogy about a serious topic. How does a startup get enough critical mass/development to raise capital in this environment when it needs capital to actually build that mass? The classic chicken and egg problem! Brian succinctly points out that only chickens are getting funded these days, as investors are looking for real proof points before making investments in web properties. Key take away – have focus on your best idea and bootstrap the execution anyway you can. Check out his post.

I’m not sure how I missed it, but Xconomy did a great piece on the technology industry in Massachusetts. Wade Roush, the author, pokes a bit of fun at the inferiority complex that Boston has vs. the West Coast. He then suggests that a plan to commission a study to come up with a new brand name for the region is a lame way to help drive innovation in Boston. 

Wade then lists 5 ideas that he thinks can help create more innovation in the area - and they make a pretty good list. I’m impressed, and since I used to live and work in tech finance in the Bay area I think I’m entitled to an opinion (you may have a different view of my right to have an opinion…)

I really like Wade’s number 2, “Upgrade Boston’s transportation infrastructure…” If there is one thing that Boston has over the Bay Area is that technology companies are actually based IN Boston/Cambridge. Boston is much more fun to live in vs. a suburb of San Jose. A lot of young programmers would probably really love their lifestyle here - particularly if they knew they could easily commute to work on public transportation and live and work in a city. Have you ever gotten off work at 11pm in Palo Alto? It’s pretty boring. But in Davis Square - well, that can be pretty fun.

Boston also doesn’t feel that welcoming because it is so damn hard to get around here. Why don’t half the streets have signs? Are we just supposed to magically know where we are? For some reason most other states can afford to put up signs. Maybe New England should try this. People want to live where they feel comfortable. I don’t think that a person should have to have grown up in a city to actually know their way around. 

Ok, well, this turned into a bit more of a rant than I anticipated. The end position is that the Boston area is a great place to build your startup, and there are some pretty easy things that can be done to make it even better. The area should play to its strengths - great educational institutions, lots of vibrant young people and yes, venture capital.*

Read the Xconomy article and let me know what you think.

*I realize a ton of people think it is impossible to raise VC in New England. It is a bit harder than the West Coast, but raising venture funding is really really hard regardless of where a company is based. It’s easier here in Boston than 99% of the world.

Another tip for the entrepreneur pitching their business to venture capitalists. This pitch tip is for startups doing the infamous phone pitch…

VC Pitch Tip #8 - If you are going to use WebEx to during your venture presentation, send the slide deck over email ahead of time and have a direct phone line available

WebEx and the like are great, but there are some dangers. Recently a partner and I spent 15 minutes waiting for a company to set up their WebEx. Unfortunately we only had an hour to for this conversation, so the entrepreneur ended up being a short-changed.

Don’t let a technical issue waste your valuable time with a VC! You’ve only got a limited amount of time to impress. By getting a softcopy of your presentation in the hands of the VC ahead of time you not only give the investor a chance to prepare for the conversation but you also give yourself the option of getting the conversation started without wasting any time.

(Note that I’m not ripping on WebEx - likely this technical issue was not with their service but rather some sort of a problem on the entrepreneur’s side… wait, now I look like I’m making fun of an entrepreneur, that was not my intention!)

When is WebEx most useful? When you are going to be doing a demo. VCs love demos! In fact, I may make that my next pitch tip…

There has been way too much chit chat recently about how Twitter doesn’t have a business model or that Twitter is going to take on Google. I’d be really annoyed of it all if I wasn’t so busy trying to juggle all of my tweet reading with my actual work. My thoughts are that these are the wrong questions to ask about Twitter. I’m pretty sure they folks at Twitter and their investors will come up with some legitimate revenue generating ideas, and I’m also rather convinced that Twitter isn’t going to put Google out of business. I think the real question to ponder is this:

Can Twitter make money without ruining the startups who are building off of the Twitter platform.

I’m talking about the Tweetdecks and Twhirls of the world. These companies are quite dependant on the Twitter platform, much like many Facebook application vendors were crushed by FB’s capricious ways. A meaningful % of Twitter users use an outside application to do their tweeting (see a report from Hubspot to learn more -Hubspot is the source of the chart below.)

Like it or not, Twitter is not the preferred interface for many Twitter users. I don’t think that I could use Twitter without TweetDeck; it would be information overload. (I wish I had TweetDeck for my email - anyone working on this? Don’t say Xobni - my computer didn’t like it and it was a pain to uninstall.)

How can Twitter create revenue without damaging these users experiences and destroying these application providers? Read the rest of this entry »

Julien Wallen has just put out a blog post on the VC fund raising process that highlights some of the better blog posts by fund raising experts.

Forrester, as mentioned in Adweek, recently found that 75% of advertisers have budgets of less than $100k for social media in 2009. However, the study also suggests that just over 50% of advertisers intend to increase their spend on social media this year, while only 5% will decrease it.

Startups seeking venture financing need to realize that VCs are pretty skeptical these days around using destination social media sites with ad-driven business models. Advertising focused startups that are succeeding in raising financing are like Quattro Wireless (just raised $10M) - infrastructure type plays that are providing platforms or tools used to advertise across multiple sites.

Nivi and Naval over at Venturehacks have a great presentation on what it takes to become a successful angel investor. (I was going to say what it takes to begin a successful career as an angel investor, but angel investing isn’t really a career - it’s more what you do once you’ve had a successful career!)

While the presentation is directed at high net-worth individuals who are investing in small companies, I think that enterperneurs may also gain something from listening to the presentation.

1. Naval speaks for a bit on how angel investors should source new deals - reverse engineer that to “as an entrepreneur, here is how I can find an angel investor.” 
2. They talk about the sorts of materials angel investors should ask to review - a 10 page pitch deck and a simple elevator pitch, plus a product demo if possible. Now you know what to prepare for an angel investor

If you are looking for funding I encourage you to spend a bit of time on the Venturehacks site - the guys know what they are talking about!

Broadstuff (a blog that I follow) has a good summary of a recent McKinsey article on the differences between how technology winners and losers navigate a recession. The key take away, besides the fact that technology spending falls really fast during a recession, is that successful technology companies are smart about how they cut SG&A and thoughtful on core vs. non-core investments. I’ve listed the McKinsey findings below (as quoted in Broadstuff); see Broadstuff’s site, linked above, for a more detailed explanation of each.

Successful technology company tactics during a recession

1. Manage working capital aggressively
2. Rationalize SG&A expenses and overall headcount
3. Make frequent, significant acquisitions (later)
4. Divest non-core assets early in the cycle
5. Maintain a stable level of leverage relative to equity

An important point to note is that for #2, the rationalization of headcount, successful companies actually slightly increased their headcount expenses (relative to their loser technology company competitors) during the recession.

This speaks to the need to focus on what works, get the right team on board and focused on the goal and get rid of non-core/distractions. This is very similar to what I am hearing board members say to portfolio company executives right now - figure out what the market needs now/what will be needed and cut out any other projects that are not aligned with this core task. Focus is a good thing.

It’s tough for me to give solid advice during these times. I’ve only lived (during my working career) through the dot.com downturn, and the current recession feels more dangerous/more wide spread. I welcome any suggestions/advice from the Startable readership on how smart technology executives navigate this market.