Startable – Healy Jones’ & Prasad Thammineni’s Blog

It looks like there is an interesting discussion starting around the dearth of venture backed IPOs. This is something that the NVCA tried to get rolling a few years ago, just before the financial markets totally blew up. Read “Recommendations to Restore Liquidity” on the NVCA’s site.

The current discussion was sparked by a WSJ opinion piece.

Here is a good piece by Dan Primack of Fortune – he basically doesn’t think Sarbanes Oxley is the cause of the malaise.

Jeff Bussgang was brought into the fray and is pretty sure that regulation is killing the IPO market.

I’m a little more nuanced. I think SOX is just one piece of the problem. I’m not sure fixing it will suddenly unleash a ton of IPOs. I think it will help, but not a ton. I see a lot of problems that the NVCA identified, mainly around the fact that small companies don’t have enough ibanking options – because ibanks can’t make money taking companies public any more. I’ve heard rumors that this is because there is no $ trading for your clients – supposedly the electronic exchanges kicked the butt of the banks, plus some sort of regulation drove down the commissions that they can charge. IDK, just what I’ve heard. So it seems like it’s hard to get shares in the hands of institutional investors. Plus we are missing all those wonderful retail day traders who drive up the price of everything. And, since many large VC backed, private, companies can use places like SecondMarket to sell shares and get liquidity, why even bother to go public anymore??

Anyways, let’s hope this discussion goes somewhere and doesn’t get interrupted by a major financial crisis like it did last time.

Eric Ries has a good post on MBAs and startups. My favorite paragraph is:

General management is supposed to be orderly, “strategic” and mostly calm. I have seen founders replaced because their style seemed too chaotic, even though what’s really happening is that they are operating at startup speed. Pivots are disorienting, but necessary. Except when a startup is busy “pivoting” all the time, running around in circles. That’s a waste of time. How do you tell the difference? General management doesn’t have a good answer. As a result, founders get removed prematurely or even entirely exiled.

Eric goes on to explain that he sees a disconnect between the entrepreneurship courses at most business schools and the actual, current best practice at startups. I think he is correct – but isn’t there is also a lag between most academic courses? Anyways, the real point here is that Eric is not just complaining, but is also trying to be part of the solution. He will be an EIR at HBS this year, and he goes on to talk about how he hopes to bring the idea of the lean startup to entrepreneurship teaching. Pretty cool.

Startups vs Bubbles

I just saw a cool Tweet by Ariel Diaz, a Boston-area startup executive.

The link leads to a post entitled “The End of the College Textbook as We Know It?” There is a pretty eye-catching chart that implies there is a bubble in the textbook market:

If a chart like that doesn’t make you want to start a company you aren’t an entrepreneur!

Someone should chart various assets/commodities/services/etc against the CPI. Anywhere there is a chart where inflation of the item is outpacing the CPI by 2x or more is potentially fertile grounds for innovation. I’d like to dub this the:

Inflation Innovation Ratio

Startups can create value by “disrupting” a market – providing a better service/good through the power of technology. If a startup can offer a superior service at a lower price, then both the end consumer and the startup can capture some of the “rent*” extracted by the current players in the industry. Growing a business by shrinking a market.

One caveat I would add is that there are industries where inflation is happening for reasons that a startup may not be able to attack – such as government regulation. I’d hope that other reasons, such as problems in the distribution chain, could be overcome by the power of the internet to disrupt.

*despite having studied way too much economics the term for the lost consumer utility in a monopolistic market escapes me…

Hiring talent is one of the most challenging things facing a startup. Hiring the best programming and technical talent is even harder. Taking data from The Entrepreneurs Census, which I wrote about yesterday, we can get a glimpse into how hard it is to hire programmers in Boston, Palo Alto and New York.

It may be easier for startups in Boston to hire programmers than startups in Palo Alto

Startups in Boston may have a better time hiring programmers, as measured by how long it takes to fill an open position and by the percent of startups that have open positions.

Hiring Programmers in Boston vs Palo Alto

The two thirds of startups in Boston were able to fill open positions in under three months – verses about half in Palo Alto and 63% in New York City. (OK, the difference between New York and Boston is probably statistically insignificant.) Three months is a lifetime for many software and web startups; being unable to add a critical developer in that period of time could derail product launches and critical feature updates. Heck, a lot of startups are out of business in 6 months to a year, so if you can’t fill your positions by then who knows if it’s even worth still looking…

The data collected by the study would fit with anecdotal evidence that I have heard from friends starting companies in Palo Alto. Many people have told me that it’s impossible to find talent in the SF Bay area… especially at a reasonable price. I know it is hard to find good people in Boston as well, but this study would suggest it is a bit easier here than in Palo Alto.

Compensation of programmers in Palo Alto is higher than Boston and New York

And of course the other important part of the equation is how much it costs to hire talent. From the study:

Compensation for Programmers Palo Alto Boston

Doing some really crude math, it looks like programming talent in Palo Alto is 13% more expensive than Boston and 36% more expensive than New York. (I very roughly calculated that the average comp in Boston was $66.85k, Palo Alto 75.65k and New York $55.75k; I assumed the comp for each salary range was in the middle of each range for my calculation. Again, the numbers are small so the difference may not be statistically significant.)

The other data point in the above compensation chart that I’m trying to get my head around is low end and high end. The high end is easy enough to understand; you have to really pay up to get good talent in some cases in Palo Alto (and NYC). This doesn’t surprise me too much, but it is interesting that the high end is zero for Boston. Maybe due to a small sample set? I just don’t know enough.

The low end is also pretty intriguing. I’d bet that most of the sub $50k programmers are working for equity. It looks like regions OTHER than Boston have more programmers working for a pittance, trying to get equity. Does this mean that Boston has less of a founders culture???

Pretty ironic and not really very important, but Gmail decided to add in this little advertisement to the top of an email conversation that I’m having with someone about this post… it looks like Google is hiring developers in Boston!

I have just re-read for the third time Steve Blank’s awesome post on business plans vs. business models. I have been thinking about something writing along a similar idea for quite a while, but obviously don’t have the same level of experience as Steve Blank! However, since I’m currently living this I feel like I can justifiably write about it.

My startup, OfficeDrop, doesn’t have the traditional 30 to 60 page word processor written business plan. We’ve written a lot down, but haven’t created a traditional 60 page business plan to supposedly guide our growth. And the writing we do do is usually done in a slide deck.

Steve writes about capturing a business model on slides. We’ve sure got a lot of slides! They are a good way to put our thoughts together and communicate them with each other and our investors.

I think the most important document in our startup is our financial model, which is build in a spreadsheet. It “memorializes” our assumptions and contains our results from operations. (I say memorializes in quotes because our assumptions change pretty quickly.) I call it our “business model.”

I prefer spreadsheets for business models, probably because of my financial background. I like the ability to put the important assumptions into a “living” sheet, so that when an assumption is changed the entire output changes and then compare actuals to our key assumptions. You don’t quite get that flow in a PowerPoint presentation or a Word doc.

We need to know how much experimenting we can do with our current pot of cash. We also need to carefully monitor the cash we gain from our revenues. As the marketing guy, I also need to understand the cost of acquiring a customer and how much they are worth – (stuff like churn rate and average monthly revenue per customer really matters to me.) A spreadsheet allows me to automatically update at the end of each month and compare against the assumptions. Oh yeah, and understanding the initial cash flows of our startup is pretty important. Spreadsheets do that, not Word docs or PPT.

Spreadsheets do have problems capturing some of the pivots a startup has to do. For example, we have just release a free desktop scanning software download that helps get paper scanned directly into Google Docs from most standard scanners. This is a pretty big departure with our current model of providing subscription scanning services and online document management. But it is a test that plays off our all of the technology we developed and all our experience in cost effectively scanning small batches of paper documents.

What is the problem with a spreadsheet as the basis for a business model during a pivot? Well, I think we understand the costs of launching our desktop software, which are captured in the spreadsheet. But the upside is a lot more complicated. The issue I find when introducing a potentially major change in a business model captured in a spreadsheet is that it takes a freaking long time to create a legitimate Excel model vs. a legitimate potential strategy captured in a PowerPoint slide. But as we test our assumptions and generate data, I’ll be sure to fill out our spreadsheet and see where the chips are falling.

On a side note:

I do think business plans have a purpose and could be useful for a traditional set of startups. If I was launching a restaurant or a law firm, I’d probably write a business plan. Obviously I like to write, and putting things down in a structured business plan could be helpful when business innovation is less important than finding a way to make an existing business concept work. The nice thing about a lot of the business plan templates floating around is that they are a bit like Mad Libs for starting a business. But I’d still build a financial model spreadsheet!

Great post by Mark Suster on when, if and how startup founders should be allowed to take money off the table before their starup has reached a real exit. Mark’s basic thesis is that it is sometimes a great idea for startup founders to sell some of their equity to their investors. He discusses his own experiences and suggests how he would have managed his own companies differently and/or not sold them when he did. His post is well reasoned and is worth reading. He does suggest a few scenarios where this makes sense and should be allowed, including the founder having been with the company for a certain number of years, limiting the $ amount to something reasonable, etc.

What I’ve seen is that early-stage VCs with big funds are not against buying common stock from founders, when the startup is doing well. As I’ve mentioned in my startup valuation post, VCs are always thinking in terms of their percentage ownership. When the company is doing great and VCs with deep pockets are already investors and want to increase their ownership, so if that means potentially buying stock from founders you may be in luck.

One of the other funds I worked for, Summit Partners, made a living off of buying stock from founders. It worked pretty well, since Summit liked investing in companies that were profitable and growing – and hence didn’t really need traditional venture capital to grow the business. Founder liquidity was the general excuse Summit used to get into some great companies.

I’m not at all against the idea of founders taking some money off of the table, provided the company is doing well and provided they continue to own enough of the company to continue to care about its success and work hard to keep it growing. I do think this would be a real advantage of selecting a larger sized fund as your initial venture capital investor. Smaller investors may not have the additional cash reserves available to both fund some liquidity and also continue to have enough in reserve to fund the company’s growth.

Properly supporting and working with the CEO is the most important action a venture capitalist can take after funding a startup. When I was a VC, I was very impressed with how often the partners I worked with would communicate and brainstorm with their portfolio companies’ CEOs. Part of the VC’s responsibility, and the board of directors’ responsibility, is to perform annual reviews of the CEO’s performance.

The board evaluation of the Chief Executive Officer

The CEO position of a startup is pretty lonely sometimes. Just because a CEO is in charge of a business doesn’t mean that his/her professional development is over – but getting the right feedback and guidance that can help the executive grow professionally can be challenging. Getting effective feedback from employees can be hard, since it is not always easy for them to speak “negatively” about their boss to their boss. And of course, your employees and co-founders are probably pretty busy trying to grow the company. Interactions with the board can be enlightening, but usually focus around discussions of strategic imperatives and operational milestones, not the CEO’s professional development.

While it is certainly the CEO’s own responsibility to try to grow as a professional, it is up to the board to provide the critical feedback and development. Some of the partners I worked took their CEO’s growth very seriously and ran rigorous CEO evaluation processes from the board level. This is a huge amount of work. Sometimes my partner would run the process, other times another VC on the board would, and sometimes it would be the independent director. This is not the same as the “hit this revenue number and these operating metrics and your bonus with be $XYZ” that is put together by the compensation committee. This is really a process intended to help the CEO become a better leader and manager.

I only got to see this a couple of times; I wasn’t a VC long enough to run through this cycle more than that. I’m sure that I am missing some of the important nuances (heck, maybe even some of the important macro-themes) of a CEO evaluation.  However, from what I could tell this is what happened:

The CEO was informed by the board that one of the directors would be running a review process. That director would inform the CEO what the expected timing of the evaluation would be. The end product of this review would be a discussion with the CEO as to his/her performance for the previous year against the company’s stated goals and the CEO’s developmental goals from the previous year, critical feedback and the setting of additional goals/areas to for improvement for the following year. That director would also have a private conversation with the board alerting them as to his/her findings in this review.

To prepare for the review evaluation forms were distributed to each member of the board of directors (I’ve put an example of this form below – I’ve embedded it with Pixily’s document sharing/embedding feature). The director in charge of running the review would collect these forms and have conversations with the other members of the BOD as needed. The director would also do the same with critical members of the management team, such as the CTO, Sales VP, etc.

The evaluation focuses on:

1. The company’s previous year’s goals and performance vs. those goals
2. The company’s near and long-term prospects
3. The CEO’s character, as demonstrated in the past year
4. The CEO’s ability to develop and articulate a vision for the company
5. The CEO’s leadership of the company
6. The CEO’s leadership of the board of directors
7. The CEO’s management of the executive team
8. The CEO’s ability to recruit talent into the company
9. The CEO’s decision making skills
10. The effectiveness of the CEO’s operational style/skill-set
11. Top strengths and weaknesses of the CEO
12. Critical advice from the BOD and team on how to improve management skills and lead the company

I’ve put my own version of this CEO evaluation form into Pixily and embedded it below. This is not a perfect copy of what I’ve seen other VCs do – it is my own attempt to make a more clear, less overlapping review form. I’d love comments on it, as I’d like to leverage other people’s experiences to make up for my own lack of experience and then improve the evaluation form…

After collecting all of this feedback, the director would then create a master evaluation form that would be shared with the CEO during an evaluation. Read the rest of this entry »

Here is a great link to “50 Essential Strategies For Creating A Successful Web 2.0 Product” by Dion Hinchcliffe. I’m about half way through the list, but some of the points are pretty thought provoking. Dion is trying to be quite comprehensive, so he has the standard “release early and often” advice, but also has more nuanced suggestions such as “Search is the new navigation, make it easy to use in your application” and “The link is the fundamental unit of thought on the Web, therefore richly link-enable your applications.”

This is a solid read on Web 2.0 strategy/design execution. I’d recommend that even experienced web executives take a look at the list. Even if you already know everything he mentions it is still a well written refresher on what makes the online environment so special.

In how to choose the right business idea, I introduced the concept of the Idea Funnel.  Like me, you could use the idea funnel to narrow down a bunch of startup business ideas into few viable ones. I talked about stage 1 of the due diligence process, namely, “Is the idea viable?”. In this post, I will present the second and final stage, namely, “Can I execute on it?”. 

Stage 2: Can I execute on the business idea?

In stage 2, you are focused on things that you need to successfully take your business idea to the market. Here are the few things you need to have:

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Last week, I gave a talk on “Starting a Business upon Graduation”  to a group of Harvard Business School students. In addition to sharing my experiences in starting Pixily right after graduating from Wharton, I shared my approach on how one should zero in on a viable business idea. 

I approach the idea development process similar to how one approaches sales leads within a sales funnel (see below). I start of with a number of rough business ideas and put each idea through the due diligence funnel. Some make it through the funnel and some don’t. Ideas that make it through the funnel are more viable and have a higher chance of being successful.

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