Peak Pitch 2009

I had the pleasure of participating in the 3rd Annual Peak Pitch event at Hunter Mountain yesterday.  Peak Pitch takes the VC-Entrepreneur mass dating ritual to a new level by incorporating a ski mountain; think of it as speed dating for VCs and entrepreneurs.  The capital providers and seekers meet at the chair lift, the VCs adorned in green bibs, the entrepreneurs in blue.  On the 5-6 minute chair ride up the hill, the entrepreneurs pitch the VCs saving the last minute or so for questions.  The VCs are given fake money, $5M Peak Pitch Pesos to hand out at their discretion.  Some choose to scatter the money, $1M at a time.  Others attempt to control the outcome by giving all $5M to one company (you know who you are).  I tend to choose 2-3 companies to split the capital.  If you were to plot the process of each VC against the stage, focus and mandate of the funds they represent, you would expect to see the later stage folks dividing the capital among one or two companies and the early stage folks scattering.  I had a chance to observe the process employed by the various VCs and I found that their allocation decisions were completely contrary to the mandates of their respective funds.  There really isn't anything to read into there as the money is pretend and we haven't done any due diligence etc.  I just found it interesting.

Thursday night all of the capital providers and attorneys gathered for the annual investors dinner.  Each year, the dinner evolves or degrades into long night of drinking.  We tend to start the night with wine or beer.... by the end of the night the drink orders stray toward single malt scotches, Grey Gooses and shots of various spirits.  Conversation topics had a similar trajectory; we started by focusing on our friend Scott Murphy's (a fellow upstate NY VC) bid for Kirsten Gillibrand's vacated House of Representatives' seat.  By dinner, we were on to more sophisticated topics; for example, my table had a fascinating 15 minute conversation about ice fishing.  At the end of the night, we were speaking about weight lifting- to be specific, bench pressing.  I know, a bunch of VCs and lawyers talking about benching........ 

Friday morning we gathered at Hunter Mountain for pitching and skiing.  This year, we had 28 entrepreneurs so at the bottom of the mountain next to the chairlift they gathered and eagerly stalked the VCs as they finished their runs.  I probably only heard 12 of the 28 pitches.  The weather was pretty lousy- high 40's, rain and wind- so I only made about 8 runs.  Good times were had by all despite the weather.  Some interesting companies, good connections lots of fun.  Many thanks to my friends at High Peaks for hosting the event and Duane Morris, Nixon Peabody and Phillips Lytle for their sponsorship.

That's about all I have on Peak Pitch this year.

License vs Manufacturing In House vs Contract Manufacturing

Many companies struggle with how best to commercialize their technology.  I touched on value chain a bit in a prior post and will take the time to really expand on the topic in a later post.  If the root of your business is a technology that manifests in the form of a product, at some point you have to make some difficult decisions.  Do you manufacture in house?  Perhaps seek out a contract manufacturer?  Strategic partnership?  Perhaps you should stay out of the manufacturing business altogether and simply license the technology?  These are indeed difficult questions to answer and the right path is different for each business.

Rather than attempt to answer the question I'll just point out some of the factors that might impact your decision.  Many entrepreneurs are either scientists, engineers or technologists.  Most in that group lack significant experience outside of their specific area of expertise.  For example, very few have experience leading complex manufacturing processes.  In that light it is quite easy to see why many choose to license their technology rather than manufacture.  Many of these inventors simply enjoy creating new and exciting technologies.  When you add the capital requirements to fund the requisite facilities and equipment, their decision to allow others to assume the risk seems sound.  Of course, the downside of licensing rather than manufacturing is the significant reduction in upside potential.  A lot of units have to be sold for the inventor to realize a significant return and for the most part, the inventor has very little control over the effectiveness of sales outcomes.

As I mentioned, building out a manufacturing facility can be a weighty endeavor for a start-up.  The entrepreneur is forced to raise significant capital, probably give up a large percentage of their business, buy or lease a facility, source expensive machinery, build out a manufacturing team, create a supply chain and build distribution channels.  In so doing, the entrepreneur takes on significant risk but if they are able to master the process, they alone (include their investors in the collective "they") realize the return.  In this scenario they take on substantially more risk than in the prior scenario to potentially realize a much larger return.  But what happens if/when output struggles to keep up with demand?  Expansion is an option; build, buy or lease a new building, source more equipment, hire additional personnel etc.  Or, the entrepreneur could look to contract manufacturers to accommodate the incremental demand.

Contract manufacturing is certainly a viable option to meet demand exceeding the production capacity of the facility.  However, why not explore this option before opting to build in house?  Outsourcing manufacturing can allow the company to realize economies of scale while focusing internal resources on core elements of their business.  For example, in the prior scenario, rather than hire say 15 employees to handle production, those dollars can be redirected.  Perhaps additional sales or marketing personnel would make a larger impact?  The benefits of outsourcing manufacturing are fairly simple: 1. save the capital and human assets required to produce product and redirect them to other core elements of the business 2. realize the economies of scale that come along with the significant buying power and experience of the contract manufacturer.  However, by outsourcing production, you have essentially built your business on top of that of another.  Their errors are yours.  There is a lack of control that can be disconcerting.

Again, there is no universal answer.  I don't profess to know all of the key attributes.  I have simply attempted to present a few of the pertinent elements.

Classmates, Facebook and Marketing Myopia

For a 35 year old, I spend a fair amount of time on Facebook.  I don't tend to play with many of the aps.  Really with a few exceptions, I use Facebook to reconnect with old friends and classmates. That should sound familiar.  The notion of reconnecting with old friends and classmates.  Classmates.com was formed in 1995, almost a decade before Facebook hit the scene in 2004 (they didn't go live with the non-college crowd until 2006).  Even Reunion.com had a two year head start.  So what happened?  Why did they fall asleep at the wheel? Let's explore that a bit.

When I was in college many moons ago, there was a HBR article floating around known as "Marketing Myopia."  Actually, the article is quite a bit older than I but it saw a resurgence in the early 90's.  Essentially, the article challenged leaders to reevaluate just what business they are in and suggested that managers tend to define their businesses far too narrowly.  Essentially, if you are Greyhound, you better know that Coach isn't necessarily your biggest competition.  You aren't in the busing game, you are in the transportation game.  Perhaps your biggest competition is Amtrak.... or maybe Southwest......  

So, where does Classmates.com come in?  Well, social networking is a fairly recent phenomena.  However, the good folks at Reunion had the first best chance to create a huge online community.  Unfortunately, they defined themselves as purely an online medium to connect old classmates and as such, they missed out on the larger opportunity. When web 2.0 hit, they were completely caught off guard.   Users didn't build functional profiles.  There were no messaging capabilities.  They were linked entirely by external email addresses.  As such their users communicated using external email editors.  Where is the stickiness?  Yes they had frequent visitors.  They were the only game in town for years but no one was using Classmates as their homepage.  What business were they in?  What business should they have been in?

Yes, Facebook's success owes quite a bit to the applications created by external sources.  However, they really have built their legacy by creating a community that caters equally to the teens, twenty somethings, thirty somethings and beyond (my 62 year old mother is on the site daily).  Facebook learned very early to push traditional boundaries and challenge early and often the business they are in.

Themes from the PA Trip Part 2

I spent a good bit of time in the last post covering capital; capital requirements, raising capital etc.  Let’s begin this post by covering one last topic related to capital.  A few of the companies I met with asked about agents.  They had been approached by groups or individuals claiming the ability to raise money from angels and VCs and they wanted to know my thoughts.  I should say that since we shut down our fund, I have been approached by no less than a dozen entrepreneurs looking for help raising money.  There must be a nasty rumor floating around that I can raise money.  I find this very funny and I’m sure my former partners would as well.  The empirical evidence suggests that my money raising skills are far from noteworthy.  If my skills were worthy of note, we would have successfully navigated the admittedly troubled waters and actually finished our raise.  So, to answer their question, if you are approached by an agent claiming access to capital, approach them with caution.  My experience has shown that those claiming to be able to raise money seldom can.  The ones that can are too busy raising money to waste their time with cold outreach.

 

Most of the CEOs had yet to settle on a revenue model.  Many frankly hadn’t thought through precisely how they planned to make money.  I have always believed that emerging businesses should constantly challenge their business model, benchmarking off of other businesses with similar characteristics.  I know that some investors get upset when the revenue model they invested in changes dramatically.  Frankly, I think that kind of thinking is myopic and just flat wrong.  An emerging business may change their model half a dozen times or more before figuring out how not to leave money on the table. 

 

VCs see hundreds if not thousands of plans each year.  As such, we have typically seen dozens of plans covering any given space.  The sheer number of businesses seen gives us perspective and allows us to assess where a business lies in the value chain and if they are positioned correctly.  This of course, doesn't make us right but we usually have seen enough similar offerings to at least have an educated oppinion.  This topic is probably best left for another day as it really should at least be a solo post and perhaps a series of posts.  So, I will leave it at this; emerging businesses should evaluate their position in the value chain and attempt to assess if that position is aligned with core competencies.  Several of the firms in PA probably should take a swim upstream/downstream to fully realize their potential.

 

The final observation I’d like to cover related to my PA trip has to do with angel groups and the not so recent trend for them to attempt to be VCs.  Angels in general, should leave the heavily structured term sheets and milestoned investments to the professionals.  The angel organization that tries to mimic the process and criteria of a VC is creating a dangerous precedent.  Don't get me wrong.  Angels form a vital piece of the ecosystem and they tend to good people looking to impact their community in a profound way; but they don't do this professionally. I made the analogy during one of my meetings that an angel trying to be a VC is akin to someone trying to count cards in a six deck shoe.  You are better off playing it straight unless you are really good at it and there are probably less than 200 people on the planet that can accurately keep a count on a six deck shoe. 

Themes from the PA trip Part 1

As I mentioned in my first post, I just completed a quick consulting engagement in PA.  Some of the regional economic development folks arranged for me to come in and sit down with CEOs of early stage businesses, economic development leaders and the service professionals that round out the entrepreneurial ecosystem.  Over the course of three days, I met individually with 10-12 CEOs.  My mandate was fairly ambiguous so I made it a point to lay out expectations and goals at the onset of each hour long session.  Their objectives ranged from assessment of business model and VC fundability to pitch deck evaluation.  Many simply wanted to know if they pass the sniff test.  Over the course of these sessions, a few themes emerged that I will speak to over the course of a few blog posts.

With the exception of two, each CEO was simply not asking for enough money.  Their asks ranged from $50,000 to about $250,000.  In the current market environment, characterized by extremely tight credit markets, tumbling home values, a stock market that can't seem to find a bottom, a dead IPO market and a dearth of M&A activity (read, no exits for VC-backed companies and no liquidity for LPs) early stage technology companies need working capital.  Remember, cash, or more specifically, the lack there of, kills emerging businesses.  I suggest having enough cash to cover your current/expected burn for 18 months.  Theme number 1, entrepreneurs aren't aware of their capital requirements.  It seems many entrepreneurs believe that asking for $50,o00-$250,000 improves their chances of finding an investor.  The reality is that asking for $50k is like asking for $10M.  In either case, you are catering to the margin.  There simply aren't many sophisticated investors willing to look at a deal of that size.  The other reason for asking for such a small sum is the hesitance to give up ownership.  The reality is that these ventures, with few exceptions, had very little chance of succeeding without significant operational assistance.  They need hands on board members with operational experience.  At the end of the day they have to ask themselves the following: would you rather have 100% of a grape or 50% of a watermellon?

Just like in the public equity markets, there is natural flight to quality in the private equity world.  Many funds that were raising didn’t get it done and have since shut down.  I can think of one in particular.  Others are suffering with defaulting LPs not meeting capital calls.  Still others have changed their going forward strategies.  For example, a fund that had planned to invest in say 4 or 5 new companies may instead choose to reserve those funds for follow-ons with existing portfolio companies.  Those portfolio companies will likely struggle to bring in "new money" so existing investors will be forced to shoulder the load.  So, what does this all mean?  Well, there is very little money available.  Those with capital are in the drivers seat and can afford to be very picky.  As such, only the best of the best will find smart money in this market.  We're talking serial entrepreneurs with prior exits, with novel, defensible technologies in markets exhibiting venture economics.  If your offering lacks any of these traits I would suggest bootstrapping.  

If it takes 3-6 months to raise money in a traditional market, it can easily take twice as long today.  If you are able, I would suggest focusing on your business instead of on fundraising.  Fundraising is a full time job for a CEO and few businesses can afford to have the leader spend their time away from their primary function.  Theme number 2, unless you have an A+ offering and you need the money, focus your attention on your business rather than fundraising.

I'm just getting started here.  Stay tuned with more thoughts from my PA adventure.

Introduction

Intro 

Is there anybody out there…………..  Dara Shareef here……  I've been thinking about doing a blog for a while now.  Actually, I have had a blog going for almost a year now although the subject and related content is quite a bit different; my preemie daughter Mikaila.  For those interested: growmikailagrow.blogspot.com

You can track her life experience beginning with her very early arrival at 1 lb 5 ½ ounces through the present time.  In the early goings, I updated the blog every day or so.  In the last several months I have been less diligent.

Back to the intent of this blog.  I don’t have the traditional VC pedigree, at least as it relates to educational background.  My undergraduate degree is from Lehigh and my MBA is from the Simon School at the University of Rochester; fine schools yes but certainly not of the ilk of the Whartons, Harvards and Stanfords of the world.  Perhaps I am the exception that proves the rule. My background suggests I can help early stage businesses.  At the beginning of the decade, I worked with CEOs to commercialize their vision.  On their behalf, I wrote business plans and investor decks.  For most of the decade however, I have been on the other side of the table with Counter Point Ventures and Glenmont Venture Fund.

About two years ago, two partners and I began the process of raising an early stage fund.  We did the market research to pull together the investment thesis and story.  We wrote the PPM, pitch deck and accompanying materials and went to market.  Although we gained some traction in the investor and entrepreneurial communities, we hit a brick wall in the fall and decided to shut it down.

In the subsequent months, I have built a small, and for the most part, serendipitous consulting practice.  I have taken on a few projects to keep the lights on but the ephemeral nature of these engagements and the transient lifestyle conflict with my desire to spend time with my wife and baby. 

These consulting clients seem to value hearing the perspective of a VC without the pressure that comes with the bag of money we typically carry.    Quite the paradox, I know.  A VC without a checkbook.

I'll add a few posts in the next day or so related to a trip I made to Pennsylvania where I worked with economic development groups, CEOs of emerging businesses, incubators, investors and service providers to build a comprehensive program; a program that will attempt to expedite the transition of a traditional industrial/manufacturing economy to one based on innovation, commercialization and entrepreneurialism.