Ftibit testimonial

I haven't been a very good steward of this blog but I thought I would relay my experiences over the last two months as I attempt to reclaim my health, vigor and vanity. Roughly 7 weeks ago I decided to invest in a Fitbit, a VC-backed start-up touting a fairly sophisticated technology that ostensibly allows the user to take control of their personal wellness. I first came across the Fitbit on Twitter as I follow Brad Feld who happens to be an investor/board member of Fitbit.

Fitbit is essentially a pedometer on steroids as it uses 3d motion technology and an accelerometer to track your movement. Unlike most pedometers, the Fitbit adds a mobile base station that dynamically uploads your data when you come within 15 ft of the hub. Sounds like a great product, right. It is but there are dozens of compelling products out there that effectively track your movement. This is more than a product, it is a program and a lifestyle. To truly get the most out of the Fitbit, one must also track caloric intake. There is nothing proprietary about the calorie counting program but it's certainly as effective as any. But the value prop of the Fitbit from my perspective is the data capture and manipulation capabilities. I have learned that data, and the manipulation of said data, allows me to develop process. Processes are repeatable and improve probabilities for success in virtually every challenge in life.

In 7 weeks with the Fitbit, I have lost 31.1 lbs. I had lost about 8 lbs in the prior 8 weeks. I attribute most of my success to my resolve but the constant feedback provided by my Fitbit keeps me motivated and normalizes the mental highs and lows. I plan to use my Fitbit to lose another 16.9 lbs in the next 29 days and roll into my 20 yr. high school reunion at my senior year playing weight.

Smartphones, Laptops, Netbooks and iPads Strain Networks

The proliferation of smart devices and the consequent increased consumption of data has severely strained mobile networks in the US and beyond. The iPhone changed the game as user expectations related to the capabilities of wireless devices shifted dramatically. No longer were phones viewed simply as communications mechanisms. From that point forward they became the hub of all of our professional, personal and social interactions and activities. Wireless users now use their smartphones to view streaming video, participate in video conferencing, listen to internet radio and download and read books. The introduction of Apple’s latest product, the iPad may have crippling effects on AT&T’s already severely strained network. Since late 2006, AT&T has seen a 7000% increase in wireless data usage!

Imagine the effects of 1M iPads consuming 5GB each month- not too difficult to hit or surpass when you look at the numbers. Say I’m stranded at a family function one day in late March and I want to watch a particular NCAA tournament game. No problem; I whip out my trusty iPad and go to town for 2 ½ hours. Unfortunately for those sharing bandwidth, I’ll be sucking down 300MB of data per hour! Ouch. Out on the boat listening to Slacker or Pandora through your iPhone? That will absorb 60MB/hour. You get the picture. Voice calls, emails and text messages now represent a pimple on the buttocks of the data piece. And with smartphone sales expected to grow 30% this year, there are no simple solutions. It is now incumbent upon the carriers to build out their networks to accommodate these changes in behaviors associated with recent technological innovations.

RFP

So you are thinking about putting out an RFP for TEM/WEM services. Terrific. Seems easy; as the Global Purchasing Manager, you reach for your standard RFP template, sift through some “independent research” to build and narrow a vendor list and send it out. Sounds easy, right. Or is it? Your standard RFP questions elicit canned responses from the usual players until you grab that one proposal that seems a bit different. This vendor’s answers weren’t really answers at all. In fact, most of your questions were answered with questions. And they didn’t even include a price for service. The nerve! Until you peel the onion back a layer. The vendor includes a note explaining the somewhat abnormal approach he took to filling out your RFP.

The note starts,” Thank you for including us in your RFP. We are sorry we weren’t able to answer most of your questions. Our process works a bit differently than most of our competitors. Without an accurate snapshot of your current state, we really can’t provide meaningful answers to your questions. Like many of our clients before they engaged our services, you really don’t have a handle on your current inventory as procurement is completely decentralized. Many employees have individual liable phones and T&E their bill each month. And there doesn’t appear to be a uniform policy in place. Without a clearer picture of your current state both from an inventory perspective and spend, we don’t feel comfortable quoting our services as we don’t really know what it is that you need. We never attempt to fit a potential customer into our standard boxes. Rather, we like to do an analysis of current state, thereby enabling us or any vendor you select to provide a meaningful quote of services. This service prepares the customer for RFP and ultimately streamlines the implementation process. Our pre-RFP service is charged on a time an materials basis….”

Wow! That was unexpected. But should it be? How can a vendor respond to an RFP when they have no idea the level of service you truly need. Let me restate that: how can a company put out an RFP when they have no idea of what they currently have in inventory, how bills are processed, how policy is developed and communicated and what level of service they need? This lack of knowledge on the side of the client and the flawed process and communication initially leads to many of the delays that often happen during implementation. Why not take a page out of the management consulting handbook and do a diagnostic analysis before making the vendor selection and service level decisions. Makes sense to me.

Wireless as a Priority

During tough economic times, managers, responding to directives from the C-Suite/Board room, typically look to the expense half of the income statement. Top line growth, the more sustainable practice to improve bottom line (costs can’t be cut in perpetuity but revenue can ostensibly grow to the current size of the overall market plus organic growth), is viewed as unrealistic and as such, controlling costs becomes the corporate dictum. In my recent travels, I have heard of 20% across the board cuts mandated by “corporate”. That sort of arbitrary pronouncement seems not only unrealistic but also not very well thought through. Perhaps focusing on areas that are truly wasteful and where an impact can be felt quickly without any material change to performance is a better strategy?

One of the challenges TEM/WEM vendors face during the sales process is the notion by potential clients that telecom really isn’t a priority; that they are looking to achieve significant savings and wireless (in our case) simply doesn’t measure up. Independent research has shown that telecom represents the third largest line item on the expense half of the Income Statement with wireless accounting for a significant and growing percentage of that spend. Yes, there are larger issues and perhaps areas where wastefulness is even more egregious. However, when you compare cost savings opportunities, managers must also consider the time and resources required to implement such changes. That is where IRR comes in.

I am a venture capitalist by trade. VCs are typically measured using two metrics: cash on cash return (our preference) and Internal Rate of Return (IRR), the preference of those that typically evaluate our performance. IRR measures investment and returns over time. The critical thing to understand here is that time is as important in the calculation as is return. Think of it as ROI weighted to reflect the time value of money; money today is worth more than money tomorrow. It is absolutely critical for managers to consider the value of their time when evaluating projects side by side. Implementations of WEM projects typically take 90 days. During that time, the vendor is determining requirements, gathering information, building and reconciling inventory, consolidating accounts, evaluating policy, analyzing bills, configuring reports etc. At the conclusion of those three months, the client should begin to experience the benefits, both economic and execution, of outsourcing to an industry expert. Compare that timeline to that of some of the oft sited initiatives competing for the hearts and minds of managers and there is really no comparison. I am certainly not eschewing the virtues of other cost cutting mechanisms. However, telecom seems to be continually subjugated to other, “larger” initiatives. When put in what I believe to be the proper context, a comprehensive analysis and shift of the telecom environment makes quite a bit of sense.

But it certainly doesn’t end with hard cost savings. It is hard to ignore that the wireless world is changing every day. Competing for a saturated market (in a country of 300M, there are more than 270M cell phones) carriers are shifting their pricing models. We are clearly moving toward a buffet style pricing strategy on the voice side; the all you can eat for $40 strategy. So if the price of plans is static, doesn’t that change the game for WEM provider? Well, the answer is yes and know. Let’s start by clarifying the savings generated by a good WEM vendor. We have discussed hard costs but we really haven’t gone in depth as to the soft cost savings. In the most recent “Voice Report” published by CCMI, the responsible ratio of Devices-to-Staffer is 500-to-1. The same report postulated that outsourcing to a WEM Vendor can move that number to 5,750-to-1! Just think about those numbers. For an organization with 11,500 cell phones, they would require 21 less full-time staffers to manage the wireless environment (from 23 to 2). Even at a modest, fully loaded cost of $50k/employee, that equates to $1,050,000 in employee cost savings. That more than covers the $800,000-$900,000 a WEM vendor might charge that company annually. And an effective WEM partner will identify and curtail employee behavioral issues that impact costs (mobile media, texting, directory assistance etc.) representing another significant savings category.

Beyond savings, outsourcing management of your wireless environment can have a dramatic impact on the organization from a process perspective. A true knowledge expert can employ best practices as it relates to policy, costing, and reporting. I spoke of policy in the prior post so I don’t need to reiterate that argument. Costing can become an issue in large organizations with numerous cost centers, especially when they are already pooling minutes in their wireless plans. For example, I may have a 200 minute plan and Jim is on the 1800 minute plan. Between us, we average about 1900 minutes each month so the numbers work. However, at present, my department is being charged for my 200 minute plan and Jim’s is charged for 1800 minutes. But, if I typically use 1100 minutes and Jim uses 800, does that paint a clear picture of performance? Is that fair? Of course not. Some companies assign costs to centers based upon headcount believing it gives a more accurate portrayal of actual costs. Perhaps but the best methodology is clearly to charge each center based upon actual consumption. A good WEM vendor can do precisely that. When you add custom reporting to the picture, the argument for outsourcing the wireless program is clear.

We are living in difficult economic times. Managers, working with fewer resources, are being asked to analyze key initiatives, departments and processes to find and eliminate waste. I have made the argument in the preceding prose that the wireless environment deserves a seat at the table. I’m convinced….. are you?

Policy Development vs. Policy Enforcement

Corporations by their very nature are political organisms. And as such, much like their siblings, government entities, they require policy to regulate and incentivize behavior. All corporations should commit to building a thoughtful and comprehensive policy to guide employee behavior related to wireless devices. As I mentioned in the prior post, today’s cell phones are as powerful and versatile as many laptops were only a few years ago. Users, if left to their own devices, have access to expensive downloads, streaming video, television, music and unfettered access to the internet, including illicit sites. Not only can this behavior cost the corporation thousands of dollars in the short term but it can also cost millions later through lawsuits and fines. A well constructed and communicated wireless policy can help to allay the fears in the board room as employees are less likely break policy if they know that there is in fact a policy and understand its basic components.

But, solid policy alone falls short without equally diligent policy enforcement. How so, you ask? Let’s take a fairly common and benign example. Several times each year, a new and exciting device comes out, replete with an updated OS, sophisticated styling, upgraded hardware/software and the media hype and consumer buzz that logically follows. The most recent example would be the Google Android-based phones by HTC, Motorola et al. Before that it was the Blackberry Tour. Before that it was the Palm Pre/Pixi. Before that, it was the BB Storm. You get the idea. Game changing technology or not, the associated buzz creates demand in the wireless users community. We have seen time and again a dramatic uptick of phones being damaged, stolen, lost etc coinciding with the release of the latest and greatest smart phone. Even though your workhorse Blackberry Tour is still at the top of its game, your desire for the new Droid has you marching into your manager’s office requesting the upgrade. “It’s buggy” you exclaim. “I’ll have more luck with the Droid” you conclude. Here is where policy and policy enforcement can and often do, deviate from one another. Let’s say that corporate policy is to upgrade phones every 18 months. But when did you last upgrade you device? Who’s keeping track? If they were keeping track they would see that you have had 4 upgrades in the last 18 months, each coinciding with the release of a “game changing device”. Without the mechanisms in place to measure behavior against policy, an organization has very little chance to enforce policy. Lack of enforcement renders policy impotent. So, if policy alone serves little purpose and enforcement is virtually impossible without the proper mechanisms in place to measure, what are those mechanisms and how do I get them?

Wireless Expense Management companies like Cellution, work with organizations to take charge of their wireless environment, empowering wireless users, mitigating risk and putting teeth to wireless policy. Cellution’s proprietary software known as BillSMART tracks every minute of talk time, every kb of data, every upgrade or accessory request, every mobile media or ringtone download etc. Our clients know precisely when an employee last upgraded their phone. They know which users average 500 texts each month, 10 calls to 411 and 5 application downloads. Some of our clients are able to curtail that behavior in real time by leveraging our Mobile-I real time product. So, there are mechanisms out there, in the case of Mobile-I, off the shelf products that arm companies with the information to put teeth to their wireless policy. So the next time an employee asks for the latest and greatest, you will have the appropriate information at hand to make the appropriate decision.

Other examples of employee abuse of wireless devices can have far more dire consequences for the corporation. Examples of such behavior might be frequenting illicit web sites, downloading and disseminating trade secrets and texting while driving. Lawsuits resulting from any of these activities would certainly be directed at the corporation owning the phone and not the employee participating in the behavior. For example, in 2005 Beers Skanska paid $4.75M to settle a lawsuit when one of its employees crashed into a stationary car while reaching to retrieve a message from a mounted, hands-free cell phone. A policy prohibiting such behavior is a start but putting into place the appropriate mechanisms to actually shift employee behavior is critical to the wellbeing of the organization. Cellution can partner with your organization to create your policy, measure behavior against said policy and, using proprietary software components and a world class team, shift behavior to achieve compliance.

Making the Case for Wireless Telecom Expense Management

Wireless Telecom Expense Management (WEM). Raise your hand if you know what precisely that is. Well, if you are in the C-Suite of a medium or large organization, you should familiarize yourself with the topic. As they have grown in functionality, wireless devices have more and more become our lifelines. Countless studies have shown them to be effective drivers of incremental productivity as today’s Blackberry and iPhone are as powerful as was your laptop six years ago. You simply can’t afford to not arm your management and sales staffs with robust wireless devices. Gone are the days where we can simply return a call or email upon our return to the office. We live in a real-time world. Those that don’t keep up will be left in the dust of the pace setters.
So, we’ve made the case for robust wireless devices in the workforce but how do companies support and manage said devices? And how can they ensure that they are not overspending? Well, according to a recent study conducted by Gartner, they almost certainly are. Gartner’s report indicates that 80% of enterprises are overspending by an average of 15% and will continue to do so through at least 2014! Where does that number come from, you ask? Well, the “breakage” is comprised of several factors including: inefficient rate plan usage, overcharging by the carriers, lack of a defined corporate policy and lack of enforcement of said policy. And the Gartner number doesn’t begin to account for the “soft” costs associated with managing the wireless program with internal resources. If you are in the construction business, wouldn’t you rather have your PMs and accountants focusing on core initiatives rather than pouring through countless cell phone bills assigning costs to six concurrent jobs? That process is terribly inefficient devouring precious time and resources. So, what is the Cellution, you ask? A Wireless Telecom Expense Management solution, of course.
Cellution is in the business of saving our customers money, real money, on their wireless spend. Every quarter, wireless is consuming a larger portion of the third biggest line item on the expense portion of the P&L, Telecom. We work with our customers to reduce their spend by an average of 30% while providing dramatically increased visibility. No longer do they have to commit internal resources to maintaining their wireless program. Cellution can come in 2-4 times each year, do an audit and recover over charges and place the customer on the correct plans. Or, should the customer choose to have Cellution manage their entire wireless program, we can handle procurement, reporting, bill reconciliation, contract negotiation, defining corporate policy, help desk and everything else associated with wireless. You outsource your call center, payroll and other non-core business processes, why not outsource your wireless?
So, we’ve done it. We’ve made the case for engaging a WEM provider like Cellution to at least examine your current state. Our Savings Assessment program is a very logical starting point as we are only compensated if we are able to save you money. If we aren’t able to save you money, we are not compensated. It’s simple, risk-free and smart.

Off Topic: My Desert Island Discs

A few friends and I decided to update an old tradition dating back to the onset of our college years. For the uninitiated, the idea behind the desert island disc list is to decide the 10 or so cds that you would require if stranded on a desert island. Please refrain from the, "how would you have power on said island blah, blah, blah...". This exercise requires a bit of suspension of disbelief. It really is an interesting process. I tend to approach the exercise as literally as I think one can. In this iteration, I decided to come up with the voices and sounds I simply could not live without. Others may choose to pick their favorite 10-12 albums. From my perspective, that process is a bit flawed. I love Stevie Wonder; I have for 20 years and I will likely for the rest of my life. But, in this compilation, I chose only one of his albums (Talking Book) in an effort to conserve space for other artists. Below, please find my most recent attempt. Please keep in mind that the list as compiled is not ordinal. You know, I don't think I have updated my Desert Island Discs in 15 years! Here goes:

Grateful Dead - Skull and Roses
Professor Longhair- Rock ‘n Roll Gumbo
John Coltrane- A Love Supreme
Bob Dylan- Blood on the Tracks
Stevie Wonder- Talking book
Otis Redding- Pain in My Heart
Sam Cooke- Live at the Harlem Square Club
The Rolling Stones- Exile on Main Street
Marvin Gaye- What’s Going On
A Tribe Called Quest- The Low End Theory
Bob Marley and the Wailers- Natty Dread
Pearl Jam- Live at Fila Theater, Milan, Italy

An addendum to the prior post

Are we so devoid of original thought? We live in such a “me too” world. In the prior post, I touched on Hyundai’s innovative Assurance program and Ford/GMs “me too” response. Perhaps the most obvious and egregious example of this is KFCs recent rebranding effort. Are we really supposed to get excited about Kentucky Grilled Chicken? If consumers have a hankering for grilled chicken there are literally dozens of options. But, unless you reside south of the Mason Dixon line, you probably have far fewer opportunities to sink your teeth into transfat laden, shortness of breath inducing, arteries hardening, all American family fun. For eighty years KFC has filled this greasy void. Does KGC really want to throw their hat into this ring? It’s a pretty crowded space replete with players holding a ten year head start.

Why isn’t there a place for Kentucky Fried Chicken? And why can’t KFC just be what they are? Sometimes standing alone bucking the trend, even when your cause is far from noble, is the right stance to make.

Recycled Ideas and the NDA

Even as I've been out of the traditional venture game for several months now I still tend to see b-plans with regularity. For some reason these plans seem to always come equiped with an NDA in tow. I don't want to spend too much time covering the reasons why VCs don't tend to sign NDA as Guy Kawasaki et al have ably covered this territory. For those that are new to entrepreneur/VC relationship, I'll spend a few sentences to explain our collective position. At any given time we are "reviewing" a dozen or more plans. Over the course of any quarter, we may may see 50-100. Although your new take on electronic medical records management or geospatial emergency management software may appear completely novel from your perspective, we may have seen similar offerings. If a VC decides to take a pass on your opportunity and instead chooses to invest in another, similar venture, you may think that the VC has stolen your idea. Clearly that isn't the case here. The second reason why we don't sign NDAs is related to resources and time. NDAs are legal documents. Before signing, we would have to retain the services of an attorney. After modifications from each side, we eventually are able to see the plan. Multiply that by 200+ plans each year and it is easy to see our reluctance. Understand that it would be virtually impossible to take your idea and commercialize it simply by reading your plan. And the entrepreneurial community is fairly small. If word were to get out that we stole the idea of an entrepreneur, our deal making days would be over.

That said, it's easy to see why entrepreneurs are so paranoid. This weekend, I took some time away from renovating my house to nurse a cold. In between sniffles and nose blows, I caught a little playoff basketball and hockey. Rather than marveling in the athleticism of LeBron James, Dwight Howard, Kobe Bryant and Sidney Crosby, I came away with a different thought. Hyundai a few months ago launched a program to combat declining sales. Hyundai Assurance essentially says, if you lose your job and are unable to make your car payment, Hyundai will allow you to stay in your vehicle without making payments for some finite period of time- say 9-12 months. They claim that they will do it for you. I doubt that. I'm sure they will simply extend the contract by the number of months missed. I think we can all agree that Hyundai Assurance was a fairly innovative idea. In the last few weeks, it seems Ford and GM have "stolen" the idea; I just saw a commercial for the Ford Advantage program. In span of a few months, Hyundai came up with and launched a truly innovative idea and Ford and GM reacted with similar programs. Is it any wonder why entrepreneurs want NDAs signed?

Never the Twain......

I have been beyond remiss in my attentiveness related to the upkeep of this blog. The last few months have been absolutely bonkers. In the midst of making a move to Florida I landed an offer that I readily accepted. I now serve as the Director of Strategic Investments for an Albany-based real estate development firm.

Strategic Investments.... Sort of has a ring to it. Where have I heard that phrase recently? The answer to that question of course is everywhere. VCs and private investors alike are positioning themselves as strategic investors. Doesn't that strike you as a bit strange? The VC mandate traditionally is to seek financial positions and returns; a mandate quite antithetical to that of the strategic investor. The strategic investor seeks to deploy capital into companies and technologies that fit within the core mission of the firm. For example, perhaps the company has developed a technology that integrates nicely into the platform of the investing company. Or a company may invest in another that sits in it's supply chain, distribution channel or customer base. Historically you have had institutional investors on one side and strategic investors on the other and never the twain shall meet. Well, it appears they have met...... thankfully for me.

What is it about us 30-Somethings

What is it about us 30-somethings?  Or is it Gen Xers?  We can't keep our hands out of every cookie jar we see.  Our parents and grandparents spent their entire careers with one employer. My step-father for example was an IBM lifer.  They put in their time at the office (8-6, 9-5 etc), came home to their families and left their work at.... well, at work.  Their children seem to be wired differently.  I live in Schenectady, NY, the Electric City, so dubbed for General Electric's ubiquitous presence (even in the wake of the departure of its headquarters to Fairfield County) in the area.  40 years ago, I would no doubt be working for GE.  My wife's entire family has GE lineage.  However, in 2009, none of my friends or family (including in laws) works for the erstwhile monolith.  Why is that, I wonder?

Perhaps the series of layoffs, retractions and retrenchment by the Fortune 500 in the last several decades has impacted our perspective.  When I speak to innovation and entrepreneurial activities, I typically point to the uptick in innovation spawned during trying economic times.  Those engineers, scientists and IT geniuses being let go from large organizations will often take technologies they have created and attempt to commercialize them.  We have seen this activity; actually we have lived it for our entire lives as the GEs, Xeroxs and Kodaks of the world have been retrenching for decades.  So, maybe our tendency to maintain several side projects is born out of our fears and experiences.  Perhaps these projects are our way of contingency planning?

I will likely accept a full time position in the next 6 weeks.  However, some of the opportunities I have created in the months subsequent to shutting down our fund will be difficult to ignore. There are a few consulting opportunities, a board position or two and even a movie project (this one I'll definitely maintain) that I simply won't give up.  Kim and I have planned a diversified real estate company for years now.  Although not in our immediate plans, we will be in the real estate business in some way in the next few years.  So, I am clearly one of them.  I would not be happy arriving at the same office, parking in the same spot at the same time greeted by the same people and battling the same challenges for 40 years.  Understand that I make no value judgements here.  It's just not for me.

Of course there is another potential explanation for our approach to our careers; perhaps our unprecedented access to information in concert with our natural ADD-like tendencies dictates a somewhat erratic and unstable approach to our careers.  

I'll let you decide which explanation makes more sense.

Defaulting LPs

In the last post, I detailed some of the challenges facing VCs attempting to raise a fund in a troubling environment.  It is indeed the most difficult fundraising environment in the history of venture.  However, another phenomena is occurring in the industry that can also be directly attributed to the meltdown in our capital markets: the phenomena to which I elude, defaulting limited partners.  New funds aren't the only ones struggling to pull in capital.  Existing funds are seeing record numbers of defaults from LPs.  What are some of the implications you ask?

Well, the timing of capital calls has at once become more and less strategic.  Typically, VCs call capital as they need it.  I have always referred to it as a Just In Time system for cash flow management.  We do this for several reasons.  First, investors find 10% at close and the balance over the investment phase of the fund more palatable.  Second, we are not money managers.  We don't want to be moving capital around in various money markets.  More importantly, we take capital as we need it to effect the IRR.  VC performance is measured by IRR (Internal Rate of Return).  It is important to note that IRR is effected by both the timing and size of cash flows. As such, we typically take capital as needed and disperse returns immediately following an exit.  To illustrate my point, go out and google IRR calculator (there is actually one built into Excel) and play around with a series of cash flows (both outbound and inbound).  Try two scenarios, each with the same numbers.  The only difference between the two scenarios should be the timing of the flows.  It is very easy to turn a 27% annualized return into 13% without changing the numbers.  Ok, that was a long digression.  Back on point.  Strategic capital calls typically relate not to the market conditions but rather to the opportunities created by the VCs and the capital requirements of portfolio companies.  However, in the current economic climate, VCs must first think how a call may impact its investors.  So yes, the timing of the calls is still strategic but certainly not core to the mission of the fund.

Another interesting phenomena has emerged.  A secondary market for LP interests in funds has popped up.  Virtually every category of investor is hurting today.  High Net Worth Individuals are either sitting in cash or on their hands.  The institutions that typically make up the vast majority of LPs are getting hammered; we're talking insurance companies, college endowments, pension funds and banks.  So, if an LP defaults who among the LP base will scoop up the positions?  Those with significant capital are in a position to accumulate shares of funds for a song.    Perhaps there is a business there?  Maybe I'll raise a fund focused on buying interests in other funds from defaulting LPs?  Interesting.

Raising a Venture Fund today

We have touched on money raising from the perspective of the entrepreneur.  Having just been through the process of attempting to raise a fund, I know first hand some of the challenges fund managers face.  I think the unique challenges we face in this environment suggest a post is in order.

 

We are in the midst of the most severe economic conditions of my lifetime.  Spurred on by a housing bubble and subsequent collapse, absolute abuse of what was intended to be an insurance instrument (Credit Default Swaps), an ever tightening credit market and public equity markets that are on the verge of collapse, investors are reevaluating typical risk-return profiles.  A high net worth investor that was worth $50M a year and a half ago, may now be worth $20M.  She may not be on food stamps but I know from experience that she is pissed!  It is nearly impossible to convince that investor to consider what is inherently an extremely risky proposition.   So, challenge # 1, investors have less capital overall which reduces the amount available for alternatives.  That leads naturally into challenge #2; the few investors with cash have more options than ever.  LPs that dabbled in venture and those that barely qualified as accredited investors are on the sidelines.  Those left are really in the catbirds seat.  There is a natural flight to quality in tough times.  First time funds, those with mediocre track records, significant management turnover, poorly defined proprietary dealflow and aggressive management fees/carry splits will find it difficult to find investors.  For example, I pitched a very wealthy investor that liked our offering.  However, he loved another opportunity in Israel and another in the UAE.  Did I mention that he is based in Boston?  He asked me why he would seriously consider a 7-figure investment in an Albany-based fund given the opportunities that cross his desk.  We were being compared to the best opportunities around the globe and admittedly, we didn’t hold up.  Challenge #2, extremely tight markets weed out the marginal players on both the LP and venture side.  Only the best of the best will emerge.

 

If you look at the performance of Venture as an asset class, you will see that we really haven’t delivered returns commensurate with the risk profile.  The PWC Money Tree report indicated solid returns for the early stage venture class.  I know this well as I featured it prominently in my investor meetings.  The overall venture class returned roughly 17% over the last 10 and 20 years.  Those numbers are very strong on the surface especially as they compare to returns in the public markets.  However, if you peel the onion a layer or two you will quickly see that the top quartile funds delivered the vast majority of the returns for the asset class.  Don’t get me wrong, I love venture but I’m typically not a big Kool Aid consumer.  We are in a risky game.  If we are to exist long term we have to appropriately compensate LPs.  That will straighten itself out soon.  Many funds that shouldn’t exist won’t exist.  The funds equipped for the long term will emerge strengthening the industry as a whole and normalize returns.  Challenge #3, too many funds popped up during the boom creating downward pressure on industry returns.  Given the inherent riskiness of the asset class, we need to do a better job of delivering returns that appropriately compensate investors for taking on the incremental risk.

 

Let me add an addendum to Challenge #3.  The trend in the venture world is for 2^nd and 3^rd time funds to move downstream, raising larger funds targeting later stage investments.  After a successful first fund the LP base will often seek to invest larger dollars in the next fund.  As such, a team that had successfully deployed $75M in a first fund raises $225M in a second fund. If the focus of the first fund was early stage, the second fund will likely move toward expansion capital. Why is that you ask?  Well, unless they want to ramp up the team significantly, they need to deploy larger dollars (3x in this case) into each deal.  By moving downstream and deploying more into each deal the team can maintain their existing head count while tripling the management fees.  Essentially, the partners can grow wealthy through management fees which really goes against the model.  The model is for VCs to make their money on the back end through their carry participation.  By paying out huge salaries, the VC’s incentives are no longer in line with the interests of the LPs.  Also, early stage and expansion stage are different businesses requiring different skills.  A team that excels in early stage deals may struggle with later stage companies.  That phenomena can certainly impact industry returns.

 

The lack of exit events and dwindling liquidity mechanisms account for the 4^th challenge.  For VCs and their investors to make money, portfolio companies need to find liquidity.  Sarbanes Oxley has effectively killed the IPO market.  I can’t remember the last venture-backed IPO.  Tight credit markets have adversely impacted M&A activity.  LPs are aware of this conundrum (actually they are living it).

 

The 5^th Challenge is known as The Denominator Effect.  Institutional assets have dwindled in the past year; a result of the turmoil in the capital markets, real estate etc.  As such, the overall portfolio value is down significantly.  Institutions have pre-set allocation targets for each asset class.  The value of each class forms the numerator in the allocation percentage calculation and the overall portfolio value forms the denominator.  Because you can’t mark the venture portion of your portfolio to market, it has to be valued at book value.  So, if every other asset class goes down in value and the venture portion stays the same (in absolute, not relative terms) then the allocation goes up.  Today, many institutions that considered new venture investments can’t because they are over allocated, a function of the denominator effect.  Institutional commitments encompass the vast majority of the LP base for most funds.  Lack of available capital from institutions is a challenge that is virtually impossible for a fund to overcome.

 

I’ve laid out a few of the challenges VCs face while raising a fund.  These are fairly ubiquitous; others may be unique to individual funds.  So, if you are an entrepreneur struggling with the fundraising process please understand that the VC across the table is probably suffering from a similar fate.

 

 

My Value Proposition

What am I doing here?

There are dozens if not hundreds of VC blogs out there.  Most in this group are very strong and fairly detailed.  In fact, when I meet with entrepreneurs, I often refer them to four or five as reference material.  The blogs and the information now at everyone’s disposal has really been game changing in many ways.  Entrepreneurs can have a glimpse behind the curtain to gain significant insight into how we think.  I will avoid making any value judgments here; just pointing out the evolving reality.  The point is many of these blogs are very detailed. For example it is very easy to find a detailed exposition of the Venture Capital Method of valuation, key elements of your pitch deck, option pools etc. 

So, with all of that information available (a fairly complete catalogue, really) I see very little point in going deep on any singular topic.  Why add to the redundancy?  Rather, I see this blog as more of an observation platform.  If I have a meeting with an entrepreneur and a theme emerges, I may decide to speak to the topic on this blog- exhibit A the PA Trip, exhibit B, Peak Pitch.  If I have a conversation with one of my VC friends about raising money, I may touch on the topic in a post.  If I’m screwing around on Facebook and begin to think through the history of social networking, I may (and did) do a post.  I’ll leave the heavy lifting to the experts.

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.