Crowdsourcing is a Symptom

Posted on | April 16, 2010 | 2 Comments

A lot has been written lately about the age of crowdsourcing, and for good reason.  It is a shift that is changing the way many companies do business.   Recently, John Winsor, the CEO of Victors & Spoils, had a great blog post where he contended that, in the world of marketing, crowdsourcing is being driven by three large macro-trends: transparency, digitization of the workforce, and the rise of the curator class.

I agree with John, but would take the argument even one step further.  In my mind, the movement in several industries towards mass collaboration is a symptom of a single macro-trend: increased communication. 

Removing the traditional barriers to communication through technology has driven each of the changes referred to in John’s post.   It has allowed for a digital workforce that can be effective and efficient despite the fact that it is spread across the globe.  It has caused a constant real-time flow of information that makes a lack of transparency for any company virtually impossible, and it has allowed the most talented people in various fields to be identified, accessed and recognized as “curators” or experts in their industries.

All of this is leading to a more participatory economy where workforces are no longer measured by headcount or payroll, where good talent quickly rises to the top, and where companies are rewarded for efficiency and productivity instead of their ability to limit competition.

These changes are apparent not only in the world of marketing and advertising, but in almost every industry from finance to manufacturing.  Whether the transformation is manifesting itself through crowdsourcing or through more subtle means like the use of real time video, open source software or social networks, it’s happening.  The bottom line:  If your business model is not leveraging off of the fruits of increased communication, then you are swimming upstream in today’s economy.

Category: Crowdsourcing, Technology

Discouraging Entrepreneurial Risk

Posted on | April 10, 2010 | 2 Comments

It is being reported that another bill has been introduced in Congress  that would require any venture capital fund with at least $30 million under management to register with the SEC.  There are a couple of reasons why I think this is a horrible idea. 

The first reason is purely practical.  Typically, venture funds, particularly smaller funds, are not staffed to handle this type of administrative burden.  Registration would almost certainly include ongoing reporting requirements, and would put a huge stress on smaller funds that are working with limited management fees (much the way Sarbanes Oxley has affected many public companies).  

The second reason is simply the lack of logic.  The stated purpose of the financial reform is to reduce systemic risk – the type of risk that shook the banking industry last year.  It is virtually impossible to think of a scenario where the activities of a venture fund – let alone a fund with $30 million under management – could create systemic risk. 

In a misguided effort to reduce systemic risk, Congress has once again missed the mark and, in doing so, may discourage VCs from taking the very risks that could help get the economy back on track.

Category: Politics, Venture Capital

News From The Portfolio

Posted on | April 8, 2010 | No Comments

A couple newsworthy tidbits from the portfolio this week:

  • Lijit joined some pretty elite company by exceeding the half billion page view threshold (you can read about it here).  There was also a nice interview with Lijit COO Walter Knapp in AdExchanger.com (here).
  • Victors & Spoils is looking for talent.  They have a full time account director position open (throw your hat in the ring here).  In addition, they have put out a call for creatives to participate in a new project to “help re-energize a classic cereal brand.”  If you are interested, you can jump on board here.
Category: Portfolio Companies

Manage the Business, Not the Board

Posted on | April 7, 2010 | No Comments

Seth Levine, a managing director at Boulder-based Foundry Group, had a good post this morning on companies who use sales plans to “under promise and over-deliver.”  Seth concludes that this type of planning creates internal confusion and completely clouds the reality of what is going on within the company.

I couldn’t agree more with Seth, and this is an issue that seems to constantly arise with our portfolio companies.  What I tell them is this: your financial plan needs to be an effective internal tool.  It should be built as a utility to help management track the progress of the company and measure its performance.  If it isn’t one of the reports that you are reviewing on a regular basis to help make strategic decisions, then it isn’t designed correctly.  If it is simply a spreadsheet that is dusted off, updated, and adjusted the night before a board meeting, then it is a waste of time. 

In order to be used as a management tool, a plan must not only contain annual projections, but must be updated on a regular basis to reflect management’s most current assumptions.  When dealing with early stage companies, where changes can be frequent and significant, this often means re-forecasting on a monthly basis. This method provides everyone with a clear view of the business which includes an annual plan, actual monthly financial results , and a current re-forecast for the next 12 to 24 months. 

A plan that is a useful for management will, by definition, be useful for the Board and the investors.  It provides for alignment and  fosters good decision making.  In other words, a good plan is one that is used to manage the business – not the Board.

Category: Venture Capital

Rebuilding a Brand

Posted on | April 2, 2010 | 1 Comment

I don’t know if it’s all the talk about Toyota or Tiger, but I’ve been giving some thought to how difficult it is for a company to rebuild its brand after losing the public’s confidence.  One of the mistakes that a lot of companies seem to make in these situations is to focus exclusively on their external messaging.  While an aggressive pr strategy is key for any company in crisis, it is only a cosmetic fix.  In order to solve the problem, a company must address the root cause which, more often than not, is embedded in the company culture.  Only by identifying and addressing this root cause, often at a higher cost, can a company begin to earn back public trust.  Said another way, once burned, the public is not likely to be hoodwinked by the marketing department alone. 

A lot of people point to the Tylenol turnaround in 1982 as the ultimate example of how to rebuild a brand. Another great brand turnaround that I’ve always admired is the story of Gibson Guitar.  Gibson has been making guitars since 1935 and is widely recognized as the guitar of choice among world class musicians from BB King to Jimmy Page.  In the mid-1980s, however, the company had sunk to an all time low.  Although it wasn’t the result of one single event, the company’s decline was dramatic.  After years of slipping sales, Gibson was put up for sale in 1984, where it sat for 2 years as an eroding asset on the brink of bankruptcy.  Due to the uncertainty, the company lost most of its craftsmen and the quality of guitars was reduced to mediocre at best.  By 1986, the prices of Gibson guitars were declining at a rate of 20% per year.  It was then that Henry Juszkiewicz, an investment banker and life long guitar enthusiast, bought the company for a price of $5 million. 

As the story goes, the first day that the new owner was on the floor of the factory, he picked up one of the finished guitars and asked everyone to gather around.  He pointed out a few flaws in the instrument, announced that the guitar was not of “Gibson Quality” and proceeded to smash it on the factory floor.  The message was clear: any guitar coming off the line that did not meet the new Gibson standards would end up in a pile in the corner of the factory. Company lore has it that the pile got pretty big before it began to shrink.  And although it is now very small, the pile exists to this day – a testament to the company’s culture of quality.

Today, Gibson has sales estimated at over $500 million per year.  It is the owner of several musical brands including Baldwin, Wurlitzer and Epiphone.  Gibson guitars are often cited as examples of craftsmanship and it is hard to find a single high profile guitarist who doesn’t play one.

Gibson is a brand that was successfully rebuilt as a result of a fundamental change in corporate culture.  Toyota should take note. 

And, as it turns out, famous musicians are not the only beneficiaries of the Gibson culture.  As you can see from my Les Paul below, those of us who are only rock stars in the confines of our own basements can also appreciate Gibson’s commitment to quality.

Category: Brands, Music

Welcome home Tyler!

Posted on | April 1, 2010 | 2 Comments

I don’t usually post about personal matters, but I would be remiss if I didn’t take the oportunity to say welcome home to my nephew Tyler (born 2/27/10) who has finally made it home from the hospital to join his parents and his twin brother Charlie.  

I can’t wait to meet you guys.

Category: Chris Marks

The Power of Alternatives

Posted on | March 30, 2010 | 2 Comments

Several years ago, when I was still spending the bulk of my time practicing law, I got some advice from one of my mentors regarding the art of deal negotiation.  At the time, the advice seemed simple.  In retrospect, it has been invaluable.

The advice was this:  Always create alternatives.

As a lawyer trying to bring parties together over a common agreement, the ability to present alternatives was a huge asset.  Creative structures, work-arounds, and the ability to think outside the box were often the difference between a deal that died on the vine and one that was celebrated as a success. 

As I transitioned to the venture world, I found that the advice was even more relevant.  In fact, it quickly became apparent that the success or failure of an early stage company is often determined by a management team’s ability and willingness to create alternatives.

For example, one of the most common mistakes made by early stage CEOs is to rely on a single source of financing.  The list of companies that have found themselves subject to a predatory financing solely because they are out of cash, out of time, and out of alternatives, is long.  Similarly, I think companies that are built around a single customer, a single potential strategic partnership, or even a single potential exit strategy, are setting themselves up for disaster.  By setting their sights on a single path, these companies are, by definition, limiting their opportunities to succeed.

The problem with creating alternatives is that it is hard work.  It takes time, and it takes effort.  In the busy world of a start-up executive, taking the time to focus on alternatives that may never come to fruition can be a tough proposition.   But at the end of the day, only a company with alternatives has the power to  determine its own destiny.  Always create alternatives.

Category: Legal, Venture Capital

An Ode by an LP

Posted on | March 25, 2010 | No Comments

I’ve been a little lazy in my posting during spring break, but came across this funny take on the Dr. Suess poem “The Lorax”  posted today by Chris Douvos.  While you can read the entire post at SuperLP.com, here is a sampling:

[With apologies to Dr. Seuss]

“Mister!” he said with a sawdusty sneeze,
“I am the Lorax.  I speak for LPs
I speak for LPs for LPs have no tongues.
And I’m asking you sir, at the top of my lungs” –
He was extremely upset as he warned retribution –
“What’s that THING they have done with our cash contribution?”

“Look, Lorax,” I said, “it’s easy to get crotchety.
GPs deploy billions; it sometimes still bothers me.
In fact,” I continued, “some think it’s a lottery.
A lottery whose tickets can be a new social network,
A diversion to give cube-dwellers ways to shuck work.
But it has other uses.  No, we’re not out of the woods.
You can use it to serve ads or sell virtual goods.
Or crowdsource a date or find homes in new ‘hoods.”

The Lorax said,
“Sir! You are crazy from drinking the potion.
There is no one on earth who would buy that fool notion!”

But the very next moment we were shown to be wrong.
For, just at that moment, a ‘tween came along.
And she thought that the club we’d just ridiculed was great.
She happily subscribed for thirty-three ninety-eight.

I laughed with the Lorax.  “You poor stupid guy!
You never can tell what some people will buy.”

Category: Venture Capital

Beware the bridge

Posted on | March 19, 2010 | No Comments

Bridge loans, or short term loans that convert into equity, are a common financing vehicles for early stage companies. In my opinion, they are too common, and, if used under the wrong circumstances, have the potential to cause more harm than good.

Don’t get me wrong, there are plenty of situations when bridge loans are not only appropriate, but beneficial.  For example, bridge loans are often used to finance a start-up company’s operations prior to the completion of a series A financing, or when a future round of capital is imminent.  In either case, upon completion of an equity transaction, a bridge loan generally converts into stock on the same terms as the incoming capital, with holders benefiting through a conversion premium or the issuance of warrants. 

The primary benefit of a bridge loan is simplicity.  With a bridge loan, lenders are able to assume a senior position in the company’s capital structure without creating a new class of stock.  In addition, they rarely require revisions to the corporate documents, and can be amended to include multiple investors, extend the maturity, or make other changes as necessary. 

It needs to be recognized, however, that bridge loans can be a high risk proposition for early stage companies in need of capital.

One reason is because of the terms, which are often lopsided in the lender’s favor.  As a result, bridge loans tend to create misalignment between management (who is anxious to pay them off) and the lender (who, particularly if they are not an existing investor, can benefit from leaving them outstanding).  In addition, if too lender-friendly, the conversion terms are almost always renegotiated by the incoming capital.  As a result, the company often finds itself negotiating on two fronts – with existing lenders and new investors.  This rarely helps the deal dynamic, or speeds up the fundraising process.

Regardless of the terms, the mere existence of a bridge loan can slow down a financing process.  Early stage companies usually raise money for one reason – they need to pay the bills.  The urgency associated with this use of proceeds is often essential to driving a financing to close (never underestimate the need to make payroll).  If, on the other hand, there is a lender willing to provide an interim funding solution, the urgency on both sides can tend to dissipate.

Finally, it must be recognized that bridge loans can carry a stigma.  It may be the result of all of the dot.coms that were hoping to be “bridged to profitability” in the early 2000s (only to see their bridges turn into piers), but the existence of a bridge loan (particularly one that has been pieced together) often conveys a sense of desperation that can be detrimental in the absence of a clear story or a clear path to permanent financing.

Again, if used wisely and under the right circumstances, bridge loans are a good and necessary tool.  Too often, however, early stage companies jump into bridge loans only because they are available, without understanding the inherent risks.  My advice to early stage companies in need of capital is to explore all of your alternatives before pursuing a bridge loan – particularly one coming from a new investor (as opposed to an existing shareholder).  If you do pursue a bridge loan, make sure it is part of a larger funding strategy, and not just a way to postpone the inevitable hard decisions.

Category: Venture Capital

Managing your social network

Posted on | March 16, 2010 | No Comments

There was a spirited conversation this morning at the Boulder Open Coffee Club about how to manage social networks in this day and age of (over?) connectivity.  It is an interesting challenge for those of us who have stuck our toe into the water on anything from Facebook to Foursquare.  Over the last decade we have seen our social networks evolve from names and addresses neatly contained in static databases (Outlook), to a dynamic network driven by user generated content (Facebook, LinkedIn, Twitter), to the point where people can physically locate us in the course of our everyday life (Foursquare, Gowalla).

Whenever this topic is discussed, two questions seem to arise.  The first question is where does each individual draw the line?  How much information is too much?  Are you comfortable using social networks as a means of connecting with family, friends and long lost high school classmates?  Would you consider using them as a tool for professional networking?  Is it a benefit or a concern when the information crosses from a virtual connection to a physical connection?  Is there a backlash coming because people feel over exposed and just check out all together (and there were a couple of these people this morning)? 

The second question is when will someone develop a tool that allows the user to manage the various and diverse relationships from one single platform?  In other words, a way for the user to assign different levels of access to his content without managing totally separate networks of “friends.”  While there have been several attempts over the last few years, no one seems to have come up with this one-stop solution.  My sense is that whatever platform carries the day will contain some combination of personal rating (i.e., each contact provided with an algorithm driven rating or grade based on background, recent connectivity, network overlap, etc…) and user based approval/adjustment (just can’t avoid the dreaded de-friending aspect of social networking). 

The continued growth and relevance of social networks is undeniable.  Whether you are an individual managing personal relationships or a Fortune 500 company trying to interact with your customers, engaging with people where they are aggregating must be part of the equation.  How we interact with our networks, and what tools we use to manage these relationships, remains to be seen.

Category: Social Networks, Technology

Techstars by the numbers

Posted on | March 15, 2010 | No Comments

Since it began in 2007, Techstars has been a great program for early stage entrepreneurs looking for mentorship and seed financing.  This weekend, David Cohen published some data on the companies that have gone through the program, and the results were impressive.  The highlights include:

  • In three years, about $16.5 million in seed-stage funding has been raised.
  • 27 of 39 (~70%) TechStars companies have either raised outside funding after the program or bootstrapped to profitability.
  • TechStars companies currently employ 156 people.
  • Four of the first ten companies from the inaugural 2007 class have already achieved positive exits.
  • The most recent group of companies resulted in seven VC-led follow-on funding rounds and three additional angel-led rounds.

If you are an entrepreneur looking to get your company off the ground, looking to meet some dynamic mentors with real life experience, and interested in spending a summer living and working in beautiful Boulder, Colorado, then I would urge you to apply.  Applications for the Boulder Techstars program are due on March 22nd, and the application can be found here.

Category: Venture Capital

How to Help a First Time CEO

Posted on | March 10, 2010 | 4 Comments

Yesterday, Bijan Salehizadeh of Highland Capital Partners had an interesting post on PE Hub where he offered some friendly advice to first time CEOs.  A large part of the article was dedicated to warning CEOs of the perils of waiting to share bad news with their board of directors.  Bijan asserted that first time CEOs are prone to keeping bad news to themselves, either relying on their ability to fix the situation or attempting to save face.  “Last minute notice of bad news” Bijan concluded, ”can leave a company trapped with fewer strategic or financing choices.”

I agree with Bijan wholeheartedly, but would take it one step further.  For board members of early stage companies with first time CEOs, helping the CEO to recognize and accept the truth is often one of the biggest challenges, and, I would argue, one of the biggest responsibilities.

The issue is not that first time CEOs are liars.  The issue is that they have become founders and CEOs for one reason — they are dreamers and visionaries.  If they were able to accurately analyze the challenges of starting a business, and truthfully assess the risks of failure, they probably wouldn’t have taken the plunge in the first place.

As a member of the board, the ability to recognize this common entrepreneurial trait and help the CEO navigate these tendencies can be invaluable.  The willingness to challenge plans, question assumptions, and push back when reality gives way to vision is one of the primary ways that a board member can serve a first time CEO (it doesn’t hurt if it can be done in a setting and manner that is supportive rather than confrontational).

CEOs are often successful because they are able to create a vision of the future that would otherwise be hard to recognize.  If a CEO is able to rely on his board to ask the tough questions, it is much more likely that the vision becomes a reality.

Category: Board of Directors, Venture Capital

An Age of Opportunity

Posted on | March 9, 2010 | No Comments

Last week, I was lucky enough to have dinner with a few real visionaries in the digital world.  The conversation focused largely around what makes this such an exciting time to be an early stage investor or entrepreneur.  The conclusion was that we are experiencing a unique confluence of historical events. 

The first and most obvious event is the emergence of a whole new world of technology.  Whether it is called Web 2.0 or something else, the era of cloud computing, software as a service, and other technologies that allow for information sharing and user-generated content has broken down traditional barriers to communication.  Today, there are a lot more voices shaping the conversation than there were just five years ago.

The second phenomenon is the aggregation of people in social networks and communities that allow for crowd sourcing, co-creation and collaborative problem solving across various disciplines.  The ability to leverage crowds has made many businesses far more efficient, and has led to incredible transparency from the customer’s perspective.  It has also been remarkably disruptive to several industries where scarcity and black box processes have long carried the day. 

The final piece of the puzzle, which seems somewhat counter-intuitive, is the financial meltdown that began almost 18 months ago.  Notwithstanding the lost jobs and failed business models, there are some benefits that can be found among the rubble.  As my partner Scott Beck likes to say, there are three things that drive change within companies: evolution, vision, and crisis.  One result of the global economic crisis is that many businesses have been forced to innovate on the fly, to find new solutions, and to create efficiencies within their organizations.  The consensus around our table was that we are probably 5 years further down the innovation curve as a direct result of the economic downturn.

So what does all this mean?  Well, in the world of early stage investing, technological innovation and industry disruption mean one thing: opportunity.  

An exciting time indeed.

Category: Crowdsourcing, Technology, Venture Capital

The Tangled Web of Patent Litigation

Posted on | March 4, 2010 | 2 Comments

Just to add an exclamation point to yesterday’s post about Apple’s patent claim against HTC, I thought I would share the diagram below.  It appeared in today’s New York Times and provides a sampling of the current patent litigation in the world of mobile technology.  A tangled web indeed. 

Graphic showing mobile patent lawsuits

(Thanks to Miles Gerson for bringing this to my attention)

Category: Intellectual Property, Technology

Apple and the U.S. Patent Mess

Posted on | March 2, 2010 | 1 Comment

The tech world is atwitter today over news that Apple has finally unleashed its army of patent litigators on HTC.  The Apple complaint, filed this morning, claims the infringement of 20 separate patents relating to the iPhone, and appears to be aimed primarily at HTC’s Android devices.

The complaint shouldn’t come as a big surprise – particularly to those who remember how Steve Jobs introduced the iPhone at MacWorld in 2007.  As he wrapped up his description of the new Multi-Touch technology (see video below) he ominously declared, “… and boy have we patented it.”  It was a not so subtle message to his competitors who, at least in the handheld world, always seem to be a half step behind. 

As people react to the Apple lawsuit, the debate seems to be focused around the question of “why now?”  Is the Android the first competitor viewed by Apple as a real threat?  Is this the first of many claims to be filed against Apple competitors?  Is this the beginning of the end of iPhone world domination?

While only time will answer these questions, one thing is perfectly clear:  the Apple complaint is a shining example of the broken U.S. patent system.

The evolution of our patent laws can be traced back to a series of judicial missteps, but at the end of the day, we have been left with a system that does little to incentivize innovation (its initial purpose).   In fact, I would argue that our laws, and the ever-growing expanse of protection offered by them, have driven a huge waste of corporate resources, perpetuated an endless race to the courthouse, and, ultimately, stifled true innovation as entrepreneurs have run for cover.

A lot has been written about this topic, but for those of those of you still clinging to the viability of the current system, consider the following:

  • At last count, companies operating in the US spend over $11 billion annually on patent litigation fees.   
  • Since becoming popular in the 1990s, the number of business process patents (e.g., the ridiculous Amazon “one click shopping” patent) have steadily increased, and now over 12,000 such patents are issued each year.
  • The Apple claim against HTC was reportedly filed with over 700 pages of exhibits and cites the violation of patents with titles such as “Unlocking a Device by Performing Gestures on an Unlock Image.”  (Really, is this what our forefathers had in mind?)
  • At the same time Apple is suing HTC, it finds itself fighting bitter and costly infringement battles with both Nokia and Kodak.  Not one of these disputes is likely to be resolved until the technology in question is well out of date.

I am certainly not blaming Apple for this mess.  They are merely playing by the rules established by the US courts.  Let’s just hope we can get a new set of rules before any more entrepreneurs throw in the towel and declare “game over.”

Category: Intellectual Property, Technology
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