Commodity
Which investors to avoid
Acquisitions remain nothing more than a welcome diversion on your way to building the largest technology empire. And even now when IPOs have dried up any focus away from building your empire is damaging. Real disruptive innovation is resistant to economic aberrations and a consistent focus on customer value remains your only rescue.
I believe that IPOs for technology companies will return (and subsequently spur more pre-IPO acquisitions), albeit not with the same players. Real companies can only be built by real entrepreneurs, with real disruptive products supported by real investors. New participants (on both sides) with higher moral values will be the ones to restore trust in the technology industry and subsequently public stock markets that want a piece of it.
Today, the VCs are stuck with a product of their own aristocratic making. Commoditization of investment philosophies since the 1990s has generated technologies that can best be described as sexy-cool rather than disruptive and meaningful (with a few exceptions). It paved the way for get-rich-quick entrepreneurs that are skilled in feeding the dogs the dog-food, rather than support the real entrepreneurs that have a dissenting view of the world.
So, assuming you as an entrepreneur are for real, how would you recognize an investor that is not. Here are some of my anecdotal recommendations:
1/ Avoid an investor who blames his quick response on ADD
Attention Deficit Disorder is an illness, not a skill. Recommend the investor to consult a doctor.
2/ Avoid an investor who does not carry (or seriously considers) an iPhone
The iPhone is the biggest innovation in consumer electronics in my lifetime (so far) and if your potential investor does not understand its ramification to the technology ecosystem as a whole, it is unlikely he will get yours.
3/ Avoid an investor who cannot price your company ahead of you.
Any technology investor should be able to price the value of your disruption. Ask the investor for the valuation and if he is close to your target, you can share with him your cost model and where you are today on the trajectory. Cost model and stage (the risk) are a discount to the disruptive value, the ability to build the technology is merely a commodity. In Silicon Valley technology is not the risk, but market entry with sufficient disruption is. Walk away from investors that incorrectly evaluate the risk model.
4/ Avoid an investor whose partners you can’t stand
Investors in a fund make decisions collectively, they need partner consensus before they can invest - just like in politics (more on that later). A firm with a partner you don’t like should be taken off your VC prospect list, as you cannot risk the influence of the bad apple to your company’s future. Develop your personal blacklist (as we did) based on fundamental people principles.
5/ Avoid an investor who wears his education on his sleeve
Wearing a Super Bowl ring means you made it in the real world, wearing an Ivy League ring does not. I wholeheartedly agree with Craig Venter that later stage education (without operating experience) in general is a deterrent to creativity and innovation or the ability to spot and spawn it. The majority of Silicon Valley investors are remnants from a bull market, echoing beliefs that are founded on skewed business principles.
6/ Avoid an investor who asks really dumb questions and is proud of it.
I never thought dumb questions existed until I ran into one investor who proudly blogged about how other entrepreneurs simply walked away from him, making his life easier. We walked away from him too.
7/ Avoid an investor who thinks he knows your industry better.
Even in the unlikely scenario he does, you should still walk away. Investors that know industries better than the entrepreneur should have become one. So either the investor is better informed (which should send you back to the drawing board) or he thinks he does (which becomes a pain in board meetings). Investors see a lot of things that don’t work, rather than discover the opportunities that do.
The bottom line is that we recommend entrepreneurs not to squander their great ideas with the first investor that waves money in their face. Real disruption does not become extinct quickly and so you literally have years to find a great investor out of the 790 firms that exist in the United States.
Thankfully the get-rich-quick money schemes in technology are drying up, so make sure you, as the entrepreneur, also have the integrity to build real disruption that spawns real and lasting customer value for years to come.
I look forward to helping develop new investor 2.0 and entrepreneur 2.0 strategies with you.
Building efficiencies - continued
Thursday - October 16, 2008 Filed in: Entrepreneurial
| Venture
Capital
I received a lot of feedback and questions on my
previous blog posting named Building
efficiencies in tough times and the embedded
presentation posted there. The danger of
attaching a presentation is, that as a reader
you may miss the rational that built the words.
Because of that I want to explain my sometimes condensed thinking a little further.
It may have appeared that I only care about the product, but nothing is farther from the truth. The diagram on the left of the chart is what I see a lot in technology companies, early and late stage - across the board. The diagram on the right is what I tried to convey with the words in my presentation. Let me clarify:
Many companies develop incremental innovation (to leapfrog their competitors) without a diligent (re-)assessment of the opportunity to change the battle field. Not surprisingly. Real disruptive innovation requires a certain amount of vision, faith and a compass combined with larger commitments and investments, all seemingly based on untested values.
The path of least resistance therefor is to start with an incremental product and throw inordinate amounts of marketing & sales at it, in order to push it beyond its competitors into the marketplace. That is a highly inefficient model (in any economy). But it is a model to which many companies are forced to comply because of risk adverse management and the stale investment criteria deployed by many Venture Capitalists (VCs).
So, it is somewhat ironic that the VCs are now telling their startups to be more efficient, right after they were pushed through the VC wringer of startup-commoditization.
I believe the market for cheap (bootstrap-to-market) technology companies, that yield a large early exit is gone. That model only worked in a bull market of technology (from the 90s that has not dissipated) and the investors that still cling to that model will get punished for it. The new opportunities are for companies that build real macro-economic value.
The starting point of the next wave of innovation, in my view, is to feed a macro-economic need, as depicted in the diagram on the right. That macro-economic need is directly attached to the way we behave as humans (which is relatively predictable). It is our need to express ourselves, live the life we want and be in control (rather than technology controlling us). Think free-market principles, think social, think benefits, think fundamentals.
The fundamental shift in thinking that needs to occur in Silicon Valley, is to develop technology with a fresh mind, looking from the outside in, and serve a larger, less specialized, constituent.
Apple comes to mind as a company that often completely ignores the current state of the technology industry and connects better to basic human needs than any other technology company. But Apple can improve/be beat at the macro level, but I digress.
We simply need to support human behavior with technology.
With “free” distribution of information through the Internet, psychographics - not demographics - matter. Four-hundred year old free-market principles, The Long Tail, and marketplaces like eBay prove that the traditional rules of marketing do no longer apply. In my thirty years in technology I have never met anyone who truly understands markets. And market definitions have changed, they comprise no longer of buyers that fit an artificial model (I cringe when I hear people debate for hours how many users delineates the SMB segment), but because they subscribe to the pain or gain from which subsequently, marketers can extrapolate a larger pool. Bottom-up.
We do not all need to be economists to create the next successful technology company, the material is all around us. All it takes is a healthy interest in the actual behavior of human beings, compare their offline and online behavior and fill in the gaps. So, stop supporting companies that just build nifty technologies, but focus on companies that create larger macro-economic differentiation. More impact to everyday people.
No company will be more efficient by simply cutting cost (as suggested by the recent doom-and-gloom VC messages), it will just take longer to die. The real efficiency comes from a more disruptive value that attaches more people to better technology. On top of that, macro-economic value is very resistant to economic downturns.
Because of that I want to explain my sometimes condensed thinking a little further.
It may have appeared that I only care about the product, but nothing is farther from the truth. The diagram on the left of the chart is what I see a lot in technology companies, early and late stage - across the board. The diagram on the right is what I tried to convey with the words in my presentation. Let me clarify:
Many companies develop incremental innovation (to leapfrog their competitors) without a diligent (re-)assessment of the opportunity to change the battle field. Not surprisingly. Real disruptive innovation requires a certain amount of vision, faith and a compass combined with larger commitments and investments, all seemingly based on untested values.
The path of least resistance therefor is to start with an incremental product and throw inordinate amounts of marketing & sales at it, in order to push it beyond its competitors into the marketplace. That is a highly inefficient model (in any economy). But it is a model to which many companies are forced to comply because of risk adverse management and the stale investment criteria deployed by many Venture Capitalists (VCs).
So, it is somewhat ironic that the VCs are now telling their startups to be more efficient, right after they were pushed through the VC wringer of startup-commoditization.
I believe the market for cheap (bootstrap-to-market) technology companies, that yield a large early exit is gone. That model only worked in a bull market of technology (from the 90s that has not dissipated) and the investors that still cling to that model will get punished for it. The new opportunities are for companies that build real macro-economic value.
The starting point of the next wave of innovation, in my view, is to feed a macro-economic need, as depicted in the diagram on the right. That macro-economic need is directly attached to the way we behave as humans (which is relatively predictable). It is our need to express ourselves, live the life we want and be in control (rather than technology controlling us). Think free-market principles, think social, think benefits, think fundamentals.
The fundamental shift in thinking that needs to occur in Silicon Valley, is to develop technology with a fresh mind, looking from the outside in, and serve a larger, less specialized, constituent.
Apple comes to mind as a company that often completely ignores the current state of the technology industry and connects better to basic human needs than any other technology company. But Apple can improve/be beat at the macro level, but I digress.
We simply need to support human behavior with technology.
With “free” distribution of information through the Internet, psychographics - not demographics - matter. Four-hundred year old free-market principles, The Long Tail, and marketplaces like eBay prove that the traditional rules of marketing do no longer apply. In my thirty years in technology I have never met anyone who truly understands markets. And market definitions have changed, they comprise no longer of buyers that fit an artificial model (I cringe when I hear people debate for hours how many users delineates the SMB segment), but because they subscribe to the pain or gain from which subsequently, marketers can extrapolate a larger pool. Bottom-up.
We do not all need to be economists to create the next successful technology company, the material is all around us. All it takes is a healthy interest in the actual behavior of human beings, compare their offline and online behavior and fill in the gaps. So, stop supporting companies that just build nifty technologies, but focus on companies that create larger macro-economic differentiation. More impact to everyday people.
No company will be more efficient by simply cutting cost (as suggested by the recent doom-and-gloom VC messages), it will just take longer to die. The real efficiency comes from a more disruptive value that attaches more people to better technology. On top of that, macro-economic value is very resistant to economic downturns.
Great Technology = Great Company?
Friday - September 02, 2005 Filed in: Positioning
| Strategy
On a regular basis entrepreneurs approach me with
jaw-dropping technology, wonderful to look at from an
innovation perspective but many times hard to
envision as a standalone sustainable profit center.
So what technology makes a successful company?
Technology is becoming a commodity. Think about it from a macro-economic perspective. Information technology is the instrumentation, not the differentiation of customer businesses. World's largest retailer, Walmart does not rely on technology to be successful, technology was barely available when Walmart started. Walmart built an effective business model and, in-house continuous to shape technology to support the business model. No packaged apps, or technology silos here.
Technology companies do become successful when their technology drives, usually with incremental improvements, the evolution in a marketplace. Google is successful because it optimized the online advertising business model and increased its effectiveness. It's all about market principles, not technology (BTW: which average user can tell the difference between Google and Yahoo! search). eBay is successful because it empowers free-market principles and supports true meritocracy in the sale of goods.
Bottom line:
1) Investigate de-funct, constricted or outdated markets and build technology that improves the effectiveness of those markets.
2) Find capital from investors that understand the market and appreciate technology, not the other way around.
Market principles are seldom wrong, the instrumentation often is.
Technology is becoming a commodity. Think about it from a macro-economic perspective. Information technology is the instrumentation, not the differentiation of customer businesses. World's largest retailer, Walmart does not rely on technology to be successful, technology was barely available when Walmart started. Walmart built an effective business model and, in-house continuous to shape technology to support the business model. No packaged apps, or technology silos here.
Technology companies do become successful when their technology drives, usually with incremental improvements, the evolution in a marketplace. Google is successful because it optimized the online advertising business model and increased its effectiveness. It's all about market principles, not technology (BTW: which average user can tell the difference between Google and Yahoo! search). eBay is successful because it empowers free-market principles and supports true meritocracy in the sale of goods.
Bottom line:
1) Investigate de-funct, constricted or outdated markets and build technology that improves the effectiveness of those markets.
2) Find capital from investors that understand the market and appreciate technology, not the other way around.
Market principles are seldom wrong, the instrumentation often is.