6.22.11 by Dov
Interesting post from David Cowan at Bessemer. In it, he explains why entrepreneurs seeking venture funding should prefer to pitch to an associate, rather than a partner, the first time they meet with a venture firm. I completely disagree. Heck – we don’t even have an associate at Allos.
His argument comes down to two points:
First, the partners are busy helping their portfolio companies and fundraising, so if they only invested in companies for which they attended the first pitch, many entrepreneurs would never get a chance to pitch at all.
Well, perhaps. But by my count, Bessemer has raised $3 billion since 2009 (call it $1 billion a year), or a bit over $60 million per partner per year. They’ve also made nearly 80 investments (5 per partner) over the last 12 months. So, yeah, I guess they’re busy with their portfolios and fundraising.
There is another way, though. Just as a counterpoint, at Allos we have far less capital and far fewer investments per partner (roughly 90% less of each). We may not be making as much money off of the management fees our investors pay, but it works for us, and it lets us spend far more of our time working with each of our portfolio companies, as well as meeting new entrepreneurs.
Second, he argues that the associates are smarter about new market spaces than the partners, because the partners are so busy. So, you’ll get better feedback as an entrepreneur from the associate than you would from the partner.
Seriously? But, the partner is who you want on your board? Are they planning to do a crash course on your market after they invest? This strikes me as so illogical that I’m not sure I have much more to say.
Look – I certainly don’t want to be setting up a comparison between Bessemer and Allos. They’ve been around for decades and are, by all accounts, one of the most successful venture firms in the world. At the same time, I think time will show that the Allos approach can work for our investors – and that it can be beneficial for entrepreneurs… even the ones we don’t invest in.
Disclaimer: I actually suspect that much of the source of this disagreement is the difference in the investing environments between the Midwest and the coasts. Because the number of startups on the coasts is so much greater (and all of them are probably sending their business plans to the same 30 investors), each venture firm there is going to see dramatically more deal flow than anyone in the Midwest. So, I suspect that our model just won’t work for a firm like Bessemer. At the same time, I’m not sure that pretending their approach is better for the entrepreneurs is really the answer, either.
6.21.11 by Dov
Who thinks this is useful?
From my perspective, I think people have gone overboard with QR codes. I actually saw a billboard over the interstate the other day with a QR code and a message to the effect of “drive safely, use this QR code instead of typing in the URL”. Seriously? Like pulling out my phone, running the QR code app and getting it to focus on a billboard while driving (let’s say) 55 miles an hour is safer than typing a URL (not that I’m recommending that) or even just trying to remember it for later?
New media is great and all, but some common sense would make it go a lot further.
6.18.11 by Dov
Had a great time today at Continuous Web-Cincinnati’s Startup Showcase. Yet another great sign of the up-and-coming entrepreneurial community in the region!
6.14.11 by Dov
John and I had the opportunity to attend the kickoff event for Ohio’s 10x competition yesterday in Columbus. 10 great teams of entrepreneurs will spend the next 80 days working to advance their businesses, with the help of a collection of entrepreneur and investor mentors.
The event was started with a keynote by Mark Kvamme, a partner at Sequoia Capital and the “Director of Job Creation” for the State of Ohio. In it, Mark highlighted eight key attributes of successful startups. Not that every successful startup has all eight, but the more the better. You’ll see the list isn’t too different from what many others have said and written, but we thought it was succinctly put and worth reprinting (along with my commentary on what each one means):
He also said Sequoia believes that having a really big market is absolutely critical – and that lack of a great market is a non-starter. I think the implication was that it wasn’t on the list because it’s in a category all its own.
There’s two of these I’d like to expand on here: frugality and data.
If you, as an entrepreneur, want to make a lot of money at the end of the day, frugality is the key. Your goal should be to raise as little capital as possible (and thus suffer as little dilution as possible) while still having enough to reach the next value-creating milestone that will let you raise more capital at a (hopefully significantly) higher price. That means you need a complete focus on what those milestones are and developing and executing the Minimum Viable Plan to reach each one.
What’s a “Minimum Viable Plan”? Well, I just made it up, so I’m not completely sure. And maybe it should be called the Minimum Viability Plan, because it’s that, too – see what you think after you hear what it is.
In any case, similar to the reasons Eric Ries advocates for the creation of minimum viable products as part of the “lean startup” philosophy, the Minimum Viable Plan is the the plan that allows you to reach the next milestone (or – nearly as valuable – determine that you can’t reach it) for the least amount of time and capital possible. And that’s the essence of Kvamme’s “frugality”. Frugality for your company might mean spending $100 in the next month or it might mean spending $1 million. But in every case, it’s about only spending on things that are on the critical path of the Minimum Viable Plan. That’s probably worth another blog post at some point. Stay tuned.
So now you probably see why data is so important. Data is what lets you know if you’ve hit your milestone or, at least, are trending in the right direction. You need to be able to quantify the attributes that will make your business successful and then measure until it hurts. Darmesh Shah has a great post of a talk he gave at the Business of Software conference last fall. In it, you’ll see a some great examples of using data to manage your business and your path to success. You’ll also see a lot of discussion of making happy customers and thinking about the outcomes for your customers of using your products. If you think about it, what he’s really talking about is being a painkiller – understanding your customer’s pain and then solving it.
What do you think? Which of Mark’s 8 points do you think is the most important? What did he forget that you’d add to your own list?
6.9.11 by Dov
Jill Hubbard Bowman is starting a series of posts on use of open source software by startups. I’d expect it to be a good read, and it’s an issue that EVERY software company CEO needs to be on top of. Virtually any software (SaaS or traditional) company today can benefit from using open source software – both internally and as part of the ultimate product. It can speed development cycles and let you focus more attention on the pieces of functionality that are unique to your value proposition. But it is critical to understand the various flavors of licenses and what they each allow and require.
Also – when you’re thinking about throwing in that new piece of code, you need to not just ensure you’re using it correctly today but also make sure that your likely acquirers can use it the way they want. The last thing you’d want is to have built a hugely successful business and have an eager acquirer lined up, only to find during their due diligence process that some critical piece of code is either being used in violation of a license or would be in violation of a license once the acquirer buys you.
So, if you haven’t already done a thorough review of the licenses you’re operating under – do it now. You are much better off refactoring your code today than after your deal blows up.
6.3.11 by Dov
So, now it’s official that Groupon’s preparing to file for an IPO with a rumored price target close to $20B.
David Sinsky of Yipit has a great post on why Groupon’s argument that they have a network effect is tenuous at best, supported with some nice analysis out of the recently filed S-1. And in this case, it really matters. It’s already clear that Groupon’s model can be copied pretty easily (it’s been clear all along, but now there’s empirical evidence, too – for example here, here, here, … well, you get the idea). But Groupon argues that it has a first-mover advantage. Specifically, that there is a network effect – the more users they have, the more valuable they are to merchants, and vice versa.
For months, I’ve been telling anyone who’d listen (i.e. my dog) that there is no network effect for a business like this – because there’s nothing tying either side to the network. I can (and do) subscribe to multiple coupon services. Heck – Yipit’s whole business model is to facilitate consumers having access to EVERY coupon service. So, just because I’m part of the alleged Groupon network doesn’t stop any other competitor from getting me in their “network”, too. This is different from a traditional network – think your mobile carrier. There, once you’re in, you’ve got free mobile-to-mobile calls with other people in the network. The only way to get free minutes to your friends using some other carrier is to switch carriers (or have two phones).
As a result, Groupon adding more merchants doesn’t increase the likelihood that I’ll sign up. Because there is neither a cash cost nor a material cost in the form of time, effort, etc., I’m going to sign up with anyone who’ll offer me a good deal.
Similarly, if I’m a merchant, I only pay for the coupons that are purchased. So, while I like the ability to reach lots of people at once through Groupon’s “network”, it’s basically just as easy to send those coupons with multiple providers. And in fact – I probably PREFER to switch coupon vendors periodically, in order to access the customers who may only use one or the other. So again, adding more customers doesn’t significantly increase the likelihood a merchant would sign up (though there’s obviously some minimum critical mass required to be of interest).
While my dog totally agrees that there’s no reason to expect a network effect here, it’s nice to finally have some data to back it up. And David does a great job of digging the network nuggets out of their S-1 by looking at the case studies they present on selected markets. Feel free to read his post now… I’ll wait.
Back? Pretty clear there’s no network effect there. One additional metric that David skips (why beat a dead horse, right?) was that revenue per Groupon is declining steadily (in the face of a growing “network”) in every market they highlight except London. Not sure why London would be an exception… any ideas?
I’d also add that I’m not sure that he needs the caveat about average customer “age”, which does appear to be growing in Chicago. I don’t agree that this could explain the other numbers. If you were demonstrating a network effect, your customers wouldn’t buy less the longer they were customers – because the network was growing and therefore the value to them would be increasing.
So, 8x revenues for an unprofitable company that may not even exist in 5 years, due to a lack of any sustainable competitive advantage and an ever-increasing number of (well-funded) competitors? I’ll pass, thanks. (Not that that will stop the company’s executives and investors from making a fortune on the backs of those who buy into the IPO craziness.)
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