Power Pitches

What do Investors Want? Maybe What the World Needs?

Try this: take a step back from your phone, your FaceBook, and your daily routine, clear your mind, and think about the large-scale institutions that need change. What markets to disrupt?

It’s going on three years since Fred Wilson of AVC did this excellent Google talk on disruption. What markets really need disruption? He said consumer finance, energy, education, and health care.

I’ve read more than 100 business plans in the last 8 weeks, and considerably more than half of them promised either “disruptive” or “game changing.” One or two of them might me.

I’d say there’s been movement in consumer finance over the last three years, and maybe in energy, but not much at all in education and health care. A lot of sound and fury, perhaps, but signifying nothing. Lots of online courses, especially for adult education. Lots of universities offer online courses, led by the likes of Harvard, M.I.T, and Stanford, including a lot of online institutions and new ideas like Kahn Academy and udemy. But not of this does much to change the basic model of one teacher and two or three dozen students in a classroom.

To me it seems like nobody’s dealt well with the problem of keeping younger kids engaged and learning by some other means than the traditional model. Or the validation and certification that comes from diplomas and lots of hours sitting in seats. Do you agree?

And then there’ s politics. In the U.S., at least, politics doesn’t work. Wherever you stand on the political spectrum, I bet you agree that our system is totally obsolete on fund raising, advertising, issues discussion, partisan politics, and the actual voting mechanisms themselves. Do you agree with the need for disruption there too — the business of politics, if not the core of politics and political parties. And the business of political discussion, and issues?

What is still true today, as it has been for a couple of generations, is that truly disrupting a market can mean a huge business win. For startups and whoever invests in those startups.

Tim Berry , Founder, Palo Alto Software
May 15th, 2012 0

Power Pitches

TED Talk 2007: David S. Rose on Pitching to VCs

It’s pretty amazing that the video is from five years ago and has been viewed something like 500,000 times.

Even though in the years since, I’ve done a lot more pitch coaching with a lot higher production value, it turns out that there is not much I would change in the content all these years later. Good luck with your fundraising.

Invested Interests

7 Reasons for Entrepreneurs to ‘First Know Thyself’

If you are going to be a real entrepreneur, it’s important that you know yourself well. After all, you won’t have a direct manager charged with giving you feedback, and your team probably will be afraid to tell you what they really think. Entrepreneurs need to recognize their own strengths and limitations.

In any case, your skills, talent, knowledge, personality, and strengths are your best assets as an entrepreneur. I’ve extracted many of the following points about knowing yourself from a book aimed at women professionals, called “Career GPS”, by Ella L. J. Edmondson Bell, Ph. D., but I see them applying equally well to every entrepreneur, man or woman. Let’s see what you think: Read more

Power Pitches

Can You Find Investors for a Family-Based Team?

I had in interesting discussion at the University of Texas Venture Labs Investment Competition last week. One of the teams there included husband and wife and wife’s father, with a very interesting business plan that I hope succeeds. They asked me to what extent family ties affect angel investor or venture capital interest.

Why me? Presumably because my wife and I own our business and our daughter is CEO and her husband COO. We did raise venture capital for the business, but not until we didn’t need it. At the time we had more than $5 million in annual sales, no debt, and positive cash flow. 

Unfortunately, most investors look askance at a startup with family members working together. For example, I was once in a group of investors that automatically ruled out the best plan in the group because it was lead by two brothers. I objected, but I was a minority of one, in a group of two dozen. 

So should a family-led startup stop looking for investment? No. They should research their target investors carefully to rule out prejudice based on family business. That’s not just a special case. In fact, every startup that needs investment should be pitching only to investors who have basic compatibility of goals, industry experience, and ways of working together.

This is always good advice: Choose an investor like you would choose a spouse.

And for sibling teams, or spouses, or two generations, prepare some extra due diligence information to address investors’ legitimate doubts. Ask yourself how will you answer questions about decision processes and decision hierarchy. Do you cross conversations between family lines and business lines? Do you have a family business code of conduct? Can you show an organization chart with clearly defined areas of responsibility for the various family members? Can you talk about how this works in practice. 

You can also point out that there are also worries about lines crossing when friends create businesses together. And you can remind them of outstanding successful sibling or husband-wife teams like Heidi and Peter Roizen, Doug and Gary Carlston, and Michael and Xochi Birch. 

What investors want, in my experience, is a good investment with a good risk-return relationship and a reasonable shot at high growth, scalability, defensibility and successful exit. When family members have what it takes to make that happen, you have the advantages of loyalty, compatibility, and hard work. 

Tim Berry , Founder, Palo Alto Software
May 8th, 2012 0

Invested Interests

Test Your Business Model Against These 10 Elements

You can’t succeed in business without an operational model that delivers value to customers at a reasonable price, with an underlying cost that allows you to make a profit. There are no “overrides” – for example, businesses don’t thrive just because they offer the latest technology, or because everyone wants to be “green, or because their goal is to reduce world hunger.

I expect that should seem intuitive to all entrepreneurs, but every investor I know has many stories about startup funding requests with major business model elements missing. The most common failures are solutions looking for a problem, lack of a defined market, and giving away the product. Read more

Fail Tales

Copywrong: Brilliant, Disruptive, Illegal Business Plans

Entrepreneurs tend to focus on opportunity rather than risk, and rightly so.  As Steve Blank has written, at its core, a startup is an organization formed to search for a repeatable and scalable business model.  In the lexicon of the lean startup movement, once “product-market fit” has been achieved, the focus shifts to scale and execution as the startup matures into a growth company.

In a sense, risk and opportunity are two sides of the same coin to early stage startups.  The huge risk that eclipses all others is that the product or service being offered simply won’t succeed — there is no product-market fit, at least at numbers that would make for a financially viable business — in which case (assuming competent execution) the perceived opportunity, viewed broadly, wasn’t really there to begin with. Read more

Antone Johnson , Founding Principal, Bottom Line Law Group
May 3rd, 2012 3

Pivotal Moments

Disruption vs. Revenue Quandary and the Tech Bubble

I remember the first tech bubble well. True story: In 1998, one prominent online vendor — long since dead, by the way — was selling my company’s product for $66 when the distributor price was $76. Also true: In 2000, a would-be acquirer flirting with buying Palo Alto Software for its web traffic, but wanted to leave out our $5 million revenue stream because “that would lower valuation.” 

And yet, despite that memory, last week I found myself suggesting to a local web software startup that they might be better off scrapping their so-called business model and just aiming for disruption, not revenue. 

Theirs is of course a special case. I saw a demo last week. Their software, though not yet released, looked to me like it could so cool that it could go viral. By viral I mean remarkable in the popularized-by-Seth-Godin sense of something so good that users tell other users quickly. Every user generates additional users fast. And it could also be disruptive. By disruptive I mean really changing the way a lot of people do things. I’d like to tell you about the company but for reasons not worth spelling out that might be inappropriate until middle May. 

However, this is the second time in three months I’ve suggested to a software startup (different startups) that they might have to choose between being disruptive and charging money to cover costs. Which strikes me as dangerous advice. Hit it really big or go broke. It certainly heightens the risk. 

To make it interesting, I found Nick Bilton’s With No Revenue, an Illusion of Value on the New York Times bits blog last weekend. He argues the exact opposite point:

When this next bubble pops — and it will pop — the idea to make no money can finally pop, too. Then investors can start working with companies to build businesses that have long-term financial goals, instead of just building a short-term mystery.

However, uncertainty is a sign of intelligence. I think. Maybe. So I’m not sure. 

Still, look at the big winners of the last few years: Facebook, Twitter, and Instagram, for example. Valued in the billions of dollars. Entirely free to users. And, although Facebook now makes billions in revenue, revenue was not the point in the beginning. Revenue in fact would have killed their growth. Do you agree? 

So there’s the dilemma: disruption vs. revenue. 

That is, at least, until some big crash of publicly-traded stock and visible valuations of top-grade startups because fashions changed and analysts started liking revenue. If that ever happens. My favorite tech bubble analysis this week is by Chris Dixon, whose thoughtful piece here includes a nod to disruption vs. revenue: 

The argument that sometimes startups get better valuations without revenue is somewhat true. As Josh Koppelman said “There’s nothing like numbers to screw up a good stories.” This is driven by the psychology of venture investors who are sometimes able to justify a higher price to “buy the dream” than the same price to “buy the numbers.” This doesn’t mean the investors think they will invest and then get some greater fool to invest in the company again. For instance, at the seed stage, intelligent investors are quite aware that they are buying the dream but will need to have numbers to raise a Series A.

What do you think? Is a valuation crash coming? Does even asking the question make it more likely? 

(Note: I apologize for defining viral and disruptive when you already knew what I meant. I like to explain those jargon buzzwords when they come up.) 

Tim Berry , Founder, Palo Alto Software
May 1st, 2012 0