Articles by Tim Berry

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 flirted 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.

Of course, theirs is a special case. I saw a demo last week. The software, though not yet released, looked potentially cool enough to 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 it has the potential to change the way a lot of people do things. I’d like to tell you about the company, but for various reasons that would 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. Quite honestly, this 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 occurs and visible valuations of top-grade startups fall because fashions change and analysts start 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 Kopelman said “There’s nothing like numbers to screw up a good story.” 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.)

Invested Interests

Are Startups Now Changing the World Instead of the Web?

It’s too soon for rigorous data analysis. I don’t have surveys. But I’ve been through about 120 startup business plans in the last month and it seems like there’s a big shift. There’s a lot more science and a lot less web. There’s a lot more save the people, save the world, than there is save the web. surgery

I’m talking about what I’ve seen as a member of a local angel investment group and a judge at four business plan competitions. This is just anecdotal. Still … it’s been a long time since I’ve heard somebody promise the next Facebook, or next Twitter, or next Netflix. Read more

Invested Interests

Angel Investors: Watch for Business Plan Competitions

I just finished three days as a judge for the Rice University million-dollar business plan competition, which was held at the Rice campus in Houston last Thursday through Saturday. If you’re an angel investor and you aren’t aware of business plan competitions, maybe you should be.

The finals were very impressive. As the six finalist companies went through their pitches, every single one was a very attractive investment. If you’re curious, look at NuMat Technologies, the winner. Then look at Medtric Biotech, Lemm Technologies, SolidEnergy, Solanux, and Salveo Vascular, ranked second through sixth, respectively. You’ll see nothing there but high-end technology, innovations, intellectual property, experienced management teams, very impressive resumes, and huge markets. Read more

Industry Experts

5 Traits Investors Look for in Entrepreneurs

What do investors look for in an entrepreneur? This month I’ve been reviewing submissions for my local angel group. I found this excellent list of 14 Ways to be a Great Startup CEO, posted at OnStartups by Jason Baptiste. And that reminded me of my own list, 10 Traits of Successful Entrepreneurs, which I posted a few years ago, before I joined the angel investing group. Both of those lists, against the background of what I’m doing this month, remind me that what makes a successful venture, or a successful entrepreneur, isn’t necessarily the same thing that makes a good investment opportunity for outside investors.

Hint: there’s a difference between a good business and a good investment. There are a lot more good businesses. A good business can make its entrepreneurs happy, while a good investment has to make the investors happy. Investors aren’t employees. They aren’t building themselves jobs. They need to get actual money back, sometime in the future, to get a return. Read more

Power Pitches

Reflections on Reviewing 30 Plans on Gust.com in a Day

I was never one of those people who rushed to get everything done early. I’m as likely as you are to put things off. So this morning I’m looking at 30 plans on Gust to be discussed this evening when we meet as the Willamette Angel Conference to take the first steps towards an investment decision in May. I started after dinner last night and I will have reviewed all 30 before I leave for the meeting in the late afternoon.

What does this mean if you’re one of the plans submitted? Here’s what I think this process means to the entrepreneur:

My process and my procrastination is not unusual. A lot of investors are going to work like we do, using quick views not to select plans but to rule some out.
I consider the information posted on Gust sufficient to rule out a plan. Implicitly that means it’s also enough to take an initial 30 plans down to 10, 12, or 15 we want to look at in more detail.
I’m immediately grateful to the startups that help me with this by using the Gust feature of posting a short video to help me get acquainted. When it’s done well, it makes a good first impression. But a bad video doesn’t help, and I’m looking for the best investment, not the best video.
The writing in (executive) summaries, descriptions and the overall business plan should not get in the way of the information. I’m not critical of style unless it interferes. I want formatting to make it easy to read and find the information I want.
I always want there to be a business plan available even if I’m not going to necessarily read it yet.

I’m definitely not going to start at the beginning of the plan and read to the end. But I want to have the plan available because I want to go from the general statements to specifics, so I’m likely to look for specific things in a plan.
What I look for depends on the plan itself, but to give you examples, I want to make sure a business-to-business startup understands the sales cycle and what receivables do to cash flow. And with a lot of plans I want to see the percentages in expenses. And with most I want to see founders’ salaries.
I’ll go into a plan quickly and I want to find what I’m looking for quickly and leave. Think of it like guerrilla plan reading. I’m going to be rating a startup lower if the information I want isn’t there or if I can’t find it.

I say “yet” in point 5 above because although I’m comfortable eliminating a startup without reading its business plan, I will never invest in a startup without reading its plan. In our group we divide due diligence into teams and the team looking at a company will always read its plan well. Usually more than once.

I hope that my sharing here helps you if you’re on the other side of the table from me. If it makes you feel better, I started on your side of the table too.

Industry Experts

Blogger About Angel Investment: “Confused, Scared, and More Than a Little Ashamed”

Now there’s a great title for a blog post. Writing about angel investment, on his Portland-based Silicon Forest entrepreneurship etc. blog, Rick Turozcy titled his post: I’m confused, scared, and more than a little ashamed. Don’t even try to tell me that doesn’t make you curious. Rick’s a smart guy, very well known in Portland (OR), and his blog matters. So here’s his problem:

WTF Angel Oregon? This is one of your concept companies? Blanket Booster? Again… WTF?

Yes, it turns out that the Portland angel group called Angel Oregon (actually OEN Angel Oregon, where the OEN stands for Oregon Entrepreneurs Network) just announced an investment in a startup making a bar that goes on a bed to hold the blankets up so they don’t weigh down the feet. What’s the problem?

I’m struggling to grasp how a rail that holds your blanket off of your feet is a better investment than the hundreds of concept companies I’ve talked to in the past six months.

Rick likes high tech. He’s a techie, entrepreneur, and startup expert, deeply immersed in a local incubator. (And I get that, I’m a techie too. Look at my bio.) He says this shows two problems:

Angel investing in our region is decidedly weak in tech. And with good reason. Very few of the Angels in our region have a tech background. As such, they’re not very confident investing in tech. Angels invest in what they know. I get that.

You didn’t even enter the race. You didn’t even have the confidence to take your awesome idea to Angel Oregon. That you didn’t feel like you had something worthy of investment. That you didn’t think your startup was worth submitting to a selection committee.

I like the way Rick writes. His point number two is golden. I hope it’s clear he’s talking to all the techie entrepreneurs in his incubator, on his blog, and working in Portland. You didn’t enter. Touche. Well said.

Posting here as a very active member of an Oregon angel investment group — not Angel Oregon, but one in Eugene and Corvallis, the Willamette Angel Conference (WAC), I’m not comfortable with Rick’s summary of Oregon angel investor tech background. Our group has 35 members and more than half of them have come out of software, web business, or computer hardware. We have two major universities in our two towns, and there’s a huge Hewlett Packard installation in Corvallis. We’ve made three investments so far, two of them software companies, one a clean-and-green personal product. I don’t think we’re weak on tech. But Rick’s talking about the group in Portland, 100 miles north.

Here’s part of the comment I left:

One thing I dearly love about business is that almost everything is a marketplace. Buying is voting, and investing is voting. And people are unpredictable. Self interest rules in these markets, and investors are spending their money. Some consider the good of the community, some care more than others about the environment, some want to change the world, most are comfortable with investments in industries they are familiar with, some care only about what gives them the best risk-return relationship. You wind those various factors up like a top or a wind-up doll, and you set them lose, and what happens is what happens. It’s beautiful.

That’s my answer to Rick’s worries. I’m not confused, I’m not scared, and I am not in even the slightest bit ashamed. Hooray for business.

Power Pitches

Warning: Half a Truth is Three Times a Lie

Entrepreneurs: think of yourself in a pitch situation. You’re talking to a small collection of people you don’t know. They’re taking notes. You’re talking and showing slides from your pitch deck.

I think you assume that on any subject you cover, there is at least one person sitting quietly watching you who knows a whole lot about that subject. Which means that a single half truth can sink an entire pitch.

I’ve seen this happen far too often. After the pitch is done, the pitchers exit, one of the investors still in the room points out a half truth. For example, somebody who knows about physical product distribution points out that the plan to get into channels ignores the power of the key distributors who feed the retail chains. For example, the conversion rate projection is way too high, or pay-per-click estimate way too low. For example, marketing costs as percent of revenue are about a fifth of the industry average. For example, competitive comparisons that have bad information in them.

What reminded me of this today was this piece on buying friends in Facebook. How do you look if you hinge one of your pitch points on success in Facebook against the background of spreading knowledge about way to manufacture that particular statistic. Which is also true of Twitter followers, with different techniques and even software packages to increase the number.

So how do you handle interruptions, and specific questions, when you’re pitching? What happens when somebody challenges you on a specific point? My suggestion is: Whatever you do, don’t pretend you know when you’re guessing. Ideally, break your assumptions down into their component pieces, explain where they came from, and be open to suggestions at that moment.

The worst option is to hide a guess with bravado and the face of certainty. Reasonable doubts are okay, assumptions are even better.

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Thoughts on startups by investors that fund them & entrepreneurs that run them

Tim Berry