Thursday, November 26, 2009

Monday, November 16, 2009

Some things to look for when seeking venture capital

Venture capital firms are not just a source of finance for the lucky few who manage to pitch their idea better than the thousands of other innovators competing for scarce resources.

A venture capital firm looks beyond the idea and is often more concerned with the team who will deliver the business growth.

In the same way, when seeking an investment by a venture capital firm, don't just spend your time marching up and down Sand Hill Road, rattling the tin for contributions hoping for the quickest offer of a term sheet. Instead, you need to view the process as a courtship. In the same way that a job interview is really an "inter-view" - an opportunity for a company to size you up, but also an opportunity for you to gain direct insight into the team you may be working with - you need to work out if you can work with this team.

  1. Will the VC team be able to help marshal all of the non-financial resources you will need to scale up your business? 
  2. Will they be an active or passive board member? 
  3. Can they help you find the right staff and do they have the connections to help you get the product or service to market quickly and efficiently? 
  4. Will they be a useful sounding board and source of ideas for when the going gets really tough?

Bear in mind that for the VC money they will have active board involvement to ensure that they maximize the return to their investment and minimize the risk that the entrepreneur is going to make mistakes. And they have most likely seen all those mistakes before.

Remember that this relationship will likely last several years and for the success of the business, it has to last. But there will be an end - because the VC must be focussed on 'the exit'. VCs are always looking at how they  will recoup their investment and pay back their Limited Partners with profit


So when preparing your pitch remember that the VC is not just a source of finance to help an innovator on the path to mega wealth, you have to make the relationship work.

Tuesday, November 10, 2009

Unleashing the Collective Genius of Employees

Unleashing the Collective Genius of Employees is the name of a webcast from Stanford University which I watched recently. It describes an excellent idea for capturing and encouraging innovation in the workplace. If you're interested in watching the whole seminar it takes less than 1 hour and can be found here. http://tinyurl.com/ylnf3fm

In summary, it describes a kind of 'stock market' for ideas in which participants (the employees) are given notional capital to invest in the ideas generated from within the company. The idea is that rather than have good ideas lost in the 'ideas basket' because of a lack of time or resources or because the promotor of the idea can't navigate the politics, there is a mechanism to have ideas investigated and championed (or quashed) based on an internal market mechanism.

Wednesday, October 14, 2009

Venture Capital 101: How a VC fund works

A General Partner (GP) raises a fund (say $100 million) which is usually a 10 year partnership between a group of Limited Partners (LP). This limited partnership of typically involves about 10 investors.

All the investing is made in new high risk ventures over the first five year period during which time the GP draws down the funds promised by the LPs ($100 million) at the rate of $2 million/year

The second five year period is the harvest time (although there might be some follow-on investing made during this time as well).

The ventures need to execute the 'exit' part of the strategy and the GP starts returning funds to the LPs.

The GP charges a management fee of typically 2%/year of the total for the first 5 years.

This management fee declines at a linear rate to zero over the second 5 year period (or a percentage of the assets is the consideration if those assets haven't been sold yet).

If the fund has doubled in value as a result of all of the exits (ie. $200 million), the LPs get all of their principle back plus all of the management fees.

Of the remaining $100 million, the LPs get 80% and the GP gets 20%.

See more at: http://www.mycapital.com/VenetureCapital101_MyCapital.pdf

Tuesday, October 13, 2009

Social Media and the Dispersion of Authority

McKinsey's article on "Building Private Sector Diplomacy" has interesting implications for all organisations. http://www.mckinseyquarterly.com/Building_private-sector_diplomacy_2450

Social media has 'dispersed authority' and customers and stakeholders are now not merely 'price-takers'.

Engaging with customers/clients is now truly about 'inter-action' and the more flexible and responsive an organisation is, the better it will survive change.

Friday, October 9, 2009

Technology Disruptively Enhancing Education

Learning material away from the class room using technology and using the classroom to reinforce the learnings is so simple yet so effective.

Instead of trying to focus on what the teacher is saying with the distractions of the classroom and then staying up too late trying to solve the homework problems by texting, IMing, Facebooking and calling friends for the answers is the 'old way' of learning.


The smarter way to use technology such as the iPod or any delivery mechanism on a computer is for the material to be delivered in a format in which the student can listen and learn at their own pace, and in their preferred environment (like the bean bag in the bedroom without the distraction of someone cracking jokes on the other side of the room) and review and repeat the material.

And then use the classroom time to go through the problems with the help of peers and the teacher. (This isn't my idea! This is what they are doing at the Menlo School in California.)

Wouldn't it be fun to go back to school!?

Well of course you can - for free - just go to iTunes University.... http://www.apple.com/education/mobile-learning/

ENJOY!

Saturday, September 26, 2009

Commercializing Technology - Strategies for Australian Corporates

Are Australia's major industrial firms aggressive enough with their strategies for commercializing their R&D internationally?

I have had two recent interactions with academics who have both caused me to ponder whether Australian corporate R&D is maximizing returns to innovation.

In a Working Paper from the Centre for Governance of Knowledge and Development, Regulatory Institutions Network (RegNet), College of Asia and the Pacific, ANU, Dr Hazel Moir questions: "Who Benefits? An empirical analysis of Australian and US patent ownership"
(http://cgkd.anu.edu.au/menus/workingpapers.php) (October 2008)

Firstly, there are several positive observations which can be made such as:
  • Australia is in the top 10 countries holding patents in the US (not bad considering that the Australian economy is only 6% of the US economy).
  • A large proportion of the patents held by foreign companies in Australia are in the biotech and pharmaceutical sectors. (Perhaps this is because of the value of the investment in a patent because the lead times and costs involved in bringing these products to market is so significant but perhaps it also implies strong R&D credentials in those sectors in Australia.)
However, one of the most striking points made by Moir is that 92% of all patent applications in Australia are made by corporates, yet there is only 1 company in the top 100 companies that own patents in Australia which is headquartered in Australia! This means that all of the 'royalty payments and knowledge spillovers' flow overseas!

Considering the phenominal technological advancements in such industries as mining and the extractive industries and our strong agricultural reseach and development, two industries for which Australian technology is world renowned, I wonder whether Australia's largest companies are sufficiently engaged in extracting rents from the global market for our knowledge and innovation?

The other academic interaction I had which has also been contributing to my thinking in this area a seminar I attended by Dr Richard Dasher, Consulting Professor and Director of the US-Asia Technology Management Center at Stanford University, entitled "Technology Strategies in Silicon Valley and Asia: Contrasting Patterns of Open Innovation"
http://www.stanford.edu/group/us-atmc/cgi-bin/us-atmc/wp-content/uploads/2009/09/090924-402a-flyer.pdf

Dasher made several very useful points comparing and contrasting the open style of innovation for which Silicon Valley is synonymous with the closed and incremental style of innovation typical of Japanese corporates.
I was particularly motivated by a comparison of strategies which major corporations could employ to develop innovation as a tactical advantage, both offensively as well as defensively.
According to Dasher, the requirements for successful open innovation are:
  • an ability to evaluate external knowledge
  • an ability to integrate external knowledge (both tacit and explicit)
  • a clear vision of the direction and strengths of the company
  • brilliant understanding of market psychology and potential new markets (unmet needs)
  • flexibility in business planning
  • strategies to hedge risk
  • strong external sources of knowledge who will cooperate.
Australian corporates need to look at connecting with global technology markets as a source for new technologies to develop internally and for possible avenues for spinning off their own technologies in a global market.

Sunday, April 5, 2009

Can you buy a Silicon Valley? Maybe (essay by Paul Graham, February 2009)

A blog by Paul Graham: http://www.paulgraham.com/maybe.html

A lot of cities look at Silicon Valley and ask "How could we make something like that happen here?" The organic way to do it is to establish a first-rate university in a place where rich people want to live. That's how Silicon Valley happened. But could you shortcut the process by funding startups?Possibly. Let's consider what it would take.The first thing to understand is that encouraging startups is a different problem from encouraging startups in a particular city. The latter is much more expensive.People sometimes think they could improve the startup scene in their town by starting something like Y Combinator there, but in fact it will have near zero effect. I know because Y Combinator itself had near zero effect on Boston when we were based there half the year. The people we funded came from all over the country (indeed, the world) and afterward they went wherever they could get more funding—which generally meant Silicon Valley.The seed funding business is not a regional business, because at that stage startups are mobile. They're just a couple founders with laptops. [1]If you want to encourage startups in a particular city, you have to fund startups that won't leave. There are two ways to do that: have rules preventing them from leaving, or fund them at the point in their life when they naturally take root. The first approach is a mistake, because it becomes a filter for selecting bad startups. If your terms force startups to do things they don't want to, only the desperate ones will take your money.Good startups will move to another city as a condition of funding. What they won't do is agree not to move the next time they need funding. So the only way to get them to stay is to give them enough that they never need to leave.
___How much would that take? If you want to keep startups from leaving your town, you have to give them enough that they're not tempted by an offer from Silicon Valley VCs that requires them to move. A startup would be able to refuse such an offer if they had grown to the point where they were (a) rooted in your town and/or (b) so successful that VCs would fund them even if they didn't move.How much would it cost to grow a startup to that point? A minimum of several hundred thousand dollars. Wufoo seem to have rooted themselves in Tampa on $118k, but they're an extreme case. On average it would take at least half a million.So if it seems too good to be true to think you could grow a local silicon valley by giving startups $15-20k each like Y Combinator, that's because it is. To make them stick around you'd have to give them at least 20 times that much.However, even that is an interesting prospect. Suppose to be on the safe side it would cost a million dollars per startup. If you could get startups to stick to your town for a million apiece, then for a billion dollars you could bring in a thousand startups. That probably wouldn't push you past Silicon Valley itself, but it might get you second place.For the price of a football stadium, any town that was decent to live in could make itself one of the biggest startup hubs in the world.What's more, it wouldn't take very long. You could probably do it in five years. During the term of one mayor. And it would get easier over time, because the more startups you had in town, the less it would take to get new ones to move there. By the time you had a thousand startups in town, the VCs wouldn't be trying so hard to get them to move to Silicon Valley; instead they'd be opening local offices. Then you'd really be in good shape. You'd have started a self-sustaining chain reaction like the one that drives the Valley.
___But now comes the hard part. You have to pick the startups. How do you do that? Picking startups is a rare and valuable skill, and the handful of people who have it are not readily hireable. And this skill is so hard to measure that if a government did try to hire people with it, they'd almost certainly get the wrong ones.For example, a city could give money to a VC fund to establish a local branch, and let them make the choices. But only a bad VC fund would take that deal. They wouldn't seem bad to the city officials. They'd seem very impressive. But they'd be bad at picking startups. That's the characteristic failure mode of VCs. All VCs look impressive to limited partners. The difference between the good ones and the bad ones only becomes visible in the other half of their jobs: choosing and advising startups. [2]What you really want is a pool of local angel investors—people investing money they made from their own startups. But unfortunately you run into a chicken and egg problem here. If your city isn't already a startup hub, there won't be people there who got rich from startups. And there is no way I can think of that a city could attract angels from outside. By definition they're rich. There's no incentive that would make them move. [3]However, a city could select startups by piggybacking on the expertise of investors who weren't local. It would be pretty straightforward to make a list of the most eminent Silicon Valley angels and from that to generate a list of all the startups they'd invested in. If a city offered these companies a million dollars each to move, a lot of the earlier stage ones would probably take it.Preposterous as this plan sounds, it's probably the most efficient way a city could select good startups.It would hurt the startups somewhat to be separated from their original investors. On the other hand, the extra million dollars would give them a lot more runway.
___Would the transplanted startups survive? Quite possibly. The only way to find out would be to try it. It would be a pretty cheap experiment, as civil expenditures go. Pick 30 startups that eminent angels have recently invested in, give them each a million dollars if they'll relocate to your city, and see what happens after a year. If they seem to be thriving, you can try importing startups on a larger scale.Don't be too legalistic about the conditions under which they're allowed to leave. Just have a gentlemen's agreement.Don't try to do it on the cheap and pick only 10 for the initial experiment. If you do this on too small a scale you'll just guarantee failure. Startups need to be around other startups. 30 would be enough to feel like a community.Don't try to make them all work in some renovated warehouse you've made into an "incubator." Real startups prefer to work in their own spaces.In fact, don't impose any restrictions on the startups at all. Startup founders are mostly hackers, and hackers are much more constrained by gentlemen's agreements than regulations. If they shake your hand on a promise, they'll keep it. But show them a lock and their first thought is how to pick it.Interestingly, the 30-startup experiment could be done by any sufficiently rich private citizen. And what pressure it would put on the city if it worked. [4]
___Should the city take stock in return for the money? In principle they're entitled to, but how would they choose valuations for the startups? You couldn't just give them all the same valuation: that would be too low for some (who'd turn you down) and too high for others (because it might make their next round a "down round"). And since we're assuming we're doing this without being able to pick startups, we also have to assume we can't value them, since that's practically the same thing.Another reason not to take stock in the startups is that startups are often involved in disreputable things. So are established companies, but they don't get blamed for it. If someone gets murdered by someone they met on Facebook, the press will treat the story as if it were about Facebook. If someone gets murdered by someone they met at a supermarket, the press will just treat it as a story about a murder. So understand that if you invest in startups, they might build things that get used for pornography, or file-sharing, or the expression of unfashionable opinions. You should probably sponsor this project jointly with your political opponents, so they can't use whatever the startups do as a club to beat you with.It would be too much of a political liability just to give the startups the money, though. So the best plan would be to make it convertible debt, but which didn't convert except in a really big round, like $20 million.
___How well this scheme worked would depend on the city. There are some towns, like Portland, that would be easy to turn into startup hubs, and others, like Detroit, where it would really be an uphill battle. So be honest with yourself about the sort of town you have before you try this.It will be easier in proportion to how much your town resembles San Francisco. Do you have good weather? Do people live downtown, or have they abandoned the center for the suburbs? Would the city be described as "hip" and "tolerant," or as reflecting "traditional values?" Are there good universities nearby? Are there walkable neighborhoods? Would nerds feel at home? If you answered yes to all these questions, you might be able not only to pull off this scheme, but to do it for less than a million per startup.I realize the chance of any city having the political will to carry out this plan is microscopically small. I just wanted to explore what it would take if one did. How hard would it be to jumpstart a silicon valley? It's fascinating to think this prize might be within the reach of so many cities. So even though they'll all still spend the money on the stadium, at least now someone can ask them: why did you choose to do that instead of becoming a serious rival to Silicon Valley?Notes[1] What people who start these supposedly local seed firms always find is that (a) their applicants come from all over, not just the local area, and (b) the local startups also apply to the other seed firms. So what ends up happening is that the applicant pool gets partitioned by quality rather than geography.[2] Interestingly, the bad VCs fail by choosing startups run by people like them—people who are good presenters, but have no real substance. It's a case of the fake leading the fake. And since everyone involved is so plausible, the LPs who invest in these funds have no idea what's happening till they measure their returns.[3] Not even being a tax haven, I suspect. That makes some rich people move, but not the type who would make good angel investors in startups.[4] Thanks to Michael Keenan for pointing this out.Thanks to Trevor Blackwell, Jessica Livingston, Robert Morris, and Fred Wilson for reading drafts of this. Comment on this essay.

Saturday, January 10, 2009

Success factors for foreign market entry

I was reviewing a 10 year old publication I wrote for the Australian government this week. (http://www.dfat.gov.au/publications/catalogue/eaaubp10.pdf). And while the data is dated I was struck by the fact that the success factors and pitfalls I listed remain timelessly relevant - no matter which foreign market you're trying to enter:

Success Factors ...The basic ingredients for successful entry into any market are especially valid when targeting Japan. In particular, companies have failed in Japan because they did not devote sufficient time to preparation (ie, gaining an understanding of the market and developing an appropriate market entry plan). This is especially crucial for entering the Japanese housing market.

Long-Term Vision, Long-Term Strategies
A long-term perspective with targets and strategies to:
· know the market, the competitors, the competitive advantage
· identify and qualify opportunities, target market segments, develop specific goals and tactics
· meet long-run goals by achieving short-run rolling plans
· develop team vision for the whole enterprise or project.

Capabilities
Measure resources and risks to identify and ensure:
· adequate capital to sustain market penetration and setup costs
· necessary human resources with the appropriate leadership and creative ability, technical, interpersonal and language skills, and willingness to adapt to client's culture
· reliable network of materials suppliers and sub-contractors (whether in Australia, Japan or
elsewhere) to meet demands and scale of operating in Japanese market.

Commitment
Recognise necessity to have:
· expectation that establishing a market position and achieving profits may take several years
· an ability to interpret short-term results in the longer-term perspective
· ability to evaluate, refine and continue to monitor market information with the aim of constant improvement.

... and Common Pitfalls and Problems
Not surprisingly, there is a wide range of pitfalls and problems that can impede a foreign company’s successful entry into the Japanese market, quite apart from the regulatory and technical issues referred to earlier. However, the majority of these can be minimised or avoided by proper research, planning and preparation.

Some of the most common pitfalls and problems include:
· inexperience in dealing with a foreign culture and in particular the Japanese business environment, as well as lack of suitably skilled staff, leading to misunderstandings with Japanese clients and contacts
· unfamiliarity with, and insufficient research beforehand into, the basic processes of exporting, resulting in delivery delays, errors and mishaps
· insufficient attention to proactively managing transport and logistics to ensure safe and timely delivery of products to Japanese client
· delay in responding promptly and fully to all communications from Japanese client
· insufficient flexibility and preparedness to modify one’s products and services to meet the precise specifications and high quality standards of Japanese customers
· over-reliance on a competitive price alone as the principal selling point of one’s product or service
· insufficient understanding of the high minimum quality standards expected in Japan for any product or service, regardless of low price
· insufficient differentiation of one’s product in terms of design, materials, novel features or functions, and assembly techniques and packaging
· inability or reluctance to meet after-sales service expectations
· insufficient staff with necessary skills to satisfy high Japanese standards and expectations of customer service
· difficulties in training Japanese labour in construction methods and material usage.

Some Australian companies have already encountered a number of these problems, including cases where the problems put an end to an Australian company’s efforts to tackle the Japanese housing market for the time being.

The Fundamental Pitfall - Inadequate Financial Planning
Probably the most common and fundamental problems encountered are financial ones, ranging
through:
· insufficient basic capital allocation for a long-term market entry strategy and all the costs involved, with sometimes a two or three year wait before making a profit
· unpreparedness for the many hidden costs that can arise, most commonly in shipping and warehousing, as well as in developing and maintaining a commercial relationship with the Japanese partner
· strong pressure from Japanese customers/partners to reduce prices, which can significantly erode the foreign supplier’s profit margin
· failure to plan around a considerable range of possible foreign exchange movements - for example, the yen has moved from Y80:US$1 in mid-1995 to almost Y130: US$1 by late 1997 (and from Y60: A$1 to as high as Y90: A$1 during the same period).

Wednesday, January 7, 2009

Online Selling in a Slumping Economy

Amazon.com seems to have proven once again the benefits of buying and selling online.

And now that Austrade has commenced collaboration with Amazon to make their Fulfilment by Amazon service available to Australian companies, it seems that we will see more Australian products available online in the US. This service will make it cheaper for Australian companies to get their products into the US and will make the products cheaper for US consumers.

Contact me if you are an Australian company with a neat consumer type product you want to bring into the US market or register here:

http://www.austrade.gov.au/Sell-on-Amazon/default.aspx