Yet Another (ex-)VC Blog

Cloud computing, startups, and venture capital

Archive for November 2008

Pitch Pet Peeves

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I spent the afternoon in Boston coaching entrepreneurs who are preparing investor pitches.  I provided some tips to the entrepreneurs and want to share a few of them here:

Quickly describe what your business does and how it will make money:  Within the first 30 seconds, it should be clear to your investor audience what your company does to make money.  Investors tend to have a short attention span and so you want to get their attention quickly during a pitch.  Another good guideline from Jon Karlen at Flybridge was to make sure you can get through your entire pitch, unrushed, in 1 hour.

Don’t spend too much time on the market size of the opportunity if you’re pitching investors who are intimately familiar with your market: If you are pitching a digital media firm who has made investments in the Internet advertising space, you don’t need to spend time telling the firm about the growth potential of online advertising.  Use the time you’ll save by cutting out the market size discussion and spend it fleshing out other areas of your business.

Make sure the margins in your financial projections are realistic: Several times I’ve seen business plans that indicate a company will achieve a net margin of 25%+ at scale.  There are not many businesses that I can think of that can achieve those margins.  The two that come to mind are Google and Microsoft.  Therefore, the logical assumption is that the author of the business plan thinks their business will be the next Google or Microsoft, but in actuality I think that people don’t bother comparing their predicted margins with comparables from their industry.  It’s never a bad idea to spend time researching public market comparables, so when you do, make sure you check some of the key ratios and margins to make sure you’re relatively in line with the rest of your market.

Mark Davis spends a great deal of time discussing pitch do’s and dont’s on his blog if you’d like some more information on this topic.

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Written by John Gannon

November 25, 2008 at 12:34 am

Posted in Uncategorized

Negative enterprise value – A buying opportunity for VC-backed startups?

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Check this out.  Transmeta, once a high-flier in the low-power processor space was purchased by a venture-backed company called Novafora.

Novafora hadn’t raised enough money to afford the $250 million+ purchase price (a price tag not many venture backed startups could afford), but was able to purchase the company (pending approvals and resolution of a class action suit) for virtually zero dollars because the market cap of the company was basically equal to the cash and short-term securities on the balance sheet!

I thought this was an isolated situaton but if you look at many small cap stocks on the market right now, you’ll see that there are other firms that also have a zero (or negative) enterprise value.

My gut tells me this is only the first of what will be many attempts by venture-backed companies to consolidate by purchasing relevant zero (or low) enterprise value companies.

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Written by John Gannon

November 20, 2008 at 8:01 pm

Making Web 2.0 enterprise ready

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A tag cloud with terms related to Web 2.

Image via Wikipedia

As web 2.0 and social media applications become more mainstream, enterprises will also begin to realize the value of these applications and begin to demand these types of applications within their walled gardens.

Companies like Yammer have already begun taking a Twitter-like model to the enterprise and there are bound to be other companies that will model themselves after familiar social media apps/concepts and sell direct-to-enterprise or in a SaaS model.

However, in order to do so, these companies will need to consider the laundry list of requirements that will be imposed on them by enterprise IT departments, IT security teams, and business owners.

A recent post to the nextNY mailing list got me thinking about this topic, which I have reposted here (along with my response).

Here is the original question:

I am trying to access if a software product is enterprise ready or
not? Is there a checklist of things/capabilities out there to
determine if a software is mature enough to be enterprise ready?
Basically looking for a software quality validation template and/or a
software process validation checklist.

This is for a client-server sort of software product (not a web
application or website).

Are there any 3rd parties that certify a software product for
enterprise readiness/maturity?

And here is my response:

I don’t know of any official standards as most organizations tend to use their own set of criteria when evaluating an enterprise software product for purchase.  Usually, a customer will propose a set of functional requirements (e.g. an RFP) when they’re looking to buy software, or verbally work with a salesperson from the software company/channel partner to scope out their needs.

Some things (this is very high level but you can drill down from here) that tend to come up frequently during an enterprise sales cycle:

– security and compliance (including but not limited to authentication, auditing capabilities, SOX, HIPAA, etc)
– fault tolerance (is the product robust and stable and can it recover from errors, etc)
– business continuity (is the product capable of being backed up, restored, etc)
– performance (requiring specific application response times)
– support model (24x7x365, onsite vs offsite, etc)
– supportability of entire solution stack, not just your product (e.g. your software is supported by other vendors’ products and vice versa) and or meaningful partnerships with the other vendors in the ecosystem
– integration w/application or network management frameworks used by app ops or network ops teams
– viability of company as a going concern

The degree of importance of each of these factors will vary from customer to customer and across product types.

For instance, if a customer is buying database software that is the backend for a business critical app then they’ll probably want 24×7 support (and maybe even onsite support) while if its software to support testing of applications maybe they’ll only need 8×5 support.

The bottom line is that any web 2.0 companies who want to play in the enterprise space will need to have answers for the various questions and buckets I’ve outlined above.  And having good answers to these questions likely means having a very different business model and organizational structure from what they have today.

I wonder if we’ll see a future where some web 2.0 and social media companies actually convert into a strict SaaS or enterprise software model because they find it to be a bigger opportunity than what’s available on the consumer Internet?

Stranger things have happened…

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Written by John Gannon

November 18, 2008 at 7:48 pm

Killer biz dev tips

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If you have even a minimal interest in biz dev, please spend the 20+ minutes it will take to watch this video.
It’s a panel discussion hosted by the nextNY crew that has some high level business development folks from area startups as panelists.

I also think it has some great lessons for venture capitalists, as a big part of one’s job as a VC is business development (either developing business for portfolio companies or developing relationships with entrepreneurs).

Great tips, check it out…

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Written by John Gannon

November 13, 2008 at 6:43 pm

What recession? Our company is recession-proof!

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If you ask someone if they are ‘above average’, ‘below average’, or ‘average’ in a particular area of their life (athletic ability, intellectual capability, physical attractiveness, etc) most often you will hear from that person that they’re at least average, and probably above average. After all, most (?) people tend to think well of themselves.

So where have all the below average people gone? They’re certainly not raising their hand to be counted as below average…

Let’s take that analogy and apply it to the VC pitch process.  In some of the pitches I’ve heard over the last few months, the company will address the current market conditions and financial crisis by saying that the impending recession is actually a boon to their business.  I’m not sure if these companies are just highly optimistic (a good trait for an entrepreneur to have, no doubt), or are just telling me what I want to hear.

In effect, these companies are saying that they will be ‘above average’ performers in this environment.

True, I am naturally going to be wary of investments in sectors that I think will be hit in this downturn, but frankly, it goes without saying most sectors will be adversely affected by the downturn.  A large percentage of companies will see a negative impact due to the downturn, and there will be a small percentage that will benefit.

During a pitch I’d rather hear something to the effect of “This recession will create a challenging environment for my business, and here’s how our company will deal with it” versus “The recession is really good for us, and here’s why.”  The former builds credibility while the latter makes me less comfortable with the company and the management, unless you have a really solid, provable case about why the market conditions play into your company’s favor.

It’s true, I always want to invest in an ‘above average’ business (OK, hopefully an outstanding business), but I’m also cognizant of the fact that in this environment there will be a very small number of startups that fit in that ‘above average’ bucket.

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Written by John Gannon

November 12, 2008 at 4:04 pm

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Not sure whether to be intrigued or scared: targeted ads within credit card statements

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Today I was checking my credit card bill online and saw that my credit card company has begun to target promotions that are tied to specific line items on my bill.

For example, I had purchased something at Borders last month and now I’m getting an offer for free shipping for orders over $25 on BN.com.  The promo shows up right underneath the relevant line item on the online statement.

They also presented a promo for 50 free prints on Snapfish connected to my recent Flickr renewal.

I am contemplating asking the credit card company to turn these promotions off.  It’s creeping me out a bit, frankly, especially since I didn’t specifically ask for them to do this targeting.  But I’d also like to know if they built this technology themselves or if they’re using some off-the-shelf product.  Cool, but a bit creepy…

Has anyone else had a similar experience with their credit card provider?

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Written by John Gannon

November 10, 2008 at 5:33 pm

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Bringing (self-sufficient) sexy back

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Stuart Ellman of RRE Ventures just made a great post on his FiveYearsTooLate blog about the venture environment we’re currently facing, including some thoughts on board dynamics in down markets.

What Stu is saying in the post is pretty much the same thing I’m seeing in the market (except for the $0 pre-money valuations), and its the same thing that I’m hearing from other VCs.

My takeaway from the post is that portfolio companies need to become laser-focused on getting to cashflow breakeven with either a) the cash they’ve got in the bank now or b) with insider money (if the insiders have the money).

My guess is that if we fast forward 6-12 months, there will alot of carnage as startups who couldn’t accomplish a) or b) above will be sold at firesale prices or go out of business.

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Written by John Gannon

November 7, 2008 at 1:12 pm

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