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Archive for February 2009

The gross margin game

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VCs are interested in a startup’s gross margins because it can show the attractiveness of the unit economics of the business.  One thing I’ve seen a couple of times is companies who have strong gross margins but those margins are a weighted average across multiple revenue streams or products.

For example, a product company may derive most of its revenue from selling product, but might also sell advertising or sponsorships on their website.  Here we have two separate revenue streams with two very different gross margin %’s.  The product business is going to have very slim margins while the ad/sponsorship margins will be quite high.  If you blend them together (weighted for amount of revenue each product contributes) you may get a gross margin that looks attractive in aggregate.

However, I’m not sure that playing the blended margin game is a good one, particularly in an early stage venture.  After all, most entrepreneurs and investors recommend that startups focus ruthlessly on one specific product.  Spreading a startup’s limited resources across multiple products will dilute the focus on either individual product and my guess is that the aggregate gross margin would suffer due to that lack of focus.

Are any startups (present or past) playing the gross margin game successfully?

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Written by John Gannon

February 9, 2009 at 4:40 pm

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Get legal help for your startup from the Brooklyn Law Center

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Brooklyn Law School's administrative building ...
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I love the nextNY mailing list-there are constantly gems that come across that are incredibly valuable to startups.  This morning yet another one came through.

The Brooklyn Law School runs an incubator that represents interesting Internet, tech and new media startups for free if the venture raises compelling issues.

Apparently they also draft a lot of documents for early-stage startups.

I don’t have personal experience with the incubator but from what I’ve heard so far it sounds like a pretty awesome resource.

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Written by John Gannon

February 9, 2009 at 1:25 pm

VCs are recruiters

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We recruit entrepreneurs.

We recruit limited partners who let us invest their capital.

We recruit teams who help the entrepreneurs we’ve already recruited succeed.

A VC is certainly an investor, but first and foremost they are a recruiter.

Written by John Gannon

February 7, 2009 at 9:22 pm

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Online backup is the Trojan Horse of the cloud

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160 GB SDLT tape cartridge, an example of off-...
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Online backup (think Carbonite, Mozy, etc) is generally considered a terribly unsexy, commodity business.  You’re basically reselling cheap (and continually declining in price) storage and compute power and then tying it together with an application to shuttle bits back and forth.  Those kind of dynamics give rise to highly competitive markets with numerous players and low profit margins.  Because of these traits, I had always told myself that I would never want to invest in an online backup business.

It’s true that the constituent parts of an online backup service are commodities.  However, I think what a company does with the data once its backed up in the cloud is what will create enormous value.

Once all of a customer’s data is in the cloud, it becomes possible to do a number of things that you can’t do as easily when it is sitting on someone’s desktop or server hard drive:

  • share an individual’s data across the organization (content management and collaboration)
  • reduce overall data storage needs by eliminating duplicate records (enterprise wide deduplication)
  • discover patterns and identify relationships between information workers (social networking)
  • run a backed up application as a thin application running in the cloud (convert to VM)

It’s almost as if a cloud computing provider could use online backup as a loss leader to get data into the cloud, and then upsell a variety of new, ostensibly more profitable services (like those listed above).

So, online backup could be the Trojan Horse that accelerates adoption of cloud services.

Maybe I will invest in an online backup business after all… ;)

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Written by John Gannon

February 5, 2009 at 4:51 pm

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Venture Capital Careers Panel at Columbia Business School

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On Thursday, myself and a bunch of my fellow Columbia Business School young alums (Mark Davis of DFJ Gotham, Eric Wiesen of RRE, and Bronson Lingamfelter of Rose Tech Ventures) sat on a panel sharing our experiences and advice on getting a job in the venture industry. The key takeaways were (in no particular order):

  • getting a job in VC is really difficult
  • most of us didn’t get our jobs until right around graduation (or soon after)
  • the terrible job market will certainly affect the venture job market and make it even tougher than it already is…and this year may not be the year to gamble that you can get a venture job
  • if you don’t like networking, VC isn’t the job for you
  • if you need a highly structured work environment, VC isn’t the job for you
  • finding internships in VC is all about proposing structured projects that don’t require much time commitment from the firm and its partners
  • the Kauffman Fellowship program is a good avenue to explore in addition to other VC job search efforts

I really enjoyed the panel and also met some great students afterwards that day and the next day at the VC/PE conference. Hopefully I’ll be able to participate again next year.

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Written by John Gannon

February 5, 2009 at 1:54 am

Experimenting with Facebook advertising

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Facebook, Inc.
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I have always done a small amount of Google Adwords advertising (< $20 month) for this blog as well as my business school blog.  Recently I’ve been hearing good things about the performance and cost of advertising on Facebook vs. Google AdWords.  So, I’m going to give it a try and buy some targeted ads on Facebook with the hope of (cheaply) driving more traffic to my blog.

It’s also worth noting that although the advertising I purchase does send some small amount of additional traffic to my blog, the reason for me doing it is to be familiar at a hands-on level with the technologies that affect the industry.  I’m definitely more of a hands on guy and the way I learn best is by doing it.

I will let you know how it goes!

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Written by John Gannon

February 3, 2009 at 10:57 am

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Are all the good venture capital deals competitive?

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A venture capitalist I know once told me that he only wants to do competitive deals (deals in which there are more than one firm bidding to lead a round).deals

On the other hand, a guy I know who does seed investing who says he never competes for deals.  Just doesn’t happen and it doesn’t seem to bother him, either.

As a newcomer to this industry I’m trying to figure out my philosophy on this topic.  Are the best deals always competitive?

On the one hand, if you are the only firm bidding on a deal, the options for the startup are to accept your bid, try to negotiate (having little leverage), or walk.  This would seem to be a good thing for the VC since they should be able to get the best pricing and terms.  The flip side is that if you are the only firm bidding, the implication is that all the other VCs the company has spoken with don’t think the company is investment-worthy.

If there are multiple firms bidding on a deal, then the startup has the negotiating leverage.  The entrepreneur can play the firms off one another and strike a much better deal than they could have had if they just had one termsheet.  This will usually result in the winning firm paying a higher price (higher pre-money valuation and less degree of control) than they would have expected had the deal not been competitive.  This also implies that there is market demand for a company’s shares.  In an early stage investment market where < 1% of companies are able to obtain funding, maybe you could argue a deal that has multiple bidders is a good deal.

However, deals often become competitve once the first firm “jumps”.  In other words, there may be investors watching a company on the periphery and waiting to issue a termsheet once they see another firm issue a termsheet.

In this case, the deal certainly becomes competitive, but is it actually a good deal?

I don’t know where I net out on this topic yet as an investor, but I can certainly tell you one thing.  If you are an entrepreneur, you’ll end up with much better investment terms if you create a market for your shares.

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Written by John Gannon

February 1, 2009 at 11:42 am

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