Eye on Startups:

Advice for Entrepreneurs

Jay Dia — Mon, 25 Aug 2008 21:17:22 +0000

In this guest article on the Sun Microsystems web site, Guy Kawasaki lists the five most important lessons he’s learned as an entrepreneur — which makes for great advice for entrepreneurs:

1. Focus on Cash Flow
2. Make Little Progress Every Day
3. Try Stuff
4. Ignore Schmexperts
5. Never Ask Anyone To Do Something That You Wouldn’t Do

Sound advice from someone who knows. I’ll add one more thing that I think is the most important lesson of all:

6. Do What You Love

When you love what you are doing, you will pour your heart into in and it will show. And, whether or not your startup is a big success, you will have done something you enjoyed and will have no regrets for having started it.

NE VC Woes Worse

Jay Dia — Tue, 29 Jul 2008 20:06:27 +0000

An article in this week’s Mass High Tech reports New England (NE) Venture Capital (VC) financings dropped 31% in the number of deals done during the second quarter, as compared with the same period last year, according to a new report from Dow Jones VentureSource. This drop represented a decline of 22.4% in value over the same period last year.

The decline in New England venture deals is significantly worse than the drop experienced nationally. The value of VC investments in the U.S. dropped 12.4% during the 2nd quarter compared compared to the same period last year.

This news comes on the heels of my post last week, which reported on the growing pessimism from VCs nationally. It doesn’t look good…

Pessimism from VCs

Jay Dia — Sat, 26 Jul 2008 03:03:27 +0000

In a July 24th story, the New York Times reports that according to a survey of venture capitalists (VCs) by tax and advisory firm KPMG, VCs expects the current Initial Public Offering (IPO) doldrums to stretch until at least 2010. As a measure of this pessimism, only 9% of those surveyed think it will pick up next year and only some 12% think the IPO market will ever reach its historic highs.

This dearth of IPOs and successful exits has some dire consequences for startups. Where there’s no exit, VCs are forced to invest any new money into their current portfolio of companies to keep them going, rather than invest them in new ventures. This is consistent with an earlier post where I reported that VC activity was down during the first quarter of 2008.

If you are just starting up and looking for money, then you should consider approaching angel investors. As previously posted, angel investors appear to be taking up the investing slack.

If you are a startup that has money in the bank, consider yourself lucky. But with the current market conditions, its time to tighten the belt just a bit and perhaps conserve your cash. Hold off on any big purchases; after all, maybe the team can do without those brand new notebooks until next year. You never know how long it will be before VCs’ purse strings will loosen up….

Leading in Tough Times

Jay Dia — Tue, 22 Jul 2008 22:27:34 +0000

In his article in BusinessWeek on July 11th, Steve McKee points out Five Dont’s for Marketing in Tough Times that are oh-so-appropriate for startups during these tough recessionary times:

Be Smart and Thrifty, But Don’t Panic. This, Too, Shall Pass
Marketing is Muscle, Not Fat. Be Careful About Cutting It.
Don’t Lose Focus By Chasing Business You Wouldn’t Normally Want
Don’t Discount
Don’t Neglect the Elephant in the Room

In his last point, McKee drives home the point that as the leader of your company, you have to let your employees know that you’re on top of things and that you have a plan for guiding the company through tough times.

When John Crowley spoke about his days founding and running Novazyme at the TCN Year-End Gala Event, he recounted days when things looked bleak at Novazyme — they were running out of cash, or drug development wasn’t going as well as they hoped, etc. — and that he had to make sure he went out of his way to talk to his employees to tell them what was going on and project continued optimism. That was one of his “lessons learned” from starting and running a company: You have to remember that you are a leader and that everyone is taking cues from you on how to handle challenges.

Its a good lesson to remember: Being a leader not only means being the big boss giving orders — it also means being the lead cheerleader whether things are looking great or otherwise.

Do The Opposite…

Jay Dia — Tue, 08 Jul 2008 15:29:42 +0000

In his July 2nd blog, “Startup Advice from George Constanza: Do The Opposite,” Dharmesh Shah at OnStartups.com makes the case that “doing the opposite” (zigging when others are zagging) can actually work for startups, citing a few examples in his blog from VC funding negotiation, to recruiting early employees and early customer conversations.

I couldn’t agree more. As an consultant who conducts due diligence on startups for early-stage investors, I am often struck at how many entrepreneurs approach investors with me-too ideas for startups with basically the same business model, market entry approach, etc.

If the business you are copying is wildly successful (hence the reason for copying it), what makes you think your startup can unseat it as the market leader? If the business you are copying is languishing, then why in the world would you have the same exact business model and marketing strategy?

As you are honing the business plan for your startup idea, take care not to fall into the trap of looking just at the obvious. Think outside the box and think what it could be if you do the opposite!

An Inspiring Story

Jay Dia — Fri, 27 Jun 2008 23:01:15 +0000

On Wednesday, June 25th, I attended The Capital Network (TCN) year-end gala at the Museum of Science in Boston, MA and heard the inspiring story of John Crowley.

John Crowley started Novazyme Pharmaceuticals in 2000, spurred by the the 1998 diagnosis of two of his children with Pompe disease – a fatal neuromuscular disorder - and would not survive for long without treatment. In a little over a year, he raised $27M from venture capitalists to develop a cure to treat Pompe disease. Within two years of its inception, Novazyme was acquired by Genzyme for $137.5M and John oversaw the progress of clinical trials to reality, including the enrollment of his children in the trials.

In his talk, John recounted how he never thought of himself as an entrepreneur until driven by circumstances to find a cure for Pompe disease. Among the many lessons he offered was to have a vision and to be resilient in the face of disappointments, whether from the funding front or the research front, to reach this vision. I think this is the essence of entrepreneurship.

In 2006, Geeta Anand, Pulitzer prize winning writer for The Wall Street Journal, authored a book on Mr. Crowley entitled “The Cure: How a Father Raised $100 Million- and Bucked the Medical Establishment- in a Quest to Save His Children.” (www.thecurebook.com). If you have a chance to read the book, do so — it is truly an inspiring story about how anyone with the drive CAN build a company and make a difference.

Cost of Success

Jay Dia — Mon, 09 Jun 2008 17:36:36 +0000

A front-page article in this week’s Mass High Tech (MHT) highlights the costs of filing for an IPO for Boston-area startups. In it’s listing of IPO filings, MHT noted IPO issuance costs ranging from $500K to as much as $4.2 million for these startups.

MHT quoted Janice DiPietro of Tatum LLC, a CFO services firm, as saying that the IPO costs vary from company to company depending on the strength of the company’s management team, its record-keeping history, and the size of its market share and customer base.

Of these three, I think the biggest factor is the record-keeping. With the advent of the Sarbanes-Oxley Act of 2002, companies are subject to more rigorous financing reporting requirements than ever before.

Many startups often make the mistake of not taking SOX compliance seriously. As a result, when the time does come (as in the case of an IPO or an acquisition), there is a scramble to get everything in order and in compliance. And this is what costs money — accountants and lawyers don’t come cheap.

In consulting with startups, I am always surprised when I hear about a startup that isn’t paying attention to SOX. Seeing that SOX compliance is required for a successful exit event (an IPO or just about any form of acquisition), why wouldn’t a startup be paying attention to it? Don’t these startups (and their investors) believe they will eventually reach one of these exit scenarios?

If you are a startup, get your house in order to comply with SOX. If you are an investor, demand that your portfolio companies have a plan to address SOX compliance.

Unless, of course, you’re not thinking of a successful exit.

Are You In The Top 5%?

Jay Dia — Thu, 29 May 2008 21:55:21 +0000

Last Thursday, I attended the networking event organized by The Capital Network (TCN) and New England Venture Network (NEVN). There must have been close to 300 attendees at the event, with a good mix of VCs, Angels, and Entrepreneurs, with a smattering of lawyers and accountants. All in all, a fantastic event to catch up with acquaintances from the past and make new contacts.

About halfway through the event, Don Dodge, a serial entrepreneur, angel investor, and member of Microsoft’s emerging business team, gave a short talk on the value of networking in the fundraising process.

Don confirmed what I said in a previous post, i.e., with the potential of being inundated with business plans coming through mail and email, investors must necessarily have some way to filter which new startup they will look at in detail. And that filter is usually a warm introduction to the startup (by a colleague or friend), or positive personal contact with someone at the startup. Hence the need to not only network, but to be prepared with an elevator pitch to catch their attention.

In his closing remarks, he said something that struck a chord with the entrepreneurs in the room. He asked everyone in the room to think about their stock portfolio and think about why they invested in those particular companies, out of thousands of others. That is, why did you invest in just 1% to 5% of the market?

VC and Angel investors are no different — out of the entire universe of businesses that they see, they invest in perhaps just 1% to 5% of the ideas which they think will make them money, whether because of technological superiority, market leadership, or a belief that it is the next big thing.

As you are going around seeking funding, you need to make sure you can position your company as one of the top 5% of startups.

So, are you in the top 5%?

No Barney Deals

Jay Dia — Wed, 21 May 2008 12:52:47 +0000

The other day I met up with the VP of Marketing of a startup that is a portfolio company of a client. He cut his teeth in business development while at Microsoft and clearly knows what he is doing. Under his watch, the startup company has blossomed, signing several revenue-generating deals with partners and meeting targets for customer sign-ups.

While I was impressed with the company’s progress, I didn’t say anything, but I guess my face gave it away. He grinned and pointed to a cartoon graphic he had created — a picture of the purple dinosaur Barney with a red circle-slash on top of it.

“No Barney Deals,” he said.

That is, he didn’t sign any partner deals where all it did was generate “I love you, you love me” press releases, with no financial or otherwise strategic gains for either party.

He is so right. I have seen so many startups fall into the trap of chasing after a “deal” with an industry giant, with nothing coming out of it except a press release and press coverage by industry rags. The VP of Marketing looks good because he’s got a stack of positive press coverage he can show off, the company looks good because it looks like it is gaining traction, and the industry giant looks good because it looks like it has partnered with a nimble startup for innovation. But in the end, nothing of any real substance comes out of it.

The reason this happens is that these “deals” aren’t business deals at all, but are just publicity opportunities for everyone. For business agreements to succeed, the terms of the deal need to be clearly specified — whether sales leads, actual sales, or a warm introduction to target customer(s).

No Barney Deals!

VC Activity Down

Jay Dia — Fri, 16 May 2008 11:33:43 +0000

A recent post by The Entrepreneurial Mind quotes a report from the National Venture Capital Association (NVCA) that venture capital (VC) investments were down 8.5% during the first quarter of 2008 when compared to the last quarter of 2007. The report also found that deal flow was also down.

It is interesting to note, however, that Angel investors appear to be more optimistic as I mentioned in a post in early April. In the Angel Confidence Report survey released by the Angel Capital Association (ACA), 55 percent of the respondents said the number and total dollars invested will increase this year, while 32 percent expected it to be the same as 2007.

But this isn’t the case where Angels are seeing a better class of startup companies than VCs. More than anything else, the disparity may have more to do with the different investment horizons of these two groups of investors.

While more Angels are now pursuing later stage deals (as Dr. Jeff Cornwall of The Entrepreneurial Mind points out), most Angel investors still invest in seed and early-stage companies — the ACA Angel Confidence Report reports that angels expect to invest in seed and startup companies (81%) and early-stage firms (85%). As early-stage investors in startups, Angels have a decidedly longer-term investment horizon than VCs and would need to be more patient and optimistic about their prospects.