Thursday, June 30, 2005


I had a great breakfast meeting this morning with someone who works extensively with the angel investor community here in NYC. Although the focus of our conversation was NYU's hosting of the 2006 Northeast Regional VCIC Competition, we talked a bit about the role of angels and how that role may grow in the future, because of lower start-up hurdles.

Fortunately for, me I had just read Joe Kraus' post - Bnoopy: It’s a great time to be an entrepreneur. Joe gives several great reasons for why starting a web 2.0 company is so much cheaper than one just 8 years ago. He mentions cheaper hardware, software, labor and marketing as key reasons.

Jeff Clavier looks more at the other side of the equation, adding that you can monetize niche markets better than ever before through advertising.

One other driver that I think is important is that it is now possible to add value in smaller doses than ever before. With the infrastructure of web services and interoperability on the web, someone can add value with just one layer of code. Housingmaps is a great example of this - 10, or even 5 years ago, no one could add value by tying together two easily exposed interfaces (in this case Craigslist and Google maps). While no one is going to become the next googlionaire off one of these ideas, they'll probably be great at providing a stable cash flow. And if a serial entrepreneur can build enough of these into a portfolio, that can add up to a pretty nice life.

Web 1.0 made it possible for the little guy to compete with the big chains - but most of what really succeeded were the little guys who were able to grow quickly. This time around, we have enough infrastructure for entrepreneurs to succeed even if they decide to stay little.

Tuesday, June 28, 2005

Signaling vs. Motivating

The end of the semester is always a crazy time. The last couple of weeks have been no exception, as I've had final projects and finals, and plenty of papers to grade. However, in the midst of all this chaos, several of my friends and I were able to get together for a wonderful evening of dinner and discussion about the book "Coopetition". We were also fortunate enough to have one of the authors, Adam Brandenburger, join us for the evening. I've had the pleasure of working as the Professor's teaching assistant, and can say that he is easily one of the nicest and most intelligent people I've ever met.

Our group was comprised of several part-time students like myself, so we were able to discuss the concepts of the book as it related to our various industries and areas of expertise, and we had a number of very stimulating exchanges. I hope to talk more about some of these in the future, but I'm still working my way through most of them.

For those who are not familiar with the book, "Coopetition" discusses the concept of the value net, explaining how various players interact with one another, including a new (at the time) type of player - the complementor. It then moves on to discuss the application of game theory to business strategy, presenting a framework of PARTS (Players, Added Value, Rules, Tactics, and Scope). One exchange that I found particularly interesting came up when we were discussing the "Tactics" section. As an example, the authors describe their thoughts on how to negotiate on their own book deal, and the conflicting interests that shaped their position. On one hand, they wished to signal their confidence in their book idea. To signal this, they considered taking a higher royalty with a low guaranteed advance. However, they also wanted to make sure their publisher was committed to the book as well, so it would be motivated to properly market the book. As such, they felt a large advance and a smaller royalty would better align their interests with the publisher.

This seems to be a similar to the conundrum faced by most VCs and entrepreneurs when settling on terms. Entrepreneurs need to signal their confidence in their plans, and VCs have to protect their investments - both of these lead to terms such as liquidation preferences. However, these protections, by their nature, affect the motivations of both the VC and the entrepreneur. An extreme example of this is a contingent valuation, where the entrepreneur and VC agree on an initially high valuation, with penalty clauses that allow the VC to acquire more of the company if certain benchmarks (like sales or profits) are not met. Agreeing to such a deal is often a sign of an entrepreneur who is sure that he/she can meet their rosy projections. However, in a perverse twist, the VC now has a financial motivation to delay the success of the company for a time, to get more of the company.

Now this is a greatly simplified example that ignores the fact that VC that actually did exhibit this sort of behavior would soon have no deals at all. But there should be a way to remove even this level of conflict, so that both interests of signaling and motivation can be addressed. One possible example? An escrow of the "contingent shares", which does not transfer to the partner in case the numbers are not met, but are only released if the entrepreneur agrees that the VC made all reasonable attempts to assist in making those numbers. If the two parties cannot agree, the shares would revert to a neutral third party (perhaps some sort of charity). In this way, the entrepreneur does get the incentive to project reasonably, since he/she loses part of the company if they don't hit their projections, but the VC has all incentives to "sandbag" removed. In this way, the conflict - between the desire to signal your confidence and to properly motivate your partner - is removed.

Wednesday, June 15, 2005

Underneath it all

I'm up to my ears in preparation memo's that I have to grade for the negotiations class I TA at Stern. The assignment was to review a case (from the excellent people at the Dispute Resolution Research Center), and to write a 3-5 page paper on how one would prepare for the negotiation.

The students that are writing these papers have had 12 hours of class already, most of which focused on integrative bargaining, or "expanding the pie". The number one method we discussed on how to create more value was to focus on the interests, rather than the positions, that the parties bring to a negotiating table. Our professor gave a simple example to illustrate this concept. She and her husband had a disagreement about where to go to dinner - she really wanted to go to Cafe Spice, while he wanted to go to Nobu. Students had to figure out a way to make both of them happy.

Well, I have to admit, people came up with some inventive suggestions: "Go home, and each order take out from different places", "Meet up after dinner", "Have dinner at one place and dessert at the other". However, it took several minutes before a student thought to ask - "Why did you want to go to Cafe Spice, and why did he want Nobu?". The answer, which made the solution much easier was, "I wanted somewhere close to school, and he wanted a nice sit down sushi dinner". Well, at that point, the answer was obvious - Japonica, a nice sushi place just around the corner from Cafe Spice.

A simple yet powerful concept, right? But it is amazing how hard it is to recast your thinking to allow for the probing that is required to do this kind of value creation. The most important step is to listen carefully. Despite having heard about this for the first four classes, many students still wrote the paper based on achieving the positions set out in the case, not satisfying the underlying interests. People display this behavior all the time (myself included), focusing on "winning" based on hitting their numbers or having the other party cave in. However, a lot of the time these "winners" could have achieved even better results by listening carefully.

I think the same skill set that allows for interest-based negotiating can be used in product development and marketing. While market driven product development is important, this has to be tempered with a questioning of the underlying needs. If a customer requests widget x on screen y, a responsive company may have a new build out the next week with that exact widget. However, an interest-based company will work with the customer to figure out WHY they want widget x.

Now this isn't license for companies to respond "you don't really want that". I've heard that as a customer before, and it's incredibly frustrating. "Can you explain why you want that? Maybe we can figure out another approach." is a much more satisfying response, and engages the customer's efforts in improving your own product.

It isn't easy to do, but I think the benefits are great if you can turn your development team into an "interest-based" organization.

Monday, June 13, 2005

A Virtual Elevator

Last week, I had a post about how much easier it was to capture someone's attention using a new medium.- in that post, the medium was blogging. Well, over the weekend, it seems that has already become passe. Instead, the newest thing is getting your "elevator pitch" onto a VC's ipod via, feedburner, and podcasting.

This new idea was the result of Fred Wilson's post on how to set up a feed to auto-download to your ipod. As a music buff, he asked his reader's to tag songs that they thought he'd be interested in, but it only took a day or two for an entrepreneur to figure out that access to a VC's ears was a valuable opportunity, that shouldn't be wasted. So instead of tagging a new song, Eric, the CTO at Feedburner, recorded his elevator pitch, and put it in the queue.

Fred liked the idea so much, he went ahead and set up a new tag, "fred'selevatorpitch" just for this type of idea. And much like any good idea, it was soon copied by David Hornik ("ventureblogpitch") and Rick Segal ("rick'svcpitch"). So, a great chance to get your company in front of three VC's, something that previously may have taken weeks or even months.

Another thing I realized while browsing the tags above - is another way to screen your VC's. For instance - looking at Fred's account, you can see a lot of what he bookmarks is related to tagging, rss, or blogs. This starts to give you some insight into the types of technologies and markets he's interested in. Obviously, as a prolific blogger, you could get a lot of this out of his posts, but one thing I saw when browsing his tags was the "ajax" tab. So although he hasn't mentioned it specifically, you could draw the conclusion that he'd be interested in pitches that talk about making web sites more user-friendly with rich interaction.

The positive side of this is that entrepreneurs can learn more about VC's before spending time trying to pitch to them. It's not as good as the conversations that happen in blogs, but for a VC that doesn't have the inclination to post everyday, its an easy way to show the things that they are currently interested in.

Thursday, June 09, 2005

The short distance between two points...

is through a new medium. At least, that's according to Mark Pincus, who has a post based on a email exchange we had yesterday. (I even get a nice reference as a "smart kid")

with the introduction of every new communication medium comes a short window to more easily get the attention of influential people. when email first came out and then instant messaging i was surprised how easily i could get to ceo's playing with the new medium (but not yet getting a lot of incoming msgs) where today it's impossible even to get people you know.

This came about because I mentioned Mark in yesterday's post, and he found my entry through a technorati search. To some extent, a blog is a much more public way of doing this than the email/im channels Mark mentions, but that also means you can grab people's attention just by talking about things that they are interested in, rather than having to mention them by name. For instance, another VC blogger I read has two portfolio companies - and Return Path. Both are interesting services that try to help us manage the overwhelming amounts of information we see and create on the net. Without ever mentioning him by name, I've now created a post that he may see if he watches for new mentions of his companies (I'll see if I get a hit based on these and post later if I do).

However, the reason Mark and I had a conversation over such a mundane activity, as him reading my blog, is a little more interesting. His post yesterday mentioned he was in Hawaii, and when I looked over my statcounter logs yesterday (yes, I have developed an addiction to seeing how many people are reading these posts), I saw a hit from an IP in Hawaii, with the referring page being a technorati search for "Mark Pincus". If it hadn't been Hawaii, or if I hadn't read his post within a minute of looking at my logs, I probably wouldn't have noticed, but as it was, I was able to put two and two together and figure out that he had searched on his own name, and had read my blog when it showed up in that search.

As Mark mentions, this is probably a short-lived phenomena, and it's probably already too late for some people. A technorati search for "Bill Gates" for instance, returns over 10 pages of hits from just the past 24 hours. But given the somewhat more intimate world of Venture Capital, it still might be a useful tool for a while. A search for "John Doerr" still reaches back over 2 weeks on the first page of results. (In fact, that may come to be a new buzz metric - how far back does your first page of results go. The shorter the time, the more buzz worthy you are right now).

And just for the record, a search for "Keshava Dasarathy" returns nothing right now.

Wednesday, June 08, 2005

Next up - VC's offshored

Well, perhaps we are not quite at that point yet, but there have been several conversations lately about how the VC industry is changing, along with the general private equity market. Bill Burnham talks about how competitive advantages based on dealflow are extinct (except for the top handful of firms), while Fred Wilson agrees that thesis driven investing has helped Union Square Ventures go out and proactively find the right companies, rather than waiting for them to come to them.

Similarly, Paul Kedrosky talks about the end of geography as a factor in venture investing. This seems a natural outgrowth of a paper by Josh Lerner, which came to the conclusion (among many others) that endowments seem to do better when investing in VC's across the country, not just in the same state.

Finally, Mark Pincus takes it one step further, suggesting that a time may come when VC's and entrepreneurs may cease to be distinct identities. Instead, VC's would simply find a market opportunity they are interested in, and create a team to address it. This in fact, is exactly what a senior partner at Warburg Pincus mentioned as one of their approaches in a talk to my Venture Capital class a few months ago. In this same talk, he mentioned how Warburg Pincus was realizing that the PE market has significant economies of scale, explaining the several new mega-funds being raised recently.

These are all indicators of an industry maturing. Another indicator is the persistent and growing gap between the top funds and the rest. Much like consolidation in a manufacturing industry allows the top few firms to pull away from the pack, it seems that the top VC firms are increasing their lead on the also-rans.

As a VC aspirant without a great deal of financial background, but strong experience in technology, this gives me hope. Another investor I spoke to recently mentioned that the finance side of venture investing is now commoditized - it's really the value added services that will differentiate firms going forward. And since it's here that I think I have to most to offer, such a shift in the venture industry can only be a good thing.

Update: In an great example of how blogs allows for greater communication, I just saw that Daniel Primack mentions one of the points above virtually verbatim today. I don't want to make too big a deal about the coincidence, but it shows how much more access people outside the industry have now. In the past, there's no way that and outsider like myself could end up with even close to the same information as someone as well connected as him - but now, because of more conversations taking place, we can connect at least two of the same dots at the same time.

Monday, June 06, 2005

VCIC @ Stern!

I'm really excited - I found out on Friday that Stern will be the host of the Northeast Regional for the 2006 Venture Capital Investment Competition (VCIC) on March 9-11th, 2006. I'll be organizing the regional, and even though it's almost a year away, there's a lot to be done by then.

The VCIC is basically the exact opposite of your standard business plan competition. Instead of student teams coming up with business plans and pitching them, the student teams play the roles of Venture Capitalists instead. The night before the competition begins, each team is given 4-5 business plans from real-life entrepreneurs. They then have twelve frantic, caffeine-laced hours to do all the background research they can on the various plans.

The next day, all of the teams have a chance to listen to the entrepreneurs give their funding pitches, and get a few minutes for Q&A. Then, there's another long night, as the teams do as much due diligence as they can. They also have to come to a decision on which opportunities they would fund. Finally, for those they would fund, they have to create term sheets.

The next day, the teams have to present their funding decisions and term sheets to the panel of VC judges. These judges examine the teams' rationale, as well as the final term sheets to award a winner. The entrepreneur's also vote for the team they felt asked the best questions.

Needless to say, a competition such as this relies a lot on the judges and entrepreneurs that are involved. The judges listen to the entrepreneur presentations, monitor the Q&A sessions, and evaluate the final team presentations. They also provide feedback to the entrepreneurs and the teams. This feedback is just as important as their actual judging role.

It's also critical to get a good cross section of companies, from different stages and industries. More importantly however, the companies need to be well developed concepts. The more refined a plan, the easier it is to differentiate between the teams that evaluate it.

What's in it for the judges and entrepreneurs? For the entrepreneurs, it's a chance to present in front of several accomplished venture capitalists, and to get more feedback than typical. Several companies have gone on to get significant funding after presenting at a VCIC.

For the judges, its a chance to see several new companies, most of which will have been referred by one of their colleagues. More than anything though, they get the opportunity to mentor and guide several of the brightest business school students interested in their industry.

If you would be interested in being a presenting company or judge, or would like more information on the competition, please email me at kbd222 at stern dot nyu dot edu.

Friday, June 03, 2005

You can't take it with you

Charlie O'Donnell has a posting up today talking about networking sites like LinkedIn, and giving some great advice to the company:

Too Many ^$%#ing Profiles

As far as I'm concerned, LinkedIn, at least for all this professional stuff, is far and away the best answer. Their site is extremely professional. Their set of permissions based contacting prevents me or my network from being spammed. That's my favorite profile, but it doesn't solve half my profiling and networking issues. I can't take that profile anywhere and use it for anything, nor can anyone else use it to really solve their member database issues. Everything about LinkedIn has to be done on the site. So, people see it as Y.A.F.P. when they already have enough trouble managing all of their member database and profile data everywhere else.

I agree - LinkedIn is by far the best networking site out there - But I've found that I still have a couple of major issues with it.

1. I haven't figured out how to attach my own notes about people. I try to keep notes on where/when I met people, as well as something we talked about at that first meeting. Right now, I have that all in my Palm contact notes, but it would be a lot easier if I could have access to those at Linked In.

2. Synching. I use Palm's desktop software as my primary contact management. For me, the most valuable features are the pictures and the notes that you can keep on each contact. However, as I grow my networks on LinkedIn, its frustrating that I have to re-enter information manually. Any time I have to type the same info more than once, it means that some company is missing an opportunity to make my life easier. LinkedIn has provided a tool to import contacts from any contact tool, why can't they allow you to synch up? I know that a standard "export" is probably not coming anytime soon, since that would make it easier for people to switch networks if a competing service arose. But a Palm conduit to synch up new contacts shouldn't be too hard to come up with, should it?

Overall, this is a big problem I have with a lot of the PIM service sites. LinkedIn (contacts), Trumba (events), Gmail (email) - each of these is really good at what it does, but they all prevent me from being able to synch up this same information and take it with me. Because of that, I end up either a) using competing services that are not as feature rich, but allow me to use my data more efficiently (yahoo has an online calendar that can synch with my palm), or b) forgoing either web or palm access to the information.

BTW - I highly recommend Charlie's other blog, Success Blogging, for any aspiring bloggers. I read it before starting this one a few weeks ago, and it was a great resource for a lot of the initial questions I had. I especially recommend the post "Week One Thoughts and Assignments".