A VC in Vacationland

MIT 100K Entrepreneurship Competition

I often get asked where an entrepreneur can compete for seed money, or just practice for venture capital pitches.  The granddaddy of these competitions is the annual MIT 100K Entrepreneurship Competition. 

The founders of one of my portfolio companies, Sean Willems and John Ruark, won the 2000 MIT competition and went on to found Optiant, raising nearly $30 million in the process from leading VC's such as Battery Ventures. Even though the competitions themselves have relatively small rewards for winners, they sure can lead to excellent sources of capital.

And they do provide a great training ground, not only for honing your pitch but also for seeing how others are positioning their innovations. Every entrepreneur will need to raise money for their startup, perhaps numerous times in the early years.  Making sure that you can tell a good story about your company is a critical success factor, one you will use again and again, in front of investors, potential customers and new hires.

You can Google local venture competitions on the web.  Every region of the country has, at minimum, angel meetings where you can pitch your deal numerous times per year as well as various competitions like the MIT 100K.

Finding a Good Part Time CEO/CFO/CMO/C?O

Looking for the perfect C-level executive for your startup?  Got some venture money in your pocket and have the urge to hire your new, full time leadership team.  WHOA!

I have seen too many mistakes by early stage entrepreneurs bringing in full time C-level leadership who turn out not to be the right match for the company. Why?  Startups by their very nature are evolving entities.  The guys that looked so good with the original business plan can turn out to be disasters as the company evolves and matures.

As a result, I am not a big fan of having too many full time C-level employees in early stage companies. Many tasks, such as financial management, marketing, HR and perhaps even the CEO, can probably be done by part time executives.  You do not need a lot of expensive overhead around while the product is being developed or in beta. 

Instead, check out sites such as www.interimceo.com to find local, successful, experienced C-level executives who  prefer to work less than five days per week. Network with other local entrepreneurs to see who they have used in the past to help develop marketing programs or manage HR a couple of days a week.  Create projects rather than positions to get specific work done, using local resources to accomplish these tasks.  Note: see my previous Blog on outsourcing to see other sources of part timers and consultants to compete for these projects.

Expensive C-level executives, fancy offices and iPhones will not necessarily win you a lot of customers.  Spend your precious money on customer acquisition, better products and competent employees to get stuff out the door.

Don't Lose Your Emotional Connections

Early customers often have strong emotional connections to start ups.  After all, they bought the unproven software from a tiny company with shaky finances, sometimes putting their own careers on the line to convince senior executives that already purchased SAP or Oracle suites could not solve the same problem.  They took a lot of risks and formed a close bond with the founders as they worked together to convince a skeptical management of the value of the solution.

Those early customers are the start up's principal cheerleaders--doer of webinars, approver of case studies and taker of many reference calls. They also get a lot of attention from founders, who favor the early customers with priority on product enhancements, superb support and detailed training.  The result is a nice symbiotic relationship between customer and start up which helps drive market growth for the company and career advancement for the buyer (assuming the software solution is consistent with the stated value proposition).

In many start ups, early customers get forgotten after a few years as the drive to add new clients focuses the start up on sales, rather than customer care.  Early customers are early adopters, willing to take a chance with unknown software to gain advantages in the market.  They help sell the next generation of fast follower companies, who generally wait until the early adopters have shown the usefulness of the tools. But as start ups acquire more customers, they often shift product enhancements towards less sophisticated customers with different needs than the early adopters.

As a result, early adopters begin to view the start up as not innovative in the space and begin to look for alternative solutions with new tools to further enhance their capabilities.  Sometimes they just stop using the software in favor of newer competitors.

How can a start up avoid such a fate? 

First, make sure you have constant contact with your early adopters, keeping track of original buyers as well as new users,  These contacts should initially be at the founder level, with the introduction of a trusted customer manager at the appropriate time.  The founders still need to be in touch with the user community, perhaps through quarterly newsletters and user forums.

Second, establish an on line user community/forum where users can post issues, request information from other users on how to solve specific problems, get up to date data on what's going on at the company and engage in dialogs with company executives.

Finally, develop a knowledge-based communication system, including webinars, white papers, and emails to inform current and prospective users of what's going on, not only in the company but in their industry.

Early adopter customer deflection is a warning sign to the marketplace that the start up is losing it's edge.  That may not be true.  It could just be losing its emotional connection with its early customers.

Supply Chain Innovators: On Line Book Sellers

I am a book collector.  Not a big one, but just first editions of books I particularly enjoyed reading and can reasonably afford. That does eliminate first editions of the James Bond novels, which can sell for $6,000 to $10,000 apiece in the rare book market today.  If I'd only known that when I first read them all.

Anyway, I noticed about a year ago that there were a growing number of 1 cent books being offered on Amazon, eBay and other auction sites. Being a supply chain guy, I kept wondering how anyone could make money on this business model.

Over the weekend, all was explained to me.  The New York Times Book Review published an interesting essay, Attack of the Megalisters. To cut to the quick, the money is made in the shipping allowance, currently $3.99 on Amazon. An exceptionally efficient seller, the essay states, can make 75 cents net margin out of a transaction. Not a fortune but multiply that by 100,000 sales in a year and someone can make a reasonable living in the on-line book business without the hassle of having an expensive store, employees and the mandatory cat.

So  where do all the 1 cent books come from?  Many come from "donations"--people who advertise, for example, on Craig's List and offer to pick up your excess books for free.  Others, like Thrift Books, acquires its stock by the ton, usually from libraries, secondhand stores and charities.

Most used or rare books, however, are not sold for one cent.  Many on line book sellers use sophisticated software, from companies like Fillz,an inventory and pricing service, to set prices on the web by optimizing across numerous variables, such as competitor ratings.  The industry has few barriers to entry and newbies often just screen scrape existing seller's listings, put them on their own site at a higher price, then buy it after they sell it from the unsuspecting competitor.

But many of the most successful players in the on line market are good old traditional book stores who use the web to reach a broader audience.  Who says you can't teach an old dog new tricks?

One could see a similar business model emerge for on line sales of vinyl records, CDs and DVDs.

Death to Patent Trolls?

Many of us remember the line from Shakespeare's King Henry IVth: First, let's kill all the lawyers!  That has now been replaced by let's kill all the bankers, mortage brokers, investment bankers, etc.  Certainly, the current financial malaise will make things more difficult for entrepreneurs and their start ups.

But there hopefully is a bit of good news on the patent front. But first, for those who have not had the "pleasure" of having a patent infringement suit filed against them, let me give you a little background. A company files a patent claiming that they "invented" supply chain management technology.  Perhaps in 2001.  What's wrong with this picture?  Supply chain management technology has, of course been around since the 1960's or 1970's. These BS business methods patents were allowed by the U.S. Patent Office for a few years and there are many more out there.  There is also a big business emerging for legitimate patent "buyers" like Nathan Myhrvold and his new company, Intellectual Ventures, which purchases patents from owners and then goes after infringers. 

Fred Wilson posted the following Blog this week regarding an important ruling on software and business use patents--the bane of some of my portfolio companies.

Entrepreneurs 1 - Patent Trolls 0

Well it looks like we got a win yesterday when the Court of Appeals for the Federal Circuit ruled that software and business method patents must meet a two pronged test that should serve to render many of these patents useless. I am not a patent lawyer and there is a debate in the comments tothis Techdirt post that suggest there's still a lot of debate about how big of a deal this ruling really is. I've emailed my favorite patent lawyer to get his opinion.

We can use all the help we can get. Our portfolio companies have been spending hundreds of thousands of dollars per case in recent years fighting off patent trolls who acquire software and business method patents and then sue for infringement. It's a huge tax on the startup/technology ecosystem and it's hurting innovation. The whole thing has soured me completely on the patent system. I think there shouldn't be any software and business method patents at all, but I think that's not likely to happen anytime soon.

Hopefully the courts and the patent office are beginning to see the problem with software and business method patents and rulings like we got yesterday are a hopeful sign.