A VC in Vacationland

Venture Capital: What Investors Want in a Startup

We often get asked the question: What do you look for in an investment? Although I’m sure every VC can have a different  take on the subject, here are our key factors:

•  Idea— we rarely see a bad idea, but often a poor business model. The idea, however, is the driving force behind what will be developed, so the ability of the founder to clearly articulate the vision and how it solves a real problem is crucial in attracting investors, building a team and speaking with potential customers
• Passion—What’s an idea without passion behind it? We get calls from founders who have an idea but do not want to start a company, only want us to ‘buy’ the idea. Forget it…that’s the founder’s job #1—having the passion to make the idea real
• Expertise—An idea without passion and expertise is also a non-starter. Don’t give us the ‘we are going to disrupt an old-school industry with our startup’ argument when you have no experience in the space and cannot really articulate what’s wrong with the current solutions, or worse yet, how ‘sticky’ they are with users
• Business Model—Here’s where the reality of the idea gets tested. Quickly. Who’s going to buy it, what do they need and what are they willing to pay? For example, have you not done testing with potential customers? That’s a big warning sign for investors, no matter how brilliant your solution appears in the PowerPoint. You need to be able to show that customers are willing to pay over the long term for a solution that does not cost you that much to deliver. There has to be solid gross margins evident in the financial plan as a foundation to any rational business
• Team—Are you all by yourself, with a great idea, passion, expertise and a solid business model? Great, but you will have a really difficult time getting any investor to speak with you. Startups require expertise in technology, finance, HR, markets, sales strategy, etc., etc. You don’t need all these skills upfront, and can outsource many of them , but investors are looking for a core team that can efficiently and effectively bring a product to market. Be sure you have the right team members identified and part of the game, not just maybe are going to join if you get funding
• Ability to Execute—OK, It’s great you have all the key ingredients listed above and now investors are interested on your ability to make all this stuff happen…on budget and in time…to hit the market before other competitors show up…which they will. The ability to execute is difficult for investors to measure. The easiest way for investors to judge this is to be a serial entrepreneur who has successfully launched and sold a company for a profit. Absent that, you need to lay out a clear plan of how you are going to make this happen. Some investors want a detailed plan, so they can track progress; other want metrics with timing to judge success
• Metrics—When will Version 1 launch? How may beta customers will be testing the version? When can sales begin to sell the product to a wider audience? What’s monthly customer acquisition/churn rates? What’s month-over-month revenue growth? These are just a few examples of clear metrics investors use to judge performance in a startup. Be sure you can articulate your key metrics upfront, be able to quantify them and report them out on a consistent basis, preferably monthly

 

Yes, getting a startup off the ground is difficult and at times frustrating. You are asking investors to commit funds—their money and other’s money—to your enterprise. You need to be able to answer a lot of questions, especially if you are a first-time entrepreneur. Preparation is essential to your success and will pay off in the long term.

Supply Chain Innovators: RightHand's Stealth, but A Picking Robot in the Works

RightHand Is Latest Robotics Startup to Grab Venture Capital

 

 

According to Xconomy, another Boston-area robotics company has raised venture capital. But this one isn’t saying much about what it’s building yet.

RightHand Robotics, a Harvard University spin-out based at the Harvard Innovation Lab, has raised $3.3 million, according to a regulatory filing. Co-founder Yaro Tenzer confirmed the amount but declined to say who the company’s investors are, except that they are “tier one” and “big name” venture capitalists and angel investors.

RightHand says it is developing “intelligent robotic order-picking systems.” That means robots that can operate in an e-commerce warehouse, for example, and fulfill orders by picking up items and putting them in boxes. Tenzer had no comment on whether the company has pilot tests or customers yet.

In addition to Tenzer, the startup is led by co-founders Leif Jentoft, Lael Odhner, and Robert Howe, a Harvard professor in bio-robotics.

As of last spring, RightHand had developed a three-fingered dexterous gripper that could pick up such items as tools, produce, and dry goods.

There has been a lot of investor and customer interest in dexterous robots that can handle goods efficiently without breaking them—it’s one of the frontiers of artificial intelligence and automation. Companies such as Rethink Robotics, Amazon Robotics (formerly Kiva Systems), Fetch Robotics, Empire Robotics, and Harvest Automation operate in the increasingly crowded sector.

Supply Chain Innovators: MIT Offers Free Supply Chain Management Courses

According to the Boston Business Journal, The Massachusetts Institute of Technology, in an extraordinary upending of the traditional model for graduate education, is expanding its prestigious program in supply chain management to include students admitted in large part based on their performance in free MIT online courses and on a wrap-up exam.

In filling about 40 slots a semester during a pilot phase, MIT will downplay standardized tests such as the GRE or MCAT, long-term academic performance and undergraduate pedigree. Instead, applicants will be assessed on demonstrated ability to do the coursework and Skype interviews.

The program unveiled today has three components.

Anyone anywhere may take MIT courses in supply chain management for free. Students interested in earning a new credential called a MicroMaster's will pay about $150 for each of five courses plus between $400 and $800 — the price hasn't been finalized — to take an exam afterward. The best students will be invited to apply to earn a traditional master's with just one semester on campus in Cambridge.

"This approach basically inverts the traditional admissions process," MIT President Rafael Reif told a campus gathering today.

The traditional model works "for people who went to schools we know very well," Reif said. "But for people outside that familiar circle, it can be hard to break in."

Speaking with reporters after the announcement, Reif said it's too early to tell whether similar hybrid programs will be replicated through MIT's graduate schools or even in the undergraduate program.

 

"I anticipate that if it goes well, we will have many others following suit," he said, adding: "Who knows what will happen someday?"

Yossi Sheffi, an MIT professor who is shepherding the program, said supply chain management was a logical choice for the first such program at MIT because many of its participants are mid-career and because of huge demand for its graduates.

"The main complaint (from corporate supporters) about our program is that it's too small," Sheffi said. "We are graduating dozens a year. They need hundreds of thousands a year."

Venture Capital: Startups investing in Startups? Here's why...

cbinsights had an interesting article on startups investing in startups recently. What caught my eye was the investment by Flipkart and Accel Partners in Zinka Logistics. What's this all about?  Poor logistics operations by FlipKart, it seems...

According to inc42.com, Bangalore-based online marketplace for freight transportation booking Zinka Logistics (formerly Blackbuck), has raised about $6 Mn  from Flipkart and Accel Partners.

Founded in 2014 by Rajesh Yabaji and Chanakya Hridaya, Zinka helps customers in moving anything, from anywhere to everywhere. Their customers include individuals, small business establishments and large companies like Flipkart; mostly anyone who need to move goods.

Flipkart’s investment in the logistics space comes in at a time when the e tailer has been news for faulty delivery of products. For example, earlier this month Flipkart sent two mangoes instead of a smartphone and bricks in place of a laptop.

There is a growing discontinuity between the on-line retailing world and supply chain providers. Although many use 3PL's to do fulfillment, many others have adopted the DIY model. It's tough to run a bicameral business model--attracting consumers to your marketplace and running the back end logistics to fulfill orders. In many cases, it is better to focus on what you are good at and not try and be world class in delivery, with so many capable providers out there.

 

 

 

---

 

 

Managing startups: There's nothing more dangerous than an idea if it's the only one you have

'There's nothing more dangerous than an idea if it's the only one you have'

fortune cookie ..

I was eating out the other night--the same night I got food poisoning before my flight to SF--and unlocked the above fortune in my cookie. It made me think about entrepreneurs and success, and how a good to great startup is actually needs a multitude of ideas to succeed.

Let's be clear up front. I am not and never will be a fan of so-called 'pivots' in the startup world, especially those that look nothing like the idea that was the basis for the original investment. For sure, some of them succeed, but are very different than the original pitch deck.

The cbinsights had an interesting piece on the original pitch decks of five companies that now have multi-billion dollar valuations. What struck me about looking through the decks was how close the entrepreneur stayed true to the original concept, like AirBnB, but morphed the execution over time to conform to changing market and competitive conditions. And these decks had numerous ideas in them on how to execute around the key concept, such as renting your spare room. Any good entrepreneur has to be ready for many objections when they first try and pitch their new concept to the market.

But let's get back to the original idea of this post--the concept that having only one idea is dangerous for an entrepreneur. I've had all sorts of pitches in my life and here's why the 'one-trick pony' approach to starting a company does not work:

• too narrow focus market--the overall idea is good, but the entrepreneur has chosen a very small customer segment to go after. I saw a company the other day that wanted to sell to small businesses that needed a certain specialized technology. The market was tiny, and not worthy of a beta
• good idea, poor execution--I see a lot of companies that want to be the Uber for shipping. Well, for one thing, Uber is likely to enter that space and how will you be better? No real answer, except that 'competitors are healthy'.
• Great go-to-market, lousy corollary ideas-- the entrepreneur worked hard on a brilliant go to market strategy, but had nothing to offer customers beyond a simplistic solution in a space begging for more capabilities. One idea just is not the formula for success in the startup world.

So, entrepreneurs, be sure you give a lot of thought to what I'll call your 'idea portfolio'--the collection of innovations that will make your customers happy for a long period of time and allow you to capture increasing value add from the portfolio. So much better than just one idea...and less dangerous.

 

 

Venture Capital: Invest in People or Just Disruptive Ideas?

There is an interesting argument going on in the venture world about whether algorithms are better investors than people. The issues are well summarized in a recent Fortune article.

The basic premise is whether it makes more financial sense (measured by fund IRR) to spend the time getting to know the team, cultivate the idea and support the growth as opposed to use some fancy formula to look over the competitive landscape and determine whether a disruptive idea has the potential to create significant value if you only throw enough money at it (think Uber).

Personally, I am much more interested in the old school model of 'finding and minding' an investment by putting in the time with founders to make it all happen. I have friends who have successful 'hands off' portfolios, where they might attend a board meeting once a quarter, but generally have little contact with the day-to-day operations of their portfolio companies.This does not sound like a lot of fun to me.

Of course, probably half my portfolio runs quite well without me, but I carefully chose the founders up front and have confidence that they can manage without my help, unless they call with specific requests. The other half I am involved in, often on a weekly basis. It's what I like to do and if I can add value, then I can help my investments be successful.

While I can appreciate the profit maximization approach to venture capital, it just doesn't create the value I am seeking--helping companies and people be successful by giving back the knowledge others gave to me over my lifetime. I guess that's what old guys think about in their later years...but it works for me...and many of my portfolio companies. I'll stick by it.

 

Managing startups: That was fast! I mean life!

That was fast! I mean life!  Ron Padgett poem

This interesting poem (that's it--six words total) got me thinking about the 'life' of startups and how to understand the various stages of birth, growth, maturity and (gulp) death. Well managed startups run in the fast lane for sure and delaying necessary transitions from one stage to the next can create all sorts of unnecessary problems.

The startup birth phase is the simplest and also the most challenging. Founders need to have the right ideas, be able to pivot if the market changes or competitors emerge and launch a product or service that has some market traction. If all goes well, angel or seed investors come along and fund product development and customer acquisition. Sounds easy but this is where most startups fail to thrive, often due to misreading the market, over complicating the product, or just plain bad management.

The growth phase is post market proof that the product or service has traction and is able to attract a paying customer base with high satisfaction, strong usage and a low churn rate. The challenges in the growth phase is to keep customer acquisition costs (CAC) reasonable, while maximizing the lifetime value (LTV) of the customer. Driving up profitable customer counts attracts venture money looking to see if the growth phase really has the legs it needs to succeed, or is it just a product and not a company.

The maturity phase is the transition from a product or service offering to a company--one with multiple ways to market, a portfolio of attractive offerings for its customers and an experienced management team capable of taking the company to new levels of revenue and profitability. Growth capital is usually still required to accelerate growth and grow into new global or vertical markets. Major challenges in the maturity phase include: founder transition (most founders get out of day to day operations in the growth phase, but remain key strategists in maturity), competitive onslaughts from cheaper, more creative players and managing a much more complex enterprise.

All companies die, in one way or the other. The death phase  refers to the time when the company does not resemble where it came from at birth. It could be acquired and its products/services absorbed into a much larger entity, it could be an acquirer, bring on new product lines to complement old (and importing new cultures and challenges) or it could just stagnate, maintaining loyal customers, but being passed by new competitors in the marketplace. Challenges include financing product development as margins are squeezed, keeping customers on the platform and finding ways to bring on new customers. Often, an acquisition by a competitor, a retiring of the aged platform and innovative go-to-market strategies are needed to revitalize the offerings.

So, that was fast! I mean life! in the startup world...

 

Managing startups:Founder Fallen on Hard Times

I was driving home through a pretty fancy suburb of Boston today when a beggar approached me at a traffic light holding a sign saying "Fallen on Hard Times". I gave her some money...I'm a sucker for beggars, especially grandmothers. Don't tell my wife--I'll be berated...again...for giving money to homeless people.

It got me thinking about a recent meeting I had with a startup I have been mentoring for over a year. The founder told me that he had run out of cash and was shutting down all development and marketing. I knew cash was tight, but not that draconian measures were needed. The rub is that the company is doing very well in the sales and customer satisfaction arenas.

But how did the company fall on hard times? Pretty simple--the founder made mistake number one for an entrepreneur--he ran the company out of money. No real excuse for that and numerous people could have helped if we knew a few months prior to the sad event. Now he wants to raise a seed round and his customer acquisition stats will be near zero for the next few months since he can't afford to pursue new customers. It's going to be very difficult....

I understand the basic reasons--he wanted to have a MVP--minimal viable product--to present to investors and spent all his previous capital getting that done, along with acquiring additional customers. Now, he does not have the capital to make improvements, fix bugs, or service existing clients.

The number one job for a founder is to make sure there is money in the bank, or that he/she have a good plan to bring it in as needed. You need at least 6 months and preferably 18 months of cash burn to ensure you can make your company viable. Fail that and it all fails. 

 

Managing Start-Ups: We are Walking on the Road as We Build it

There are many similar quotes, such as 'we made the road as we walked', or the Australian  Aborigines "singing the earth alive' as they walked their roads. 

The phrase is very appropriate for the startup world, as I was reminded the other day, speaking to one of my CEO's. The company is on a fast growth path and we need to do a lot of things simultaneously to make it all happen--hiring, preserving culture, training new managers, etc. etc. You have to have a lot of faith that all is on the right track every day--mistakes are difficult to correct in a fast-growth world.

It made me think about the most important part of this entire process, having the management team learn how to let go, trust others to take over their day-to-day jobs and start spending time thinking about how to make the future happen. All the while, walking the road as we build it.

I warn them that having 200 people in a few months becomes much more of a people, rather than task management responsibility for the founders. You can't spend your days second guessing your new hires. You need to give them the resources to be successful, set clear objectives and be their biggest cheerleader. Otherwise, the whole scheme collapses on itself. It's impossible for you as founders to run the whole show, like you did only a few months ago.

It's a huge change for the founders, but critical if the startup is going to make it into the next phase of growth. You will still be walking the road as you build it, but with a lot more people walking along beside you. That's they way it should and needs to be. You as a founder become a leader of people, not just someone who does everything. It's tough but a critical transition but the rewards are fantastic when you get to the other side.

Managing startups: Quirky pivots...dramtically...after spending $185 million

According to VentureBeat, Quirky has pissed away its $185M in venture funding. I liked the concept when it was announced a few years ago, sort of a VC firm for product inventors. But either these inventors never went online (I recommended it a number of times to people who approached me), or there really is nothing new under the sun (highly unlikely). My guess is that there are numerous other channels and funding options for product entrepreneurs to tap into. Anyway, here's the story from VentureBeat:

Quirky might seem like one of the more extreme examples of Silicon Valley excess in recent years, but its recent pivot — and the way its CEO handled it — is a rare example of honesty and transparency.

The startup’s premise was inspired, if a little idealistic: Take inventors’ half-baked ideas, help them turn those ideas into legitimate products, then sell those products in stores, sharing profits with the inventors.

The company raised over $185 million over the course of its six-year life. But the most successful inventions it has turned out are frankly underwhelming. The “Pivot Power Strip,” which allows its plugs to rotate so it’s easier to plug in several bulky “wall wart” adapters, and the “Bandit,” a line of rubber bands with little hooks attached, like mini-bungee cords. In other words, useful stuff, but hardly high tech.

So, in classic Silicon Valley fashion, the company is pivoting to something new. Founder and chief executive Ben Kaufman described that new path with unusual candor and humor earlier this week at Fortune Brainstorm Tech, an elite conference in Aspen, Colorado that I was fortunate to attend.

Kaufman was funny, blunt, self-deprecating, and pulled no punches. In short, he stood out in the crowd: You rarely, if ever, see entrepreneurs acting humble or self-deprecating onstage in Silicon Valley events.

At this point, Quirky has burned through almost all of its $185 million. Asked when the company runs out of money, Kaufman quipped, “Weeks ago.”

“I hope we raise more money,” he said — though he was silent on who the company would raise it from, or whether the company’s previous investors would pour more capital into the company. (Probably not.)

So Kaufman is counting on a two-pronged strategy to bring Quirky back from the brink. He seemed well aware that it was a long shot, but it’s also clear he hasn’t given up on the company at all.

The first part of Quirky’s new strategy is predicated on forming partnerships with big manufacturers, like GE, who can bring Quirky’s products to the market.

Kaufman acknowledged that selling products in “big box” retailers wasn’t generating enough profit to keep the company afloat. Yes, he said, the products’ sales generated a small margin for the company — they were profitable, strictly speaking. But add in Quirky’s quite substantial overhead expenses, and the company was losing money.

Plus, he said, the brand worked fine for things like power strips and power-cord management gadgets, but it didn’t work so well for more expensive products, like the connected air conditioner Quirky made together with GE.

“People don’t want a ‘quirky’ air conditioner, they want a good one,” Kaufman said, to laughter from the audience.

The partnership with GE makes Quirky into an ideas shop — an invention factory — for the bigger company, which has deeper pockets and more manufacturing resources, not to mention better relationships with those retailers who are so critical to the consumer products category.

The second part of the new strategy, Kaufman said, is Wink, Quirky’s platform for connected home devices. With many companies now betting that the Internet of Things (IoT) is about to take off, what’s needed is a common communications standard to help devices talk to one another and communicate with the Internet. Wink provides that, through a single app that you can run on your phone or a wall-mounted tablet.

Products that work with Wink include GE’s connected “smart” LED light bulbs, Schlage smart locks, the Nest thermostat, and more. Kaufman says more than 300,000 homes already have Wink-compatible devices inside them, which is a substantial base, and that Wink will do $25 million in revenue in its first year.

“On a clean sheet of paper, that would be an incredibly huge startup,” Kaufman said. “The problem is that its attachment to Quirky has plagued it.”

Quirky certainly lived up to its name over the years. Kaufman chuckled over an $80 “connected egg tray” that he was very excited about: When you were running low on eggs, it could notify you and order more from the grocery delivery service, I suppose.

“Obviously it didn’t sell that well,” Kaufman acknowledged. But, he said, it was meant more as a demonstration of what could be done with a connected home, rather than a moneymaking product in its own right.

In the end, I’m not certain whether Kaufman’s onstage appearance in front of a bunch of high-powered investors and executives did his company more harm or good. He certainly didn’t duck from the responsibility of having failed, and having lost a lot of investors’ money.

But if anything will save Quirky, it will be that transparency. Kaufman said that he told the community about Quirky’s new direction back in February, and that while they weren’t excited about it, most of the community members were understanding and supportive. The company is still getting thousands of new product ideas submitted every week, and that’s due in large part to the fact, he says, that people still trust Quirky.

“We have to be authentic because all we have is the community’s trust in us,” Kaufman said. “The reason people trust us is because we’ve never hidden anything, from our community or from our partners.”