VC Confidential

Tim Draper's 8 Rules for Start Up Success

I am out at the annual DFJ CEO Summit. Tim kicked off the event with his eight rules for company success based on 26 years in the business. They are: Eight rules for success: 1) Test your product and get it out into market...see if the dogs will eat the dog food 2) Don't run out of cash 3) Eliminate human friction...one button on iPod, simplicity, simplicity 4) Focus...what is the most important thing to customer and what you can do to uniquely solve it. -- and eliminate items on fin statement like WC, anything not critical to key customer need 5) Leadership: you are the meme...you are on a mission but everyone picks up what you eminate...Sun always used the term Awesome (from McNealy), Job's culture. You are the leader of organization: take care of self, employees will also. You are the brand and heart of culture. 6) Think Big...go after things that count, one life to lead and go after big problem, change society 7) Have fun: get the endorphines firing, lots of little stupid things...leads to creative solutions 8) Partner and work with as many people as possible David Rosenblatt of DoubleClick fame added: 9) Accountability: clear owner of each item who goes to bed focus and worried about it. 10) Transparency: avoid layered bureaucracy and heavy processes that obscure. Keep employees informed of all the company's tentacles, challenges and opportunitities

Favor to Get Out the Vote

I'm looking to withdraw a little from my Karma bank here. My son just led his high school team to the Illinois State golf championship. This is big deal for his small school (60 kids per class). It is the first state title in any sport in the school's 60 year history. He also finished second at Regionals and second at Sectionals. He's worked incredibly hard over the past years for this.

The Chicago Tribune has nominated him as one of six athletes to possibly win High School Player of the Month. He is second right now against others from much larger schools who are getting out the vote across their schools. I'm clearly biased but you can decide for yourself who to vote for. I would love to see as many of you as possible go to the Tribune HS Player of the Month site and vote for Nicholas McCall and help send him past the larger schools (plus his is the only State Championship in the group:). Thanks in advance!!!

Enough With the Gloom & Doom on Groupon

In 2000-2001, I remember reading negative article after negative article on Amazon. It was burning money quickly, e-tailers were going under left and right and brick & mortar stores were re-asserting themselves. People kept a diligent death watch for it after the demise of Webvans ($1b) and others. In reality, what was going on was a rationalization of the e-commerce space, a pruning of the weak. As scale effects kicked in and they offered new services, suddenly the company swung to profitability and the rest is history. Using Google, I can't even find articles from those days. 

I have a similar feeling about Groupon. I have been amazed by the manic swings in public opinion on Groupon that we have seen over the past year. Lately, it has all been gloom and doom. The company goes public at $20/share ($2 above targeted range and trades up 30-50%. First headline I see: "Groupon gets a pop--but not the 1999 kind". Come on guys...enough with the dramatic trash talking.

I'll be the first to admit that I have no crystal ball about the future of Groupon nor an in-depth knowledge of its solvency. However, $700m will certain give them a nice runway to work things out. There are several high level factors that people seem to be ignoring about the company.

1) like all e-commerce spaces, when they rationalize, everyone suffers and, in the end, it is usually the top 2-3 companies that come out dominant. The number of daily deal sites has already dropped from 300 to 180 and continues to fall rapidly. There is scale advantage to being large in everything from online acquisition costs to logistics to call center efficiencies to branding.  These grow with time.

2) everyone wrote off Amazon around 2000 and 2001. Eventually, the company fully leveraged its economies of scale, tightened its cost structure, got to break even and then rolled out new products/services. You now have everything from Amazon stores to Amazon private labeling online service & fulfillment for other large retailers to all of its cloud infrastructure (AWS). Groupon will follow a similar path. It will grow, it will get to breakeven and it will innovate. We have not even seen the services yet that will eventually drive profitable growth for the business in the future.

3) why has no one been commenting on the incredible talent in the firm. First, if you give Eric, Brad and Andrew opportunity to iterate, they will figure out solutions. They are quintessential entrepreneurs. $700m buys a good amount of runway for them. Second, they have hired folks like senior data experts from Netflix to figure out preferential targeting and a former Amazon finance exec as CFO. There is a lot of top talent there.

4) does the world expect 10-15 of the largest, most connected venture firms in the world (as well as the two top investment banks) to allow anything to happen to this company? I think it is safe to say that Groupon is well buffered.

So, enough Groupon bashing and enough Groupon hyperbole on the other side. Let this team innovate, grow and take full advantage of the $700m they just raised. I can't guarantee that things won't end in tears here but I can say that they have a lot more going for them than the press/analysts have been willing to admit. 

Touched by Something Greater

Even in death, Steve Jobs connects us and reminds us of something greater. It is amazing the impact that Steve's death has had. Nearly everyone I know seems saddened almost at a personal level. It's as if we all realized this special, creative presence has now moved on…communal loss. Very interesting. I think some of us almost viewed him as immortal given his many recoveries. Others realized that his creativity and entrepreneurship reaffirmed our connection to something greater than ourselves. Most feel a tangible loss. He was the ultimate embodiment of innovation and entrepreneurship...how it inspires and raises us to a greater plane. 

I've reposted his 2005 Commencement Speech (over 15m views) which I first blogged about 5 years ago. Steve, we'll miss you :(

Seek First to Understand then to be Understood

When you've been in the venture business as long as I have, you have seen your share of dysfunctional, poisonious board/management situations. None of these needed to occur. They all fall into the "life's too short" category. Understanding, alignment and unification (leave your ego at the door) are the key elements of avoiding this. 

For those of you that have read my favorite book, the Tao of Pooh, this may seem familiar…Pooh is the Uncarved Block and just is. It talks a lot about misalignment occurring when we fail to see things as they really are but as we would like them to be.  I'm a novice here but seems also common with Buddha's core philosophy around how desiring things (versus seeing/accepting what is) leads to pain and suffering.

My mentor in the venture business, Ed Chandler, taught me this about venture deals. He said that every company and every board/management team of individuals have natural directions, biases and likely behaviors. A good VC or manager, must first assess where things/people will go naturally given a situation, biases & incentives. Understand the logical paths forward then and determine where does that leave the company. To the degree that there are misalignments between parties, figure out how to facilitate coordination between these misalignments so as to unify everyone such that they are rowing in the same direction.  Take ego and one's own agenda out of the picture for a moment when doing this. If the direction is hazardous or wrong, your job is to then figure out, given each party's (or the market's) natural inclinations and nature, how to shift the direction or flow naturally. If the flow can't be redirected, then you need to accept that and figure out what you need to do given that reality versus sticking your head in the sand and bemoaning your fate to all that will listen. In other words, if the result is not what you hope for, you need to embrace and "lean" into the pain/disappointment and fully appreciate it. From there, you can figure out the optimal next steps and chapter. If you deny or fight what is happening, you never fully understand what is meant to be, to align yourself with that and to fail quickly and redirect/reinvent. A friend used to tell me to always "lean into pain" not away from it  and understand it…like putting pressure on a cramp. It eventually dissolves.

Too often people put their own ego or desire first and try to remake their environment/company in their own image. They use force, leverage, politics and other means by which to do this. In the end, they may be successful but at what cost. You usually have collateral damage in the form of broken trust, dysfunctional communications and often, a result where they win the battle and lose the war. Early in my career, I used to lean on legal rights (blocking rights, board votes, etc) to force through changes I wanted but others didn't. Eventually, I found myself completely isolated from future important dialogs and my relationships with those CEO's frayed. As Steve Covey said "seek first to understand then to be understood".

 

This Too Shall Pass

With all of the activity at work over the past 18 months as well as a host of mid-life course corrections, I have been negligent in feeding the blog gods. With Maria Katris's kind encouragement at Built in Chicago, I thought I would start posting more often.

One topic that comes up with increasing frequency these days is around managing one's future or career. In addition to all of the bubbly successes, there is a growing amount of stress and angst. Every entrepreneur and VC, at some point in time, has had one (if not many) gut wrenching, anxietal periods. Like a bad night at Texas Hold 'em, the cards keep coming up weak and you begin to question both your sanity and why you are doing what you are doing. Sometimes this is because others are hitting winners in the new SoMoLo (social, mobile, local) wild frontier while you watch and sometimes, it's because you are simply struggling to keep your head above water (dealing with debt, personal issues, non-scaling business, etc). Worse yet, you extrapolate out from today towards a draconian future. It's a terrific formula for sleepless nights (that or writing late night blog posts...).

In all my years, somehow, that draconian future never seems to hit like people think. While they don't get what they want, they often get what they need (thanks, Mick, for the words). So, when things just don't seem to be going your way and others seem to be passing you by or your future is opaque (and driving you nuts), what should you do?

My friend Carter reminded me of a Lincoln tale. When asked how he dealt with setback and issues he recounted a tale about a king who sent his wisest sages out into the world to find out how to live a content and fulfilling life. They returned, huddled and came back with a common finding...the words "This too shall pass".

In my favorite personal blog post, The Significance of the Karma Bracelet, I discuss my own journey down such a path during the last Bubble apocalypse. And again, in the past two years, nearly every aspect of my life has changed and one thing that has kept me balance and moving forward optimistically are these four words. Another friend once said, when you find yourself reinforcing your stress by linearly projecting the present, stop...don't think out more than 2 days and focus on what you have the ability to change not the phantom ghosts you can't. Things will change, synchronicity will come into play and life (or company) will right itself. Nearly all great start-ups have to nearly dance with death at least once and you haven't earned your stripes if you have not found yourself lost at sea in a foggy mist. As my partner, Ed, once said, it is a lot harder to kill a company than you think.

That said, what have you found to be helpful in handling adversity, setbacks and stress?

 

Carter Cast on the "Drama of Comparative Living"

My friend, Carter Cast, gave a wonderful talk to a large group of Fortune 500 executives and non-profit leaders. I highly recommend everyone reading this to take this to heart given where Carter comes from. Carter has had a career unmatched by most I know. Starting as one of the star swimmers on Stanford's national championship team, he has progressed through a host of successes ranging from being employee 4 (CMO) at Blue Nile, defining its successful launch strategy to being the CMO of eBay to CEO of Walmart.com (growing it from less than $100m to several billion). On top of this, he is one of the most down to earth, humble people you'll meet and his former lieutenants will tell you how engaged he was in their development. Enjoy...

"For much of my adult life, a subtle form of fear has been my constant companion.  Eventually, I found myself in the position where I could no longer attempt to ignore it. It had sufficiently eroded my health that I was forced to confront it.

From my own personal experience, (and this is by no means an academic definition) fear can be grouped in three areas of descending intensity: 1) the anticipation of direct danger to one’s being—the guy in the alley coming my way, to fight or give flight; 2) the fear that something I have will be taken away—my house, my job, my loved ones. (In this category, the Buddhist preaching of acceptance of life’s impermanence has helped me.) 3) The feeling that I am not enough, that I don’t measure up to some ever-moving standard of worthiness. This last category of fear is the one I will discuss tonight.

In this categorization, there exists a kind of anxiety gap between what is and what we think should be. “I should have a PhD like Rob Wolcott.” “I deserve to be as wealthy as Ben Elowitz, because I was instrumental in building the Blue Nile business.” This is the drama of comparative living. Bertrand Russell, in The Conquest of Happiness, calls it “worry fatigue.” He says, “Envy is a form of vice which consists of seeing things never in themselves, but only in their relations.” He had a great example: “Napoleon envied Caesar; Caesar envied Alexander; Alexander I daresay envied Hercules, who didn’t exist.”

I am fairly certain that the destructive emotion of envy has increased in the age in which we are living. Amidst all of the opulence we not face the alarming gap between the have and the have-nots, we now also have the ability, due to the opening up of the world through technology, to compare ourselves to others with just a few keystrokes. We all do this. Everyone in this room has done it. How many of us have gone on Zillow or another real estate site to check out the value of our neighbor’s house? How many of us, when perusing Facebook, have seen that one of our friends just dined with someone fancy, dined somewhere fancy or become downright fancy themselves? And then and felt…envious. Today we have the dubious “opportunity” to gauge our progress relative to just about everyone with an Internet connection. And we can gauge the progress of those without one too. Meet your new neighbor, commit to memory his name, and Google the guy when you get home…Only a few hundred years ago, we compared ourselves to the work product of the one other blacksmith in our village. Now we compare our work to all the blacksmiths in all the villages throughout the land…If our values aren’t strong and properly reinforced, we will feel envious. And if we don’t pay attention to this destructive emotion, it can spin out of control and turn into a deep-set fear that we just aren’t good enough.

If you think about it, this comparative frame of reference should only matter when we’re competing in a zero-sum situation. He gets it, I don’t. There’s a winner and a loser. Yet most of the situations we find ourselves in, on a daily basis, do not involve zero-sum outcomes. In most of our life experiences, we find ourselves working with others in situations where we all can benefit. Even in very complex negotiations, creative solutions exist that expand the pie and leave plenty of slices for everyone.

So in reality, in the vast majority of the many millions of discrete moments that make up our lives, we have the ability to choose not to participate in the drama of comparative living.  And that is my epiphany: that through awareness and discipline, I can choose to see things not in their relation to others, but only in their relation to myself—in relation to my own spiritual and intellectual development. Am I increasing in my capacity to show compassion to others? Am I increasing my business skills in order to be more useful to others? Now, at night, I reflect and remind myself that my development as a human being is relative to no one else, just myself and where I was at a prior state of development.

Everyone in this room is in the bonus scoring round of life. We’ve taken the tests and passed. We’ve auditioned and gotten the gig. We’ve made it—the degree, the car, the house. We have respect. Yet the only respect we really need is our own. We can choose keep trying to make it, over and over again, or we can realize we don’t have to live our lives in pursuit mode. We don’t have to keep trying to keep up with the beat of an imaginary metronome. We can say, “I am enough.” As Thomas Merton said, “We have what we seek.” Harmony, for me, lies in this thought."

 

Synchronicity in Everyday Life

"A connecting principle Linked to the invisible Almost imperceptible Something inexpressible Science insusceptible Logic so inflexible Causally connectable Yet nothing is invincible" -- the Police, Synchronicity

People, places and events come into our lives for a reason. We rarely fully appreciate or even notice them. Often we'll observe a confluence of them and comment on what a "coincidence" we've experienced. Well, after 15 years in the venture industry, I strongly believe that there are no coincidences but rather synchronicity in our everyday lives. There are invisible webs that hold them together and it is our responsibility to be curious enough to examine and enjoy them.

We race around, head down, failing to observe the greater picture. Great entrepreneurs, successful authors, wise everyday people all seem to have a gift of standing back and seeing this activity in the periphery.  They see connections between apparently unrelated events or trends and create/uncover new realities. They see, connected to a set back, a lesson and a message to head in a different direction (rather bemoan their poor "luck"). If you ever catch your self commenting on something being "ironic" or "quite the coincidence", stop and look around. There is usually something bigger going on and you should be more curious and open to what that new reality is.

"Jung believed the traditional notions of causality were incapable of explaining some of the more improbable forms of coincidence. Where it is plain, felt Jung, that no causal connection can be demonstrated between two events, but where a meaningful relationship nevertheless exists between them, a wholly different type of principle is likely to be operating. Jung called this principle "synchronicity."

In The Structure and Dynamics of the Psyche, Jung describes how, during his research into the phenomenon of the collective unconscious, he began to observe coincidences that were connected in such a meaningful way that their occurrence seemed to defy the calculations of probability. He provided numerous examples from his own psychiatric case-studies, many now legendary.

"A young woman I was treating had, at a critical moment, a dream in which she was given a golden scarab. While she was telling me her dream, I sat with my back to the closed window. Suddenly I heard a noise behind me, like a gentle tapping. I turned round and saw a flying insect knocking against the window-pane from outside. I opened the window and caught the creature in the air as it flew in. It was the nearest analogy to the golden scarab that one finds in our latitudes, a scarabaeid beetle, the common rose-chafer (Cetoaia urata) which contrary to its usual habits had evidently felt an urge to get into a dark room at this particular moment. I must admit that nothing like it ever happened to me before or since, and that the dream of the patient has remained unique in my experience." The Scarab represented Self-Generation, Resurrection and Renewal.

We live in a non-linear world that defies our linear thinking (just look at weather). We are focused on getting Jimmy to soccer or the project done at work or the report done for class. We can go through entire periods of our lives, jumping from one fire drill to the next and never tuning into the bigger symphony and the inter-related flows around us. This could be the random person on your plane, an article that catches your eye or an event you witness but move on. Life's best experiences and lessons come from these synchronistic encounters.

If you want to be a good entrepreneur, a good parent, friend or partner, look around and try to see the forest from the trees. Introduce yourself to complete strangers, do random acts of kindness and force yourself to do things outside of your normal routine. Life is unpredictable and as the Rolling Stones said, "You don't get what you want but, sometimes, you get what you need."

The Torch is Passed to Android

Everyone watching the mobile OS wars has been expecting Android to become the dominant OS by powering a lot of the non-Apple hardware. The most recent Comscore numbers indicate that the torch (no BB pun) has been passed to Android in Q4, 2010. Below are the share numbers of mobile handsets and OS share. Android is powering much of the key handset players' devices (Samsung, Motorola, etc) and the Android market share just passed Apple's. The iPhone still has legacy stickiness due to the App store, iTunes, desktops, etc so it is not likely going to be a repeat of the Mac/Windows wars but it'll rhyme. Below is an excerpt from the Comscore Report (link here)

OEM Market Share
For the three month average period ending in November, 234 million Americans ages 13 and older used mobile devices. Device manufacturer Samsung ranked as the top OEM with 24.5 percent of U.S. mobile subscribers, up 0.9 percentage points from the three month period ending in August. LG ranked second with 20.9 percent share, followed by Motorola (17.0 percent), RIM (8.8 percent) and Nokia (7.2 percent).

________________________________________________________________
Top Mobile OEMs
3 Month Avg. Ending Nov. 2010 vs. 3 Month Avg. Ending Aug. 2010
Total U.S. Mobile Subscribers Ages 13+
Source: comScore MobiLens                                       .
                            Share (%) of Mobile Subscribers
                                            Aug-10    Nov-10    Point Change
Total Mobile Subscribers    100.0%    100.0%        N/A
Samsung                              23.6%     24.5%        0.9
LG                                        21.2%     20.9%       -0.3
Motorola                               18.8%     17.0%       -1.8
RIM                                        9.0%      8.8%       -0.2
Nokia                                     7.6%      7.2%       -0.4
________________________________________________________________

Smartphone Platform Market Share
61.5 million people in the U.S. owned smartphones during the three months ending in November, up 10 percent from the preceding three-month period, as RIM led with 33.5 percent market share of smartphones. After several months of strong growth, Google Android captured the #2 ranking among smartphone platforms in November with 26.0 percent of U.S. smartphone subscribers. Apple accounted for 25.0 percent of smartphone subscribers (up 0.8 percentage points), followed by Microsoft with 9.0 percent and Palm with 3.9 percent.

____________________________________________________________________
Top Smartphone Platforms
3 Month Avg. Ending Nov. 2010 vs. 3 Month Avg. Ending Aug. 2010
Total U.S. Smartphone Subscribers Ages 13+
Source: comScore MobiLens                                           .
                                Share (%) of Smartphone Subscribers
                                                    Aug-10    Nov-10    Point Change
Total Smartphone Subscribers    100.0%    100.0%        N/A
RIM                                                37.6%     33.5%       -4.1
Google                                           19.6%     26.0%        6.4
Apple                                             24.2%     25.0%        0.8
Microsoft                                        10.8%      9.0%       -1.8
Palm                                                4.6%      3.9%       -0.7

Buckle Up for the Next Chapter

I don't want to pile onto or repeat some of the great posts of the current market conditions. Fred Wilson's post, Storm Clouds, was one of the better initial snippets on what is going on. One of the advantages of being in Chicago is that we are the first to lose liquidity and the last to get it. So, we track the number of term sheets from the Valley hitting Chicago as an indication of froth. When it goes up, we know that the Valley has so messed up its ecosystem that they are willing to fly in Winter to Chicago. The planes have been flying in with significant frequency, some driven by the Groupon halo and some driven by a hunger for deals at 50% the price of the Valley. I made the call in June 2008 that the cycle had ended and to buckle up:  Rough Ride Ahead.  I am not prognosticator but rather a risk handicapper. I still believe the next 5 years will produce some amazing wins but we will have a rough interim period here in the next year or so.

Having survived three VC cycles, the pattern is usually the same.

In Stage One, fear sets into the market when the public markets pull back and VC's grow concerned that they won't get exits. They stop feeding the funnel. Valuations fall in the Valley and they pull back their activities to their "two hour radius".  The markets eventually stabilize and VC's come out with a more cautious approach, often looking hard at core fundamentals, take extended periods of time on diligence and price deals somewhat conservatively. Recruiting of talent is rational and effective.

Stage two, the market starts to heat up, companies start to ramp, revenue grows and VC's start to pick up their activity. They have moved from fear to semi-greed.

Eventually, in stage three, a couple of deals pop in a big way (Groupon, Facebook, Playdom, Zynga, etc). Suddenly the VC's begin to get greed and fearful that they are going to miss the next big win. They start pricing deals not at core fundamentals today but at expect or hoped for revenue in the future. If the deals inflect they look like heros and if not, they have a portfolio of destroyed cap tables.

Indicators of Stage Three are:

-- frequent "pre-emptive" rounds at 50-100% the expected valuation to "take the deal off the market"

-- high valuations in excess of historical norms ($5m revenue, $50m pre-$, $20m revenue-$200m pre-$)

-- general sense of anxiety and envy in the Valley with fear of missing the next Facebook dominates partner discussions on Monday's

-- talent wars with pricing on salary, tenure shrinks

Well, guess what, we have a lot of term sheets hitting Chicago, talent wars are resulting in Google engineers getting paid $3m+ not to leave, valuations are insane and momentum investing in vogue (term sheets after 2-3 days). My suggestion to VC's is to wait for you pitch and it may be a bit of time before things come back around. My belief is the leading indicator will be an increasing rate of IPO efforts and perhaps a market pull back. Be smart and be ware...  That said the revolution is still alive and strong!