TBJ Investments, LLC

More Buzzient social media analytics on $BA Boeing Dreamliner

There's more evidence of $BA Boeing brand damage after the battery debacle. Some of this has been listed in a previous post on the Buzzient blog:

www.buzzient.com/blog/the-boeing-dreamli.../

Since this original post, there's been a lot of noise about various aircraft fleets delaying purchase of 787's or even shopping for alternative airframes. If we take a look at Buzzient sentiment analytics for the last month, we can see this clear divergence for the 787 product line, where sentiment drops appreciably when compared to other Boeing products:

(click to enlarge)

The dramatic drop in the red line (787 model) corresponds to the time period where it became known how bad the battery problems are. Since that time, Boeing announced decent results, but we can see in the social sentiment charts a lingering gap in product sentiment. Will this show up in delayed orders in subsequent quarters? I think prudent traders, using this Buzzient data alongside other measures would advise a HOLD on $BA.

$CAB Cabela's: Negative correlation between sentiment and stock price?

 

 

This is one worth exploring. In comparing the Buzzient sentiment charts for Cabela's over the last 7 days and the Bloomberg chart for stock price, it's almost like they're inversely correlated:

 

 

Case in point, Feb 8 was the high point for sentiment, which correlates to the low point for the stock price in the past week. Is it that social sentiment drives new stock purchase behavior, hence the increase in stock price lags? If so, then using social media sentiment could be a VERY interesting and profitable technical indicator of where stock prices are going to go, particularly for long-oriented investors.  Will analyze this further over time, but another tidbit of data on the potential application of social media analytics and sentiment to equities, ETF, and other long instrument trading.

Beat the Series A Crunch through M&A

As a follow up to the previous post on the Series A crunch(  Series A Crunch), it's important to also think of alternatives. Yes, my principal thesis is that seed-funded companies without institutional investment should focus first on their core business and customers in order to get over the financing hump. That being said, the smart company also looks at alternatives.

If you're a startup that has been bootstrapped, hasn't raised any institutional money, and will need money anytime in 2013, you should strongly consider selling. Why?

1. The angel market is about to dry up

Everyone feels it. There's lots of competition right now for angel money, and few angel groups really have an efficient process for looking at lots of deals. To be blunt, so few angel groups have high volume deal screening processes that there's a bottleneck in looking for angel money. So, if an angel group tells you that their process takes 30 days, well, it actually takes 60 to 90. If they say 60 days, it's really 6 months.

In addition, there are so few cash on cash returns at the seed stage that a lot of angels are illiquid as well.  That means they're waiting for cash buyers for existing portfolio companies in order to get back in the market.

2. VC's are being "Crunched" as well, and will act accordingly

There's another crunch going on; it's the Underperforming VC Crunch. Most venture capital firms underperform the S&P, and have done so for the last decade. A number of LP's are reconsidering their allocation to VC; CalPers for example is reducing their allocation from 7% to 2% or less.

That means that in order to justify their existence, those firms which aren't in a select few will have to drop eye-popping returns on at least 1 deal that captures headlines. That deal may/may not drive the overall portfolio, but will give the VC firm a reason to lobby for another LP allocation.  To do this, VC's will tend to do later stage deals, even though their charter might be to invest earlier stage (Series B at a Series A Price). This is all about survival and justification of that 2% management fee, so charter be damned.

So, if you're a seed funded company looking at a "true" Series A where you have some revenue, customers, product, etc, but haven't begun to auto-scale, you're SOL. 9 out of 10 VC firms are just not going to be up for company building right now. For them, they're in their own "crunch", and in the battle for survival between you and them, well, guess who they'll pick?

3. There is an innovation gap that advantages startups; this means YOU!

Since the financial crisis, the level of R&D by both public and private companies has been somewhat suppressed. What that means is that the VP of Engineering/VP of R&D for larger companies has a list of innovations he/she would love to have, but has never been able to fund. That's where startups come in. If you're seed funded and have an actual product, your offering helps those companies accelerate their own plan. For the seed-funded entrepreneur, you get access to larger distribution channels and resources you don't have. It's a Win-Win.

To survive the Series A Crunch is going to take a lot of nerve, hard work, and an iron stomach. As you gird yourself for more capital raising, don't turn away from the acquisition route  as well. If you find the right investors who are up for company building, carry on. If you don't find enough of them, M&A provides an alternative path that benefits your startup, your investors, the acquirer, and you the entrepreneur. Particularly without the "overhang" of VC preferences, M&A could be a BETTER outcome for early investors and entrepreneurs than with continued capital raising.

 

Digital NYC is Real; Observations as an angel investor and CEO

I had an awesome last week in NYC while presenting my portfolio company Buzzient (www.buzzient.com) to potential business partners and investors at the Gridley and JEGI conferences.  So good that I've tried to step back and understand why Buzzient seems to get more customer and investor traction in NYC?  IMHO, there are a few characteristics of the NYC scene that make it (second only to Silicon Valley)  a dynamic place for tech businesses:

1. Sense of Urgency

One of the things I've always loved about NYC is the sense of urgency in business conversations. There is very little of the "let's see what happens, come back in 6-12 months" inertia that you find in a number of other areas. Some of this is the "trader" mentality which has moved uptown from Wall Street to the technology clusters in the city. This awareness of the fleeting nature of opportunity makes business conversations in NYC move faster, and have a definite action or endpoint.

2. Availability

I've found CEO's, financial executives, and prospective customers FAR easier to get to in NYC. I think this is related to the sense of urgency, but doors and rolodexes seem to spring open with far less advance notice in NYC. I was pleasantly surprised on this trip to have senior people in a variety of organizations re-arrange their schedules to accomodate my trip.  I find that in the Valley, VC's are booked so far in advance(with a lot higher volume demand) that this is hard to do.

3. New Perspective

NYC has changed a lot from the Silicon Alley era. During that time, one could experiment with a tech startup and if things didn't work out, you could always go "Back to Banking". What's different now is that several of the banks are themselves gone (Lehman, Bear Stearns) and others are laying off (Morgan Stanley). For the first time I believe there's a new perspective where, short-term compensation aside, tech startups are not necessarily more risky than staying in financial services.  With this fresh perspective, I believe the NYC tech community has a more balanced view of risk and reward that makes the tech community more long-term focused.

4. Community Building

I'm impressed by the amount of community building I see going on in NYC. As mentioned, I was in town to attend Gridley 2013 as well as the JEGI (Jordan Edmiston Group) Conference. In both cases, members of the firm reached out to me proactively to attend, as well as made time for introductions and connections to other companies. I saw a real "can do" attitude in hooking Buzzient up to at least one flagship firm and reknowned investor.  Extremely refreshing attitude and one of the reasons why I believe startups from all over the world are seeing NYC as an easy place to get established.

I'll have another chance to evaluate the ecosystem Jan 30 when Buzzient will present as one of the SIIA Class of 2013 at SIIA Breakthrough:

http://www.siia.net/iis/2013/previews.asp

If you happen to be at Chelsea Piers (Pier 60) on Jan 30th, please come by and say hello!

 

The SBA has recently (re)launched their Early Stage Program, designed to provide capital to funds focused on younger, riskier companies.

https://www.federalregister.gov/articles/2012/12/18/2012-30431/small-business-investment-companies-early-stage-sbics

I'm now being deluged with emails on webinars on how to participate. From an initial read, I have the following concerns:

1. The Early Stage Program really is aimed at steering capital to existing funds with complete investment teams.

2. Those existing funds, if they were performers, would ALREADY be able to attract capital and wouldn't need to use SBA leverage. Likewise, these existing funds have been concentrating on already established market sectors, hence they won't be heavily invested in emerging technologies or disruptive sectors.

3. Therefore, by selection, the existing firms applying to the program are laggards, and shouldn't actually attract the capital.

I suggest that the SBA should focus less on the "Early Stage Funding" leverage and more on "Emerging Managers". There are so many transitions taking place in existing funds that the real opportunity is to identify and fund Emerging Managers, building new funds with new areas of expertise.

Emerging Managers are important, as they can disrupt the status quo of venture investing in so many of the markets outside of SV or NYC. Let's be frank; only in SV or NYC is there sufficient competition for deals such that the VC community has to actually compete for deals vs collude to compress valuations, or route capital to their "favorite" entrepreneurs. Hence why in so many areas you see the same people getting funded and new entrepreneurs going begging. A new class of Emerging Managers would disrupt these cabals,and create more competition for deals, as well as speed decision making of financing. That can only be good for entrepreneurs, VC's and emerging regions alike.

The Series A Crunch is a hot topic now in entrepreneurship circles. Over 1000 companies are facing their own "fiscal cliff" of being unable to raise a subsequent round of capital post their seed rounds.

I posit that in order to get past the fiscal cliff, companies need to focus on a few core fundamentals:

1. Romeo Tango Bravo: "Return to Basics", or rather, focus on your core competence as a business during this challenging time and eliminate everything else. Many companies have increased their burn with premature scaling and additional expenses. NOW (if you haven't done it already) is the time to cut expenses to the bone. Kill the office, drop the service providers, reduce the over-provisioned AWS servers. Have employees transition to 1099 consultants and pay them for performance. Return To Basics.

2. I to the Power of WE: Time to use your network like never before. The only way you can scale without resources right now is to leverage the collective networks of the people you know, and not in an accidental way. Make tapping into your network 25% or more of your time every day. Ask for deals, ask for help raising capital, ask for freebies. Get your message out to the people who trust you and know you, and the people they know.

3. Customers First: Yes, the cliff is about inability to get synthetic capital into your company, but now is not the time to forget organic capital. Ask your customers to help. Get annual prepays up front to offset the cash flow gap. Scrutinize your CAC and Customer carrying costs; if your customers cost you more every day then they pay, you have to change the balance. Time to throw the unprofitable models used to get VC interest ("up and to the right, even if we're losing money") away, and get back to the basics of any business. You have to bring in more cash than you spend. Period.

Last, recognize that this is not an abnormal event. This is normal business and market forces are doing their thing. Don't get wound up in believing this is a special time in financing; in fact if you leave the world of tech and spend time with companies in other sectors, the "Series A Crunch" is called "Regular Life".

Deal with it.

With the end of the year approaching, it's time for us all to catch up on our reading. As a result, I'm going to be publishing a series of case studies on how Enterprises are using social media for customer intelligence, customer service, and other purposes with Buzzient Enterprise. Since so many of the use cases for social revolve around a handful of companies, these use cases will serve to diversify the viewpoints on Enterprise Social Media.

I had a great conversation with an executive yesterday about social customer care. His take, as a reseller of social technologies and a provider of contact center solutions: Most social media companies don't have a clue about customer service and support. There is a strong disconnect between the social media products world and the world of customer care.

This viewpoint underscores the huge opportunity that exists to move social media into customer care. There is still a large window to adapt social products to the needs of the customer service and customer care world.

Series B at a Series A price

Let's face it, we're living in an era of severe deflation. It's cheaper than ever to start a company with open source and cloud hosting. Real Estate (residential and commercial) is at a generational low, making it easier to find a business location or (save the Valley) an inexpensive location to live while launching your dream.

At the same time, I've seen a behavior I can only call"Series B at a Series A price". Meaning, I've encountered more investors than ever before who are looking to put money into very advanced companies stage-wise, but only at a low or early stage valuation. That is, the expectation level of how much a company will accomplish is often irrationally high, so much so that many of these potential investors expect Series B style metrics when a company has not had the resources to get there. I fundamentally believe this is at the heart of the Series A crunch we're hearing so much about; a lot of investors really want to invest later stage, and aren't willing to invest in would be considered true Series A; some proof points but the model and metrics aren't yet complete.

What will change this behavior? Who knows. A crash certainly wouldn't hurt, but I'm afraid a number of good companies will get caught up in this unrealistic wave of expectations brought on by price deflation.  We'll see.

With all the discussion of Series A crunch, I think it's worthwhile to examine another potential phenomenon: The coming Angel Shakeout. It's been mentioned before, but the explosion of Web 2.0 has created a class of angel investor who a)expects products to be built on the cheap, b) probably doesn't have much operating experience, so not aware of downstream problems when you do (a), c) has unrealistic expectations ("Can I make $1M off a $25K investment in < 2 years?"), and most important, d) has no stomach for sustaining their ownership position as companies begin to raise larger rounds of capital. Not saying that for (d) angels should have the capital to invest pro rata in successive rounds, but many I've encountered don't have ANY capital for a later round. Meaning that by definition they get diluted.

Knowing this, I'm starting to see more and more angels asking companies to do screwy things, not to improve the chances of success, but more aimed at financially engineering the outcomes.

Entrepreneurs need to be wary of this, and find the angels who really are trying to help you build a business long-term. These angels might not have the deep pockets to invest pro rata long term, but the best angels will still work the phones to get other investors in the deal, even if it means they're diluted.

Every entrepreneur should aim for a Don Lucas; Lucas was Ellison's first angel investor at Oracle and years later is still involved with the company.

Just back from almost a month on the west coast. I'm even more convinced now that the Enterprise Social Media market is going to be a battle between the west coast and NYC. There are just so many enterprise companies pivoting to include social now that what was considered "fringe" even nine months ago is mainstream. The west coast guys got this first and moved on it. I've seen the NYC community embrace enterprise social as well, both at the platform(Foursquare) and application layer (BuddyMedia). I'd add Austin as a distant third, with the cluster of companies formed around Bazaarvoice, Social Dynamx and Austin Ventures. Everyone else seems to be fighting for fourth or worse.

Enterprise is Back and Sexy as Hell

This was also posted at buzzient.com/blog

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For those of us brought up in the enterprise software (#EnSW) era, it’s been a long time coming. Ever since the emergence of B2C commerce, many of us have had to take a back seat to sketchy online consumer businesses which, though they make our lives better, are not necessarily feats of engineering or substantive importance to corporations, big businesses. Remember online dog food ordering? You get what I mean.

After the dot-com crash, there was a glimmer of hope for us enterprise software folks. As consumer internet investing seemed to be going the way of the platypus, companies such as Salesforce.com, Successfactors, and NetSuite emerged with internet-delivered business software which served the needs of fast-moving young gazelle companies as well as maverick departments inside larger enterprises. These Software-as-a-Service (SaaS) pioneers blended the best of the internet boom with the pragmatic problem solving required of enterprise solutions.

However, the re-emergence of the enterprise began to be overshadowed in 2003 by something new: Web 2.0 and social networks. All of a sudden, it seemed like the world took a great step backwards to 1999, as companies just needed to add a “-ster” or “-ly” to their name in order to raise capital and capture mindshare. Just type a few words into your Web 2.0 name generator and you were on your way:  Web 2.0 Name Generator

Some of these companies were legit innovators and eventually market leaders. Many were not, but collectively they served to reinforce the notion that software had evolved away from being hard and difficult to build and deploy to being a gossamer, effortless use of a few open source libraries and some scripting. That the real purpose of software was to power consumer or small-medium sized business (SMB) interests and not cater to the needs of larger enterprises.

Many venture capital investors loudly proclaimed that the “Enterprise was Dead!” and they "wouldn’t invest in any company which required a business decision maker to be involved". Any investable company had to be tailored to the needs of the SMB user, someone willing to swipe a credit card for a few dollars to bring your product into their sole proprietorship, or into their cubicle, bypassing the scrutiny of the CIO.

Things have changed, though. In the last six months, there has been a resurgence of interest in big company software, particularly around managing unstructured social data and customer experience management. It’s as if investors, analysts, entrepreneurs, and even consumers have woken up and realized that there must be more to high tech than yet another photo-sharing social site which enables me to text my feelings to my followers and their puppies (or something like that).

What I’d like to highlight is that during this long nuclear winter for Enterprise Software, during these multiple head-fakes where it looked like the world would turn serious again, then blinked and went all consumer Web 2.0-y on us, that real enterprise software companies kept chugging along and building value. The SaaS upstarts previously mentioned continued to grow, and ultimately went public with market caps in the Billions. At the same time, a next wave of enterprise software companies emerged which resisted the urge to go consumer and are now poised to lead a new “golden generation” of business software. Jive, Marketo, Lithium, at the application layer, as well as others such as Vertica, Splunk, Cloudera and Couchbase pioneering Big Data.

Of all the new players though, the one that stands out in my opinion as epitomizing the "Rebirth of Enterprise Software" is Workday.

If there's any proof that yes, you CAN go home again, it's Workday. Workday provides cloud-based Human Capital Management (HCM) software for running payroll, recruiting, and general financial management. For those who don't know, Workday is the reincarnation of PeopleSoft.  PeopleSoft, which was acquired by Oracle for $10B in 2005 after a hostile takeover by Oracle, was known as one of the best companies to work for in software.

Founded by Ken Morris and David A. Duffield ("DAD")  in 1987, PeopleSoft came to the fore as an innovator for a number of reasons:

1. Culture: PeopleSoft had a unique culture for the software industry of the late '80s. As opposed to what was then the slash-and-burn culture of many fast growth players of the time, where customers were left holding the bag on uncompleted products and employees churned at a high rate, PeopleSoft was extremely popular with both customers and employees. A lot of this came right down to the founder, who treated both constituencies like family.
2. Tools: PeopleSoft's products were designed for HR management, but one of the keys to their success was their easy to use, web-based toolset which enabled end users to configure and change the look and feel of departmental applications. In this respect, PeopleSoft foresaw the movement towards more consumer-driven UI design vs. the tradition vendor-centric UI approach.
3. Location: By locating in the more bucolic settings of Pleasanton, in the SF East Bay's 680 corridor, PeopleSoft was able to establish a virtual lock on recruiting from a number of talent pools: UC Berkeley and Lawrence Livermore National Lab to name a few. Basically, any strong technology person who preferred the East Bay to the Peninsula for family, lifestyle, or weather reasons would have considered PeopleSoft. This talent pool enabled PeopleSoft to compete head to head with Oracle, SAP and other much larger companies for years, and finally culminated in Oracle having to make a hostile bid in order to enter the HCM market.

When pushed out by Oracle after the acquisition of PeopleSoft, Duffield could have just put his heels up and relaxed. Already extremely wealthy and with nothing left to prove, he could have devoted the bulk of his time to his already considerable philanthropy efforts. Instead, he and former PeopleSoft executive Aneel Bhusri started Workday a scant two months after the acquisition of PeopleSoft. By timing their recruitment of their old team to the expiration of non-competes and non-solicitation agreements they were able to successfully "put the band back together". And customers?  Customers fell over themselves to do business with the new company taking HCM to the cloud. In a scant seven years, Workday grew from idea to IPO and market cap of over $8 Billion. Oh, and the deals they do? Straight up enterprise subscriptions with average sales price of over $400,000. Not something that would be put on a credit card. In fact, it smells like enterprise software to me, and that sort of growth and deal size is sexy as hell.

 

Attended the CalPERS Emerging Manager forum on Mon. Very interesting. No matter how you define "emerging manager", there is clearly a next generation of investment manager eager to get into the game. More on this later but key takeaways are:

1. CalPERS is reducing allocation to VC from 7% to 1% of portfolio over the next several years. This is still going to be a big number, but signals a retreat from VC.

2. Discussion on Micro-VC funds was notably absent, so much so that I had to raise the topic in the Private Equity forum. Microfunds are doing some of the best investing right now, and it's shame there wasn't some recognition of the unique characteristics of the class.

3. There are still a number of investment niches not adequately addressed by mainstream firms. These opportunity areas are where the alpha is going to come from in the future.

4. Elephant in the room, especially as per comments of reducing VC allocation, is how poorly a number of mainstream firms have performed. See here:

http://www.slideshare.net/tbjbuzzient/annual-investmentreport2011

If you go to pages 271/272 you'll see performance numbers for a number of firms. Some are absolutely dreary.

What's frustrating is that the selection process for EM's seems to be higher than the accountability for many of these firms. More on this later...

Just managed to go over the Cambridge Associates VC returns for Q12012. 10 Year VC returns are less than S&P. Better to have put money in your mattress if you're an LP...

The Big Whiff; Facebook IPO and the Boston Investment Community

This post has been a long time coming. Maybe it's the historic date itself, the wooziness from a stomach virus, or the realization that you rarely see such a stark contrast between success and failure.

Namely, the Facebook IPO, valuing the company at $100B, exposes the sharp distinctions between the Boston and Silicon Valley investment communities. In effect, the inability of the Boston investment community to put even a sliver of investment in Facebook, a company that started here, is probably one of the largest squandered opportunities in business.

Facebook raised over $2B in the march from dorm room to IPO. Not a single dollar is from a Boston angel investor, venture fund, hedge fund side pocket, or corporate strategic investor. Not $1. The closest claims are the west coast office of Greylock and the trivia that Jim Breyer of Accel grew up in Newton, MA. That's it.

Not being a baseball guy, I may have my analogies wrong, but this reminds me of Babe Ruth. The Boston Red Sox undervalued Babe Ruth and traded him away to the Yankees. The Babe went on to a storied carrier, and 80+ years later the Red Sox finally won something. Boston had first crack, but just whiffed.

The failure doesn't just end at the first up at bat, the Seed/Series A, but in every successive round. Whiff, Whiff, Whiff.

The question is why?

When I first came back to Boston in March 2006, I saw major cultural differences with Silicon Valley. These differences were based on my having had ~20 years experience in high tech as an early employee, entrepreneur, CEO, Limited Partner, and even VC associate. That experience was in areas as diverse as SF/The Valley, London, Paris, Atlanta, and DC.

At the time, I compiled my ideas into a short deck:

http://www.slideshare.net/tbjbuzzient/boston-vs-the-bay

Now, obviously many of the points raised in this presentation have changed. There still do remain, IMHO, some fundamental differences in the regions that led to this outcome.

1. Risk Tolerance:

Frankly, Boston has essentially none when compared to the Valley. Sorry, but that's just the way I feel. Even the "risky" deals I've heard certain investors beat their chests about have some sort of hedge, financial or otherwise. I've had conversations with a ton of investors who are really growth/momentum investors in VC clothing.

2. The Outcome, not the Process:

I've never been exposed to as many so-called investors who really are interested in multiples of Revenue/EBITDA and not actually building a company.  The shift to SaaS in the software industry has created an even better cover for this behavior, with companies being reduced purely to CMRR, CAC, CLV and assorted other metrics. I don't know any successful Valley entrepreneurs who started a company to maximize CMRR or CLV. The Process of building a great company is what drives the best entrepreneurs I've known; their investors thus support that belief system and help the entrepreneurs BUILD companies vs. harvest the financials.

3. Clubbiness, not Competition:

Boston investors seem way more driven by colluding with whom else might be in the deal, vs. originating a deal and having to compete.  There is far less outright competition between Boston VC firms to invest in new deals. So, that creates a slower tempo, less risk-taking behavior, and little desire to do something out of the box.

There are plenty of other factors that I will analyze in successive posts. I'll also make a series of suggestions on how to avoid whiffing on the next big pitch.

 

 

 

 

Pitching a VC: Why Financials Matter

I was once being pitched by a very smart entrepreneur who, when he got to the slide about his companies financials, said "I made all of this up, but here you have it." On the one hand, it was an pretty flippant approach to a relatively crucial aspect of his business. On the other hand, he was saying what ever other early stage entrepreneur was thinking when describing to me the financial outlook for his or her extraordinarily risky and unpredictable business. So why bother with a slide on your financials when pitching a VC? It is well understood by entrepreneurs and VCs alike that the specific numbers an entrepreneur pitches when describing her early stage business are completely made up. Most early stage CEOs are lucky to have visibility into the next 6 months, let alone the next 3 year that are reflected in their financials (and the 5 year forecast is mere fortune telling). Nonetheless, there is a huge amount of information about a business, and about an entrepreneur, that is reflected in those financials. The key is not to focus on the numbers themselves but, rather, to focus on the assumptions in those projections and the points of leverage for that business. It is almost assuredly the case that a early stage company's projections are wrong. In the last decade I have only seen one company actually hit the numbers they pitched me on. The rest of the companies have missed by varying degrees of big time. But the real question when listening to a pitch isn't whether the company will actually hit the numbers they are projecting, but rather what those projections say about the entrepreneur and the business? Is the entrepreneur focusing on the right things? Do the financials make reasonable assumptions? If the assumptions are anywhere close to right, is there a big interesting business to be built? Smart investors will dig into your financials to get a better sense of how you are thinking about your business. Company financials are rife with assumptions. Entrepreneurs can easily gain or lose credibility based upon the assumptions that are embedded in their financials, their understanding of those assumptions, and their ability to justify them. How long will it take to hire the people you need? How much will you pay them? How much will it cost to acquire a customer? How many engineers will it take to build your product? What is your margin (are you selling software, hardware, a cloud service)? What is the length of your typical sales cycle? How long will it take for you to collect earned revenue? How much are you spending on marketing? What is the expected return by channel? If you are pursuing a freemium business model, what percent of your user base do you expect to pay? How much will it cost you to support the free members? How much money will your company make, if any, and when? How much more money will it realistically take before you get the Company cash-flow positive? What will you achieve with the money you are raising now? These are all incredibly important questions for any startup and how you are thinking about them will have a huge impact on the success or failure of your business. No one will have perfect answers but an entrepreneur's ability to be directionally right will often be the difference between success and failure. Not only will it be important to understand the assumptions built into your financial plan, it will also be crucial to appreciate the sensitivities of your model. There are often single variables that make the difference between a good business and a great business (or, more likely, between a viable business and a failed business). If the cost of acquisition is off by 50%, do you still have a viable business? If free customers only convert at 1%, can you support the 99% who will always be free? If the viral co-efficient of your service is 1.2 instead of 1.5, what does that do to growth? What if it takes 90 days to collect on billings rather than 30 days? These "what if" questions are critical to the understanding of your business. You should appreciate the places your business has leverage, and the places that your business has potential vulnerabilities, and be ready to engage in an honest conversation about those pivot points. I will be the first person to acknowledge that early stage financials are a work of fiction. But some fiction has the ring of truth, while other fiction is so outlandish that it is impossible to suspend disbelief. It is an entrepreneur's job when pitching her business to convince an investor to suspend disbelief. The better you understand the underlying assumptions in your plan, the more effectively you'll be able to do just that. So embrace the opportunity to build credibility. As an investor, I'm happy to buy into your fiction, I just want to avoid unbridled fantasy.

via www.ventureblog.com

I totally agree with testing and uncovering the assumptions in the financials. The challenge is doing it if you actually have a real company up and running,and the metrics are incomplete. In this scenario, the entrepreneur who has NOTHING is actually better off than the entrepreneur who has actually gone off and generated revenue, albeit inconsistent.

Zuckerberg in Boston, or "Yet another one that got away"

The last week, Boston has been abuzz with the news that Mark Zuckerberg was coming back to "visit". In one of his various interviews, the founder of Facebook remarked that "if he could do it all over again, he'd have stayed in Boston".

Almost immediately, select members of the Boston technology community seized on that statement as proof of Boston's equivalent status to Silicon Valley. There was just one little problem that those people conveniently overlooked...

Rather, there were 2.3B problems those boosters overlooked. $2.3B worth of funding that Facebook has raised since leaving Boston; none of that from Boston angels, investors, hedge fund side pockets, asset managers, private equity or venture firms.

Instead of crowing about Zuckerberg's comments as some sort of self-serving justification of their own existence, I think that Zuck's visit should be viewed more in collective shame.

Shame on Boston for letting him get away. Shame on the local angel investor community for not getting into the deal. Shame on the VC community for not only missing the early stage rounds, but with the exception of Greylock's west coast office, not being a part of ANY successive round. Shame on the Hedge Fund and PE communities for not getting into the deal via side pocket funds in later rounds.

Download Who-owns-facebook.jpg (JPEG Image, 600x446 pixels)

For a city that is one of the major money centers in the US, this is a major failure. This was never a matter of lack of capital. This was all about lack of will, lack of vision.

As it turns out, Zuck's trip to Boston wasn't just a simple visit, but a recruiting trip. Hundreds of the best and brightest students of MIT and Harvard were pre-selected for interviews with Facebook. I look at this as the biggest talent suck in Boston seen in recent years. Some of the best talent coming out of Boston universities was just drained away to the west coast.

I would hope that this visit, and the fact that Facebook is now valued at ~$50B would serve as a teaching moment, and an opportunity for reflection. I fear that lesson will be lost in the rush to claim some hollow victory in Zuck's initial comments.

How to avoid the next one? How to keep the next Zuck from leaving? Here are my thoughts:

1. Enable VC associates to originate deals up to $100K on their own, investments in technical members of their peer group.
2. Support a standard Boston Seed Deal termsheet, pre-vetted with local law firms and VC's. This termsheet should be similar to the Series Seed terms, but adjusted for East Coast investors. One page, easily executed.
3. Boston LP's should scorecard Boston VC's on their ability not just to generate returns, but invest in companies that create jobs in the Boston metro. Given that most VC's haven't generated returns aboove the S&P the last decade, this extra requirement shouldn't cause undue alarm.

Last, no one gets fired in VC for missing a deal. In the operational world of high tech, a sales rep missing the big deal in their territory would be fired. Not in VC. Somehow that lack of accountability needs to change.

 

Race In Silicon Valley

In the furor over race in Silicon Valley, I had a few ideas on how to improve the situation:

- Expand recruiting beyond Stanford, Cal, CMU, MIT. Georgia Tech is the #4 engineering school and one of the most diverse engineering student bodies around. One of the things that's always pissed me off is SV hiring managers not taking the 4 hour flight to recruit in the US from a major public school, vs. bitching about not being able to find diverse candidates.

- Be transparent about your workforce diversity. Mike Swift of the SJ Mercury news tried to cover the hiring practices of a number of major Valley companies (who shall go nameless) and they slapped an injunction on him, stating this was competitive information. My understanding is that the data showed that these "select" companies were far more likely to hire overseas nationals than US minorities, even when the overseas nationals didn't go to the sacred 4-5 schools.

- Also look at the better ranked HBCU's, Tribal Colleges, etc, several of which have joint degree programs with the top schools. For example, one can attend Morehouse and get a joint MS in Engineering, Physics, etc. from Georgia Tech. Wellesley has a joint deal with MIT as well. The NSF is a great resource for other schools for recruitment.

- Kill the STEM education in high schools, etc. canard. It's always used to justify the lack of brown faces in SV companies. There are plenty of minorities in engineering fields, though from my perspective clearly not enough. The issue is that SV companies/VC's have to stop being so lazy and recruiting at the same 4-5 schools. I also wonder how many SV companies even bother to check the NSBE/SWE/SHPE memberships on the top 4-5 campuses?

- Not everyone needs to be a BS/MS/PHD in Engineering/Computer Science to work in High Tech..How many Sales/Marketing people are PHD's in Electrical Engineering from Stanford? As a point of comparison, look at the relative diversity of Pharma sales forces; most of those people don't have life sciences masters or PHD's. Same thing with big Telco. Far more diverse in sales/marketing than High Tech w/o the necessity for advanced degrees from a select group of schools.

- Increase diversity of the VC GP pool. I think there are less than 50 GPs of color in VC firms nationwide. I'm a strong advocate of bringing back the SBIC program for Equity Investment firms, and creating a new generation of more diverse VC firms, by composition, strategy, etc. That will also create more competition with the incumbents.

- Public retirement LP's of venture firms have to start scorecards for VC's. Little known secret is that VC's only need to put in 1% of the Fund from their own pockets as per NVCA rules. That means the other 99% is OPM (Other People's Money). Much of that is from public LP's(Calpers, Calstrs, Utimco, etc). So, retirement fund money from a diverse population(50%+ in California) goes to VC funds who then overwhelmingly invest in startups led by white men (87% according to CB Insights http://bit.ly/aiQ50C ). Over a 10 year basis, most VC firms have barely tracked the S&P, so you can't say that this strategy is yielding higher performance. I think this is one of the roots of the problem; change the funding behavior and the trickle down effect of having a more diverse leadership group in funded companies will naturally create a more diverse pool of employees.

That's all I got. Now, gotta get back to running my company and being a statistical anomaly...;o)

Will write a longer post on this, but TBJ Investments just led a $1.1M Series A in Buzzient!

Oracle CrossTalk 2010

Buzzient has had a great opportunity to present during the general session at Oracle CrossTalk 2010, Oracle's Retail industry conference. We've met with top retail executives from all over the world.Social media is clearly emerging as a new channel for multichannel retailers; Buzzient's ability to integrate social media data with Oracle applications gives these retailers tremendous competitive advantage.

I'm attaching my presentation here:  http://slidesha.re/aGUIIn

Having a great time at Oracle #CrossTalk 2010 conference!

Buzzient got a GREAT writeup at BostInnovation:

http://bostinnovation.com/2010/04/24/buzzient-social-media-analytics-with-enterprise-solutions/

Buzzient updates

A lot has been going on at Buzzient, the company we started out of research Andreas Goeldi and I conducted at MIT. www.buzzient.com

We've seen a dramatic pick up in customer activity in Q42009 and into 2010. Basically, a number of companies that were experimenting with social media decided to put a stake in the ground and get going. These customers are in a variety of vertical industries:

Financial Services:  Credit Suisse, Motley Fool

Life Sciences: Perkin Elmer

IT: Xerox

Higher Ed: Pace University

We also developed a relationship with a leading applications developer for online social networks. Without saying who the customer is, I can attest to the fact that we're playing a much larger scale than any other application in this vertical industry.

So, all in all, a real positive shift in the winds and a lot of velocity in 2010!

SAP CEO resignation is an interesting bit of news. Not sure what it means for SAP's cloud or social media directions.

Happy 3rd of July!

It's a Friday. July 3. The official holiday is tomorrow.  Kendall square is practically empty; just a few straggler tourists looking for the Duck boats, MIT PHD/SDM students wolfing down lunch, and  probably about 10-20% of the normal Kendall SQ.- located workforce is around.  The Cambridge Innovation Center, where the Buzzient offices are located, has locked doors and relatively empty halls.  My cofounder and I can actually get an elevator within a minute of hitting the button.

The first thing that popped into my mind was "THIS is the difference between Silicon Valley and Boston". Like it or not, but in a bunch of places in the Valley, this would seem like a normal workday, not as if the neutron bomb hit.  I've been in offices on a major holiday where half the management team has shown up, to "get caught up on email, paperwork, whatever low-value stuff I can do on a holiday so I can optimize high-value stuff during the workweek".

When I lived in South of Market and launched Eba Systems from my basement, I would often wander out in the streets on holidays not even knowing what day it was, let alone think of taking it off. We're in the supposed "epicenter" of Boston innovation and it's pretty vacant. Oh, wait, the CEO of LiquidBits is here. Hell, he's ALWAYS here; nights, weekends, you name it. Old school entrepreneurship at its best.

I'm all for work/life balance; heck I rowed an extra few miles today and came in late. However, I still came in.  Seems like in trying to catch up to the Valley, a lot of local folks want to make sure they don't impinge on their Nantucket beach house time.

I'd love to be at the beach myself; in fact there are numerous striped bass and bluefish that are missing a shot at one of my elegantly (I wish) lofted flies, and my unique line-stripping style that's far too influenced by having watched so many bass fishing shows as a child (are you supposed to say "Booyah! as  a fly fisherman?) . Alas, not to be. Innovation (smirk) calls...

So, my cofounder and I pound away at all the "other stuff" that needs to get done in a startup; accounting, company blog posts, etc.  Wish we weren't so lonely here in the epicenter...

Social Media and the Iranian Election

I've had some time now to reflect on what we saw here at Buzzient with the recent Iranian election.

First of all, I was amazed at how quickly the social media community jumped on this issue and instead of being passive, became very active.

Second, I observed that the "digital resistance" organized very quickly, into self-managed and led groups. These folks put together proxy server lists, changed their posting locations to Tehran, whatever it took to add themselves to the legion of those wanting the results challenged. This resistance also took it a bit far with DDOS attacks and otherwise, but it was fascinating to see how quickly the partizans formed.

Last, I have to admit I felt proud that Buzzient's product, Buzzient Enterprise, was able to monitor Twitter in real time and create a social network of who was posting about the election. We've subsequently had more than a few requests to share the data, but we're going to err on the side of extreme caution here, as we don't want to endanger any of the people involved. That being said, it is remarkable to see how technology can enable both the resistance to political impropriety(suspected, not confirmed) as well as inform the casual observer.

Buzzient

After a long, self-imposed hiatus, I'm back posting. I've been deeply involved with the formation and launch of Buzzient. Buzzient is the result of work my cofounder Andreas Goeldi and I started at MIT in looking at cloud based applications. We realized that there was a huge opportunity not only in running an app in the cloud, but in helping enterprises understand the wealth of data growing in the ether.

Long story short, over the last 2 years we've built an application that harvests, analyzes, and quantifies what people are saying in social media. We've linked that to applications such as Salesforce.com and SugarCRM, and will expand the set of applications dramatically over the next two quarters. Thus, we're able to not only provide insights into social media, but can make social media actionable by connecting it to application workflows.

That's it for now. Check out www.buzzient.com or our crunchbase entry: Buzzient on Crunchbase   for more on the company.

Why I got out of the Homeland Security Business...

I've not posted for a while due to a stealth mode startup I'm involved with. In the interim, I've had the chance to reflect on past areas of interest, including homeland security technology. Though I still maintain active interests and relationships in this area, and have a deep belief that technology from our existing labs and universities can be marshalled to detect and project against terrorism, it's frankly a lousy place to do business.

Here's a classic example why:

Big Box Retailers block cargo container scanning

Net Net: Large, influential companies such as Home Depot and WalMart are actively lobbying to PREVENT the use of technology to scan 100% of containers coming into the U.S. . That's right, PREVENT the scanning of containers for potential radioactive, biological, or explosive threats. Why? Because it will generate  an expense of ~$20 per container. Now, there are 20M odd containers coming into the U.S. each year, so the aggregate expense is substantial, but spread across several multi-billion dollar revenue companies, plus a network of transporation interests, this strikes me as incredibly short sighted.

I had the pleasure to visit the Kennedy Space Center over the winter, and I marveled at how we once "girded our loins" (In the Shakespearean sense) during the '60s to go to the moon. Once upon a time, personal courage and national interest came together to achieve great things. Now we live in an age where large, stodgy companies who invent NOTHING block the use of technology so that they can keep the cost of Chinese flip flops as low as possible.

Time for Home Depot et al to Cowboy up and act responsibly. In the interim, there a sea of companies like AESI, Savi, etc. that could potentially help introduce new technologies to achieve a 100% scanning goal, but they're at the mercy of the big boys. Hence, a noble cause, but a lousy place to do business.

Global Mobility

I'm in Sweden and Holland for a week, but couldn't help but write about wireless and mobility on this side of the pond. I'm continually astonished at how mobile technology is embedded in Scandinavian society; on a trip out to Sandham in the Swedish Archipelago, we had top notch coverage on mobile devices and were able to download ringtones and songs on our way into the Baltic.

Contrast that with Sand Hill Road, where I ALWAYS lose a connection at the junction with Highway 280...Hmm....

Enterprise 2.0 update

I'm just coming off a week spent at the Enterprise 2.0 conference in Boston:  Enterprise 2.0 Conference

My general feeling is that this market is in the early stages where the food chain isn't clear. There are a number of collaboration companies that classify themselves as E2.0, but it's not obvious what if any greater capability they bring to users. Even more daunting is the lack of clear financial benefit to this movement. Though some dismissed my constant badgering of speakers/presenters as to the ROI, I think it's important that financial metrics be established to enable faster adoption.