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Thoughts on Networked Businesses

Wed, 02 May 2012 22:29:46 +0100

I have had some experience in trying to build networked businesses. I have learned many lessons the hard way.   Growing quickly sounds better to investors than to the sponsors and revenue sources who you will depend upon to build your business. As a result, though VC's tend to love these types of networked businesses - the VC math of generating a high internal rate of return on their investments is not perfectly aligned with the go-it-slow / measured approach of major sponsors.

I view these networked businesses and particularly those that are media based to be potentially very valuable platforms. So here are some quick thoughts to some friends who have recently asked for my insights on networked businesses.

a) looking at regions or markets where you can dominate and saturate the marketplace. Ideally - seek to suck all the oxygen out of the room with how powerful your solution may be. It doesn't have to scale nationally to scale dramatically first at a local level. National sounds better than it is. In fact, both Facebook and Groupon had early success and value creation not because they were national, but because they saturated markets and could deliver them for advertisers.

b) think carefully about who your customer is - in our college media business they were colleges and universities / but sponsors are really the customers who pay you.   Therefore, consider identifying the vital partners and approach them as "investors" in media - treat them that way. Help them imagine what the world would be like if your model and marketplace was successful.

c) If you are building a media or marketing services network, Seek to provide 3 - 5 national category sponsors a heavily discounted rate if they will commit to a multii-year (with service requirements built in) so that the sponsors are paying effectively a competitive rate today, but the same rate over 3 years will appear even more discounted and they will look even better as the network get's built.   The reality is your network requires the infrastructure to be built - you have to build the network to scale and that requires big brands to believe in it.

d) most of all - be mission focused. Ideally your solution or networked business should create value beyond the users you serve but should create extra value to your users, customers or other third parties that may benefit from the networked value - in our college media business the extra value we created were for newspaper editors and writers who could share content that would have otherwise remained un-networked, For our advertisers they could target larger pools and of networked subscribers where they had not been available without the network. For other sponsors, the college media business created the infrastructure to digitally deliver not just content, but personalized promotions and ads that had otherwise been unavailable to them. In short, the value created is not always obvious - but the benefits can be seen as the network grows.

The real value, as a result, is that the network grows and creates dependence in the lives of users, customers and clients.   This is where value creation scales quickly and where everyone benefits - more than investors - but all the users you seek to serve.   As a result - the most important insights is to remain MISSION focused - and to not worry about the value of your business as much as the value you are creating for your users.

The Post PC world

Sat, 17 Mar 2012 00:15:03 +0100

I have to admit that I didn't believe the original article I read that said the world is moving to a Post PC world. However, now that I am more fully using my iPad - I see its truth. Applications for specialized interests are changing my life dramatically.

It is hard to see the value of Twitter or Facebook without an application such as FlipBoard Using Flipboard to consume my content and social feeds has changed my view of the future of all social content.

Zite - enables me to consume content in new ways that are superior to my magazine

Frequency - which is a powerful tool to consumer video content across platforms.

There are many others - but these are three that clearly demonstrate the value of Pads over PCs.

Stay tuned for more good tips another day!

Communications & Leadership - Dr. Martin Luther King Jr.

Sun, 15 Jan 2012 16:14:11 +0100

(Just above this post is a PDF of the Letter from the Birmingham Jail by Dr. Martin Luther King.)

While attending Harvard Business School, I saw many examples of courageous leadership.   Entrepreneurs need courage. Politicians need courage. What is interesting to me is that leadership is fundamentally defined by having the courage to express your views - despite opposition, despite fear, despite overwhelming odds.   It is courage that defines leadership.

One of the best illustrations of expressing courage is Dr. Martin Luther King Jr. Letter from a Birmingham Jail.   It is very difficult to appreciate the context for his arrest, the violence and unrest that surrounded him - yet his letter captures so many complex emotions, speaks about enduring values and illustrates the courage that is needed by anyone who assumes the mantel of real leadership.

Do yourself a favor and take the time to read Letter from Birmingham Jail - which he wrote in 1963.   Take from it what you will, but I think it should inspire each of us to find courage to give voice to the values we know to be true.

Life, Careers and Entrepreneurship

Sat, 05 Nov 2011 16:09:38 +0100

Recently I was asked to give a presentation to a class at Arizona State University. As a result, it gave me an opportunity to think about the fundamentals to building a life, career and entrepreneurship. There is nothing ground breaking here, but my aim was to share a framework for thinking about modern life and careers and to illustrate this framework from my own experiences.

There are many topics that surround this framework - the importance of family, of mentors, of networks. I will try to outline ideas on these topics at another time. I welcome feedback on the presentation.

Life, careers and entrepreneurship by john fees

View more presentations from John Fees

True Grit

Tue, 01 Nov 2011 19:38:03 +0100

There are several excellent articles and videos on the importance of Grit to high achieving people. This relates as much to new ventures, entrepreneurship as it does parents.

The bottom line is that Grit helps us understand why talent alone does not always achieve the most. Talent is of course diverse, but the ability to persevere, to be industrious, to be diligent and to do so day after day, year after year - is what helps to define Grit.

This video is worth watching as is the story from the New York Times magazine - which appeared recently.

Steve Wynn's Interview and Anger Are Appropriate Even More Today than in 2010

Sun, 31 Jul 2011 15:41:29 +0100

The entire budget fiasco and inability for the US Government to deal with the budget debt and required compromises is another illustration of what an empire in decline may look like.

At the end of this video - Steve Wynn's quote from Alexis de Tocqueville is perfect. Another quote from de Tocqueville that fits today's climates - is "A democratic government is the only one in which those who vote for a tax can escape the obligation to pay it."

Watch this video and ask yourself where are the statesmen in this debate?

http://www.cnbc.com/id/37392344/Steve_Wynn_Takes_on_Washington_Vegas_EBITDA

Great Discussion by Mark Suster on Valuation Considerations

Mon, 06 Jun 2011 16:17:47 +0100

Sometimes what I try to do with these blog posts are to help compile some of the best thinking that has already been published. I am a big believer that most new ventures are not a fit for traditional venture capital. Most new ventures are either not venture ready or not actually a high-potential venture where venture funding makes sense. That doesn't mean that the venture should not raise capital, only that venture funds may not be the best fit or best use of a Founders time.

This is a post by Mark Suster (@msuster), a 2x entrepreneur, now VC at GRP Partners. Read more about Suster at his Startup Blog, BothSidesoftheTable. This is an edited version of a recent post which is in advance of a presentation he is preparing for later this month.

"Private markets for stocks are.... pretty illiquid. If you invested in the first angel round of a startup company it is usually very hard to sell your stock—usually for many years if ever at all. So how exactly are prices determined?

There is no great science to it. The earlier you invest the higher the chances the company won’t work out and thus you pay a lower price than later-stage investors. As an investor you’re trying to pay the appropriate price for your perceived risks of the company succeeding and protect yourself in the event that it isn’t quite as valuable as you had hoped. As the risks below get eliminated the higher the valuation investors are prepared to pay.

Over time some “norms” have emerged in pricing based on investors risk / return profile. The obvious thing that investors think about is making a financial return on the investment they made in your company. Early-stage investors in technology startups are only looking for growth-oriented companies that can achieve an “exit” someday—either via selling your company to a larger company or via an IPO. The former is much more likely than the latter. So investors have to have some general sense of what companies that are similar to yours ultimately sell for in the private marketplace via an M&A transaction and they have to have some sense of valuations on public stock markets to be able to back into what their potential returns on your investment might be in the event of an IPO.

For example: If you were to invest $41 million into a company (and one could assume that you owned between 33-50%) then the company is worth $82-123 million at funding. As an early stage investor you’re often planning around 10x your investment at the time you write your first check so in this case you’d be going into your investment expecting an exit of $800 – $1.2 billion. Then you can do a little bit of research and find out that very few companies ever achieve this valuation in a trade sale so you’re clearly gunning for an IPO. You’re unlikely to want to make this sort of investment with the product or the market not yet validated. The risk wouldn’t be appropriate.

Ah, but you say that for a normal-sized angel check or A round check one shouldn’t worry about the ultimate exit because he or she is getting in really early and at a cheap enough price so who cares whether one pays $5 million pre-money or $15 million pre-money—you just have to make sure you back really big companies. Well, obviously if you knew that in advance it would be big, of course that would be true. But the reality is that you’re faced with two problems: 1) the earlier the stage the riskier and thus more write-offs so you need to have enough ownership percentage in your winners to make up for the losers and 2) the earlier stage your check the more likely the company will need many more funding rounds behind you and thus you face dilution.

So rounds tend to be “range bound” where prices at the top end of the valuation spectrum often being done in boom markets (i.e. 2007, 2011) and for the hottest of companies test the top end of the range, and in bad markets for fund raising (2003, 2008) test the bottom end of the range.

There is no such thing as a uniform price. It is highly dependent upon many factors: experience of the team, type of opportunity (a big biotech or semi-conductor A round is likely to look different from an Internet A round), geography, etc. So the ranges you would expect can be highly imprecise. But to help with the explanation I’d like to put down some markers of typical Internet pre-money valuations done in major US markets (San Fran, NY, LA, etc.) while acknowledging that San Fran deals are often higher valuations due to increased competition amongst investors.

There is no value judgment in my putting up these numbers nor am I negotiating with anybody. I’m just pointing out my gut feel for approximate ranges of deals that I’ve seen with Silicon Valley having the highest valuations, NY / LA / Boston / Boulder / Seattle having valuations in a slightly lower range but comparable and sometimes significantly lower prices in markets that don’t have a healthy venture market. These are not scientific, just anecdotal and just trying to provide some transparency for entrepreneurs on what I’ve seen in the market. And of course there are always outliers.

Prices have definitely gone up in 2011 as depicted in the anecdotal chart below. Again, prices are expressed as pre-money valuations.

For me I think that investors have got to accept the new reality in pricing if they want to remain competitive in markets like we’re seeing now. As ever, prices are still determined by: quality of team, quality of product / market and competitiveness of the deal.

So when I advise entrepreneurs on fund raising I often say that it’s OK to try and shoot for the “top end of normal” for the market conditions. So in 2011 as a startup company if you can generate lots of demand you can definitely raise an A round of capital (say $3 million) at a $7 or 8 million pre-money valuation or slightly higher whereas just two years ago you would have struggled. That’s fine. That’s the deal you get when you’re raising in a good market for startup financing.

What I caution entrepreneurs from doing is raising money at significantly ABOVE market valuations. I’m a VC so I have an obvious bias. But that’s not where this is coming from. I’ve been preaching the “don’t get ahead of your inherent valuation” message for nearly 10 years. I raised my A round at a $31.5 million post-money valuation with no revenue. It was early 2000. That was market. I saw this kind of pricing when I first entered the VC market in 2007. We had companies pitching us that had almost no revenue at all and they were raising $10-15 million in capital at a $40-50 million pre-money valuation. I should also point out that while they had built their products they had limited market traction.

We passed on all of these deals and often tried to discuss the possibility of more modest amounts of capital raised and at more realistic prices. It’s hard to stop a train. One company which was raising at $40 million pre-money wrote a comment about me in a public forum saying something along the lines of “Mark worked really hard to understand our business and was very detail-oriented. But he and his firm were just too cheap on valuation.” Fair enough. But he sold within 3 years for not a huge price after having raised more than $20 million. Another firm we saw tried to raise $15 million at a $60 million pre-money with similar metrics. They did an inside round, spent a bunch of money and then went through a fire sale of the business less than 2 years later.

Here’s the problem. If you haven’t figured out product / market fit and therefore still have a highly risky business you run great risks for getting too far ahead of yourself on valuation. If you raise at a $40 million pre-money on what would in normal times have been a $15 million valuation you’re fawked if the market corrects and you need another round. To any prospective investor you look like you’ve failed even before your first pitch. Even if you have an interesting story to tell, most investors won’t want to go through the brain damage of doing a “down round,” which creates tension between them and early investors.

Finally, even if they could bring themselves to offer you a major down round, the more sophisticated investors know it’s fool’s gold. They get a cheaper price, they wipe out much founder stock value and they reissue you new options. You’ll take the money—what choice do you have? But 6 months later you’re not working past 10pm. 1 year in you stop catching early morning flights. Within 2 years your evenings & weekends are spent planning your next business. And the CEO they would hire to come in and run the business when you go would always be a mercenary.

So my advice: go ahead and ask for a valuation that 2 years ago wouldn’t have been likely. Use competition to make sure you get a fair price. Raise a slightly higher round than you would have previously but keep some amount as a strategic reserve. Make sure that when you need to raise your next round of funding that you are able to show an uptick in valuation that is important for new investor confidence and to maintain great relations with your early investors.

Increase price. But unless you’re already a well-known technology heavyweight be careful about raising above the range of prices that are normal for a bull market. If you’re hot, don’t raise above normal. Raise at the top end of normal."

Be sure to follow Mark Suster on Twitter (@msuster)

Thoughtful Time

Sat, 23 Apr 2011 21:28:35 +0100

Holiday weekends are great moments to reflect and think about our lives. I am not sure where I heard the following quote, but I think it is profound as we try to make sense of the world around us.

"we live in an era where we enjoy a wealth of information but a poverty of knowledge."

I often say that the first job of a leader is to define reality - not as they might want - but as it is. Reality may appear different depending on your perspective, but the leaders who have the time to demonstrate thoughtfulness and empathy, in my experience, are most accurate in defining reality for their organizations. It is often hard to see reality during the fog of a start-up venture or the haze of Bureaucracy but is is nonetheless vital in each case.

So this weekend, it is useful to take a moment to evaluate our own reality for ourselves and for our organizations.

Reid Hoffman's 10 Rules of Entrepreneurship -

Mon, 28 Mar 2011 18:27:42 +0100

There are many good lists and ideas to consider for entrepreneurs. The best advice I find come from serial entrepreneurs such as Reid Hoffman, the founder of LinkedIn.

What follows are some of his comments from the 2011 South by Southwest Interactive conference in Austin, he recited a list of 10 rules of entrepreneurship. Hoffman, who is now a partner at venture firms Greylock Partners, cautioned that he “reserves the right” to change the list later on. But for now, here are his rules:

LinkedIn founder Reid Hoffman’s 10 rules of entrepreneurship

Try to create “disruptive change” — “It’s got to be something that changes an industry.” As one rule-of-thumb on how to judge whether your idea is disruptive enough, Hoffman said it should take $10 revenue and replace it with $1 of revenue, because that’s creating opportunities for new ecosystems.
“Aim big” — Hoffman argued that it usually takes the same amount of work to run a the small company as it does a big company (except that if you sell the small company early, the work ends sooner). With that in mind, he said entrepreneurs try to build big companies that revolutionize their industry rather than create a startup they “flip” after a couple of years.
Build a network to amplify your company — That network includes investors, advisors, employees, customers, and others.
“Plan for good luck” — Sometimes entrepreneurs are surprised when something good happens, and they must take advantage of it by changing their plans. For example, he noted that PayPal (where he worked) started as an encryption product on mobile phones, then pivoted to a number other products before the founders noticed that it was being widely used at eBay. At first, the team wondered, “Why are these eBay people using us? This is terrible,” then they realized that PayPal could become a payment tool for online merchants.
“Maintain flexible persistence” — “The art is knowing when to be persistent and when to be flexible and how to blend them.”
“Launch early enough that you’re embarrassed by your 1.0 product release.” Hoffman said that “unless you’re Steve Jobs,” entrepreneurs are probably at least partially wrong about their product, and they won’t find out what they’re wrong about until people are using it. He added that when he launched LinkedIn, his co-founders wanted to wait until they launched the “contact finder” feature, but it turns out that wasn’t necessary — LinkedIn still hasn’t added that feature eight years later.
“Always keep your aspirations and aim high, but don’t drink your own Kool Aid”
“Having a great idea for a product is important, but having a great idea for product distribution is even more important.”
“Pay attention to your culture and your hires from the very beginning.”
“These rules of entrepreneurship are not laws of nature. You can break them.” — After all, the nature of entrepreneurship is that you’re doing something for the first time.

Remember to Say Yes to Invitations

Tue, 01 Mar 2011 00:15:30 +0100

My friends know that I don't often attend morning or evening meetings. My first priority is to support my family and be with them during the week, so I often say no to invitations to interesting events. That said, this post from my friend and mentor, John Kobara (twitter @kekobara) posted a great article on his blog at http://bit.ly/iceLEu is a great reminder to SAY YES.

"As I try to preach and practice: Make every effort to meet people. Go to events and gatherings with an open mind and most times you will encounter fascinating people. People who will reveal something new to you about yourself. And more often than not, these ideas and people create opportunities in your mind and in your life. The opposite is even more true. When you limit yourself by not meeting people, hearing different perspectives, and ultimately not developing options and opportunities, your life can be so much less interesting and fulfilling."