Category: Ventures & Entrepreneurship

I thought I would relate a case I had in a startup situation where I had felt that I had reached the lowest point in my personal and professional life. I was really choked up, and it was probably the first time I have ever had something mental shut me down physically. But I think this case also reflects some aspects creativeness and caution that are bred into people working for startups.

I was contacted by an individual in Caracas, Venezuela. We’ll call him Mr. P. Mr. P. purportedly has a background in the enterprise software market and connections into the financial services space, a sector very ripe for my company’s product. Through pure chance, I happen to talk with one of our sales directors who actually has worked with Mr. P in the past. The past experience with Mr. P was positive. The prior company (in the same market space) got a number of high-level meetings with customer prospects and a mini-roadshow in Venezuela. One deal actually came though and was signed. Trick, however, was that Mr. P wanted his sales commission up-front (i.e., before receipt of first payment from customer). To make a long story short, the key person that signed the deal at prospective customer changed jobs, and the vendor lost the deal. Mr. P., part of a population where the economy is under terrible duress, no longer had the money to pay back the vendor. Our current sales director still speaks very highly of Mr. P.

So I decide to move forward. What does that mean? Well in a startup situation, and especially in cases where you do not have the Board’s blessing to pursue international speculation, you either need to get cash up-front or do a commission-only based deal. Went with later approach here. Additionally, I did not agree to pay for any expenses. Let’s get things rolling first.

I start to have a number of phone conferences with prospective partners (e.g., IBM distributors) and customer prospects. Mr. P. prepares some good presentations for us, and I verify some of the phone calls, discussions, and exchanges with people I know, people who have done business in Latin America. I even use informal networking to get connected to folks at IBM who manage the Latin America operations, tell me things about doing business there, and can verify that the people I am talking with as IBM distributors are actually IBM distributors. Early on, I also get introduced to a Mr. V. who is supposed to be able to broker additional connections, but on my first call, I wasn’t so sure about the fit.

A few weeks into the various calls (I never traveled to Venezuela btw), Mr. P. starts to indicate to me that he needs an advance of money. The highballing starts to come on strong. He has set up conference calls, cannot pay for food to eat, traveled to different parts of Latin America, etc., and I have not sent a single cent to him. I consult with our director of sales. Compressing things a bit, I am still cautious, so I roll out phase 2 of my "jerk manager" approach. I tell him that I cannot advance any money, but that I will send up to $750 in three pieces (perhaps not the exact amounts), and that each piece is tied to a milestone: e.g., phone conference with customer (both business and technical contacts), verification of pilot install of software, and signed order form (of a qualified, credit-checked customer) for training. He say "great". OK.

We almost complete through the second milestone, but have some issues with the Java virtual machine implementation in the IBM AS/400 environment.

Then something happens out of the blue. Mr. P’s son has been in a motorcycle accident. He will lose his arm if he does not get surgery. Mr. P. does not want to take his son to a public hospital, but wants to take him to a private one. Please advance the rest of the $750. Offline, I call the special crimes division of the FBI to see if they’ve ever heard of this one before. No guidance there. But they do have four full-time people manning the customer services lines to handle the Nigerian email scam. FBI says to me that they can’t make any recommendations here, but that it sounds like I’m doing all of the forward and backward chacking I can.

In the end I try to console Mr. P., but I also indicate that it is not my money to advance. It is shareholders’ money. I ask to let me speak to the doctor and the hospital. I say that I am not comfortable advancing money to him directly, but will pay the hospital directly, using some of my own money. He says OK. To make a long story short again, I get one of my friends that can help with the language to connect me to the hospital. I go through a number of different departments, and finally get so caught up with transfers, that I spare my friend the rest of his time with helping me out pro-bono. I ask Mr. P. why I cannot reach the person at the hospital, he says to call Dr. V.

In the midst of all this is where the low point happens. Mr. P. calls me out of the blue. He is sobbing. He tells me that he had to take his son to the public hospital for immediate surgery or the arm would be lost, but it turns out that his son has died.

It is even hard for me to recall how I felt at that moment, but I felt directly responsible for the death of his son. I had not advanced money to take him to the private hospital. While I had moved quickly to verify circumstances, it seemed as if I was not rapid enough. My mind and body shut down for 24 hours.

A few days later, Mr. P. tells me not to worry, that he will be gone for about a week to bury his son.

My mind starts to work again eventually. Hmm. V is a name I’ve heard before. Where have I heard that name? Let me scan my address book. There’s a Mr. V. that is a business development person. But what’s this? Dr. V (the scheduled surgeon for Mr. P’s son) has the same telephone number as Mr. V. Now V is a common name, but this seems odd. I eventually try to mention this to Mr. P. He has no explanation other than in his distraught mental state he must have confused things.

Mr. P. and I never seemed to trust one another after that series of incidents. Our business ended, and the company shareholders were out $250 and about 2 weeks of my time in paid salary. To this day, I do not know whether Mr. P’s son had died. Mr. P. let me know that it was not my fault though. One of my close friends told me that I need to see the movie, "The Spanish Prisoner". Probably both Mr. P. and my friend are right.

Accenture’s Outlook Journal has a somewhat older article (vintage 1999-2000) describing the benefits of "fast ventures", a strategy to bring a new eCommerce company to market fast using new company and new equity structures.

I have been involved with a number of internal venture and new business
initiatives within large corporations (not generally eCommerce though) and resonate with some of the pressures cited in this article that
must be compensated for or actively managed (I cannot speak factually on
the comparative findings on incubation and return timeframes). The passage that caught my interest from the article is as follows:

One research review by Patricia G. Greene and Candida G. Brush, "The
Corporate Venture Champion: A Resource-Based Approach to the Role and Process"
(Entrepreneurship Theory and Practice, Spring 1999), suggests
that compared with entrepreneurial startups, corporate ventures require a much
longer incubation period before commercialization and take twice as long to
reap a profit.

It’s unclear why this is the case, but experience
suggests five answers.

First, corporate executives tend to have a much smaller
universe of ideas to choose from than does the typical venture capitalist.
Second, they may have less objectivity about which ideas should succeed; this
may be due to internal politics or hardened views about their particular
industry. Third, internal initiatives are limited by the company’s own
capabilities, which may fall far short of best- of-breed.

Fourth, getting the green light for an internal venture
typically requires layers of approval that sacrifice swiftness for a certainty
that is rarely attainable in today’s fast-moving markets. Staffing allocation,
annual budgeting and political power struggles all conspire to limit a
company’s ability to innovate.

Fifth, and perhaps most important, corporate initiatives
suffer because managers are seldom personally on the line. To paraphrase Samuel
Johnson, nothing so concentrates a manager’s mind as the prospect of an IPO in
just three months.

In a corporate environment, a fast venture can minimize or
eliminate these impediments. New-venture teams tend to make decisions motivated
less by career advancement or company politics than by the opportunity for
personal and financial gain, creating powerful incentives for success.

Fred Wilson posts that Union Square Ventures has turned its front webpage into a blog. Although Infectious Greed has some mixed feelings on the subject as to putting a blog on the front page, I think it’s a great thing for small organizations. Aside from blog hype, etc., I suspect most people click by the blah, blah, blah on the front pages of many small org. websites anyway, especially venture capital websites. Why not make information on the main page fresh like a newsletter? So long as people can find out what you are about and who you are in one-click, I say just optimize the web flow to the audience. What will be interesting to see will be how Fred Wilson divides his posts between the firm’s blog and his personal blog. The division will probably be far from representative of a typical corporate blogger, but I see it as a small test case of a prominent blogger moving to an organizational blog. We haven’t seen many cases like this as to whether the shift can be successful. For Fred, it may be business as usual (as I suspect it will be), but who knows. For one thing, cross-posting in Web 2.0 is a pain in the neck. That’s going to have some impact I’m sure on either the author or reader base. Make sure to check out Brad Burham’s rationale for the switch to a blog.

Ran across this 2004 article in Entrepreneur.com by Asheesh Advani that poses the question as to whether your start-up or small company needs a COO. Of course I’m going to be somewhat biased on this question since my past three assignments have been in an operations role. From the article:

At my company, the COO (what
we call vice president of corporate development) is in charge of
managing business relationships with key suppliers and ensuring that
our products and services meet standards of quality and cost
effectiveness. He frees up my time so I can focus on investor
relations, business planning, media outreach, and major sales and
marketing efforts. How would having a COO help you?

The job description of a COO varies by company, but in almost all
cases, it doesn’t include sales, marketing or external public relations
duties. Typically, the responsibilities of the head of operations are
comprised of quality control, order fulfillment, employee/HR matters,
and managing internal systems and business processes.

Now in two of my past three "operations" assignments, I will say that business development, sales, and anchor account management have been major functions of the job in addition to handling backoffice functions (e.g., legal, finance). I agree with the article that such a span is probably more the exception than the rule though for an operations person. Many companies are probably better off splitting the outward-facing and inward-facing functions if only to prevent task swapping (e.g., seeking a lower-level resource for inward-facing functions if controllable costs not highly leveraged). In partial defense of my past functions, however, I will say that some companies can benefit a great deal when those in business development functions have better than average facility with legal, finance, and product management issues.

Update (9/29/05): Zoli Erdos has some additional thoughts and personal experiences here
in a more focused context of a start-up contemplating VC funding. Zoli
makes some interesting points about distinguishing real business
reasons for having CXO/VP/President roles and the needs to structure
things properly with a (potential) VC in the picture. Regardless of VC
money, most parties that want to win want clear accountability and
metrics to keep a company on track – no convoluted organizational
structures or incentive structures. To take this on a bit of a tangent, I will say that I had about 4-5
sets of business cards in one venture. First I was Director of
Operations and Strategic Intiatives (the concept being that I filled a
sweeper position to unclog whatever bottleneck [other than R&D]
that the company needed to move forward). Then I happened to close a
large enterprise deal and secure corporate venture capital financing
(from targeted cold calling based on a magazine article related to a
company in the integration space). Was able to choose whatever title I
wanted from there having earned my stripes as a non-founder. I didn’t
care, I could have been called Assistant Toilet Scrubber if it helped
to build shareholder value. From there, I became VP of Operations. Then
VP of Finance and Business Development (a weird one, OK). Then finally
stayed as VP of Business Development roughly coincident with trade sale
of certain intellectual properties. Bottom line: still wore many hats in a start-up. Title and role got narrower over time as drew down money.
I will briefly say that title can have some real impacts as to how one
treated by customer prospects, partners, prospective VCs, wild dog negotiators, etc. outside of the firm. Some
of the title and role changes tried to deal with that partially,
especially as the tactical focus of the business shifted over time. Maybe more on this
for another post.

Chad has a post that got me thinking about adding people to entrepreneurial endeavors. Of course, since I spend a portion of my time as a hired gun for start-ups, I naturally tend to agree that people should to be added to a team to get a venture moving forward. Adding people to a team can create friction though, e.g., with founders, other managers & employees. How to balance things out? No quick answers here. That said, there was one soft principle that an angel investor once mentioned to me. It is a litmus test of sorts. You can try to analyze things all you want, but regardless of what it may cost to add a specific person to a team (and setting financial and management control structures aside for a moment), the real question is whether the person you are going to add to the team will measureably help move the company forward. As risk of diminishing the importance of hiring stellar people for a venture, one should also consider the marginal benefit of adding people, spending more dollars to move faster, etc. What does your subconscious tell you about hiring a particular person for a venture?

Of course, this type of thinking has to balanced against hiring only A-players, matching the team to the financial trajectory and aspirations of the venture, and making sure that chemistry is right with the rest of the team. Wrong fit can kill a venture. But sometimes the answers are quite grey. Not all ventures have the luxury of centuries to wait for the Perfect fit.

Venture capitalist Fred Wilson has expanded on my earlier post related to the relationship of venture capital and geography. He outlines some concrete examples of board meetings and other f2f items that aren’t as effective remote. People shouldn’t get too discouraged by "location, location, location", however. Venture capital is not exactly real estate, but geography surely plays a strong role (accentuated for early-stage ventures) in ways too detailed to go into here.

As an additional note, remember that VCs are also networked, networked, networked. In a prior post, I related a prior recruiting encounter with a VC in another geography as brokered by a VC in a different geography. I’m not even sure my contact information was public at the time when the brokering occurred. Deals and information of all kinds get passed around (hopefully, not passed on). So one can’t give up just because of geography. Just be very sensitive to it and recognize the customer concerns.

Just highlighting CNET’s new article on Top 10 dot-com flops along with two others in the vein of failures and missed opportunities:

• "Top 10 dot-com flops" (CNET)
• Bessemer Anti-Portfolio (MISSED big opportunities by BVP – hat tip: Zoli Erdos)
• Business Plan Archive of the dot com era (highlighted by me before)

And if we don’t remember the climate of the dot com era as well as we should, consider the WSJ’s tabular account of layoffs and shutdowns – they gave up tracking after Nov. 28, 2001.

On the CNET list, the one I have to say that I miss from a personal perspective is WebVan (which took the #1 spot of colossal failure). Didn’t have too much personal experience with the others on the list, but WebVan actually added value to my life. A shame.

I’ve posted quite a bit about offshoring lately (e.g., here, here, here), and I’ve been more in tune with international business (now that I work for a German-HQed firm). This post over at SiliconBeat and the related threads are rich with information on deal sourcing, tides in the venture world, what macroeconomic tides many investors want to tap into, venture operations, the (un)scalable aspects of being the first resources in a start-up, plus much more (such as why later-stage deals have risen as of recent). The one thing that is not really covered in this post, however, and something I have not quite reconciled in my mind is the craziness of start-ups in the Valley right now. My hypothesis (which is neither complete nor a very constructive hypothesis) for the craziness is that the economics for certain start-ups has significantly changed (lower costs of entry), and that the reach of such companies can expand quite far. The utility of forming a hypothesis about all of this, however, gets at understanding where the money will be, where the money will flow out, where you want to be, and where you don’t want to be.