innovation

The Other Bubble: Pressure on Venture Capitalists

Sarah Lacy of BusinessWeek online published an interesting article about the state of the venture capital (VC) industry.  According to the article, despite the increased valuations and deals, expect to see even fewer VC firms next year.  In short, despite all the recent interest in tech stocks, the volume of IPOs is extremely low.  Hence, fewer exits.  Moreover, the YouTube type homeruns that sustained the 80/10 benchmark set in the late 90s is increasingly the exception for VC firms. http://www.msnbc.msn.com/id/21114509/ 

From my perspective, the issue has less to do with the supply side of IPOs or VC firms.  The fundamental issue is the lack of strategy in most of these portfolio companies.  One of the overarching problems is the status quo.  What does that mean?  The majority of these start-ups could not show you or articulate a truly differentiating approach, business model, or marketing strategy.  The prevailing approach is to build it first and figure out the rest along the way.  A number of venture backed start-ups in the Web 2.0 and other areas of technology services are too busy developing their products / solutions autonomously with no clear business or marketing strategy.  Otherwise, know as autonomous innovation.  I see only a handful of initiatives leveraging the open innovation framework or reflecting the new social media way of marketing. 

Earlier this year I outlined a simple framework for picking truly innovative start-ups in my blog.  Not one of my criterions had to do with leapfrogging intellectual property or technology.  I think the days of being the first to invent a router or some other infrastructure plumbing are over.  And good luck trying to go IPO with a strategy of building a cheaper mousetrap.  Most of the notable 10X homeruns have to do with disintermediation, disruption, and democratization of relatively well-established things.  The simplest guideline for a successful exit has more to do with understanding the need / problem and developing a solution with consensus and feedback from your community. As Zimbra pointed out to me in several conversation earlier this year, if you cannot validate your value proposition with your community from day one – good luck selling your solution when it comes time to launch your beta.

Kameran Ahari

http://gotastrategy.typepad.com

Venture Capital: Resources & Tips For First Time Entrepreneurs

A recent blog posting reminded me that first time entrepreneurs probably are not too familiar with the process of raising capital other than some basic understanding of the concept.  I thought I would list a few suggestions, recommendation, and resources to get you started.

Before you submit your business plan to hundreds of potential investors, do your homework. According to a recent report, only 10 out of 100 business plans are short listed for a closer review and only 1 will be funded.  You can see other investment demographics in this report

http://www.nvca.org/pdf/NVCA_VentureCapital07.pdf

There's a lot more information available on the internet than a decade ago. However, the information is not very organized. 

Once you have captured your idea in a business plan, familiarize yourself with the investment process and retain some professional help.

STARTING POINT:

1. BUSINESS PLAN - Capture your value proposition by writing a business plan.
2. INCORPORATE - Where and how do you want to incorporate your business (LP, LLP, S Corp, C Corp, etc.).
3. TARGET MARKET - Also give some thought to who and where is your target market- regional or international. 
4. ORGANIZATION - Are you planning to adopt a highly distributed virtual model (...dev team in India etc...and management all over the world).
5. NAMES - Early on, you need to be thinking about both a company name and product name. The availability of a particular domain name and trade name are going to be big determining factor. You don't want to be promoting someone else's brand or even worse - creating a liability for yourself as a start-up.  Look at the recent Cisco / Apple fiasco over the trade name iPhone. The good news is the process of both researching and obtaining these items is nominal.   
6. PRO - Unless you have direct experience or someone with a JD, MBA, or CPA on the team, you're likely going to need some help with various agreements and investment related documents.  The process of raising capital is effectively a "buy / sell" agreement for a piece of your innovation / company.

TYPICAL DOCUMENTS:

Sample list of agreements and documents you are going to need at some point.

• Business plan
• Marketing plan
• Financial plan
• VC PowerPoint (15 to 20 page max)
• Term sheet
• Non disclosure agreement (NDA)
• Employment & contractor agreement
• Stock purchase agreement
• Investor rights agreement
• Voting agreement
• Right of first refusal & sale agreement
• Real estate rent / building occupancy agreement
• ...just to name a few

RESOURCES:

Martindale-Hubblle lawyer locater:  http://www.martindale.com/

Nice list of VC resources compiled by University of Washington Foster Business School library: http://www.lib.washington.edu/business/guides/vc.html#web   

National Venture Capital Association: http://www.nvca.org/ 

Mid-Atlantic Venture Capital Association: http://www.mava.org

Small Business Association: http://www.sba.gov

Step by step guideline for establishing your small business: http://www.sba.gov/smallbusinessplanner/index.html   

Typical business plan outline: http://www.sba.gov/smallbusinessplanner/plan/writeabusinessplan/index.html 

Sample business plans:  http://www.bplans.com/samples/sba.cfm

Search trademark and patents: http://www.uspto.gov/

Check domain name availability: http://www.networksolutions.com

Insider's Guide To Venture Capital, 2002, by Dante Fichera. One of the VC references in my own library. The book is really two books in one. In additional to listing VC firms, the author provides entrepreneurs an insider's perspective into how the process works. ISBN 0-7615-3239-0

Send me an e-mail to see what a typical VC PowerPoint presentation should look like.

Kameran Ahari