Tech Trends to Look for in 2012

As we turn our attention to the new year, I came up with my predictions for the main area’s of focus in 2012. And I think it’s all about the mobile, baby…

LBS

Location is one of the main enablers that deliver services to users based on their context and analysts expects the total user base of consumer location-based services to reach 1.4 billion users by 2014.

Social Networking

Mobile social networking is the fastest-growing consumer mobile app category. Social network platforms are sucking in increasing amounts of network traffic. They are becoming portals, transit hubs and cloud storage for increasing amounts of messaging and e-mail traffic, videos, photos, games and commerce. As mainstream adoption progresses, global social sites will be driven toward providing services in partnership with third parties using open APIs, and are likely to evolve to a role as infrastructure providers acting as data warehouses and providing user data and access to the more-consumer-facing brands.

Mobile Search

Visual search is usually related with product search to enable price comparisons or to check product information. To bring mobile search to the next level, the app would allow users to take actions based on the result, such as making a call or reservation, buying a ticket, placing an order, and so on.

Mobile Commerce

Today, mobile commerce is more of an extension of e-commerce but in a smaller form factor and with a more-streamlined experience. However, over the next 24 months, Analysts expects the emergence of uniquely mobile functions, such as the ability to “check in” to a store to alert a retailer that you are there, or the ability to add items to a shopping cart simply by taking a photo of an item or bar code in the physical store.

Mobile Payment

Although near field communication (NFC) payment will be included in high-end phones from 2011, Analysts do not believe that it will become mainstream before 2015. In order to get consumers on board, payment solution providers need to address ease-of-use for users and ease-of-implementation for customers without compromising security. They also need to increase user awareness, extend the service coverage and address ease-of-use to appeal to end users.

Context Aware Service

Context-aware applications provide improved user experiences by using the information about a person’s interests, intentions, history, environment, activities, schedule, priorities, connections and preferences to anticipate their needs and proactively serve up the most appropriate content, product or service. Mobile carriers, along with handset manufacturers, should provide expanded location services to include, among others, directory assistance, mapping, advertising and privacy controls.

Object Recognition

High-end devices have an increased sensor and processing capability that enable sophisticated applications to recognize the user’s surroundings, including specific objects of interest. Because OR provides an easy-to-use interface, more apps will come to the market with enhanced capabilities by 2012.

Mobile Instant Messaging

I expect MIM to attract consumers to new types of unified communication (UC) clients, provided by over the top (OTT) service providers such as Skype.

Mobile Email

Smartphones have begun to drive the mainstream adoption of mobile e-mail through a series of technology enhancements enabling low-cost mobile extensions to existing e-mail service. I expect mobile e-mail users worldwide to increase from 354 million in 2009 to 713 million in 2014, to account for 10.6 percent of the global mobile user base.

Mobile Video

Mobile phones with larger screens and media tablets offer the ideal platform for video consumption and with careful marketing and consumer education, I believe that carriers and content providers would be able to drive mobile video usage in the coming years.

The New Tech Bubble

SOME time after the dotcom boom turned into a spectacular bust in 2000, bumper stickers began appearing in Silicon Valley imploring: “Please God, just one more bubble.” That wish has now been granted. Compared with the rest of America, Silicon Valley feels like a boomtown. Corporate chefs are in demand again, office rents are soaring and the pay being offered to talented folk in fashionable fields like data science is reaching Hollywood levels. And no wonder, given the prices now being put on web companies.

Facebook and Twitter are not listed, but secondary-market trades value them at some $76 billion (more than Boeing or Ford) and $7.7 billion respectively. This week LinkedIn, a social network for professionals, said it hopes to be valued at up to $3.3 billion in an initial public offering (IPO). The next day Microsoft announced its purchase of Skype, an internet calling and video service, for a frothy-looking $8.5 billion—ten times its sales last year and 400 times its operating income. And those are all big-brand companies with customers around the world. Prices look even more excessive for fledgling firms in the private market (Color, a photo-sharing social network, was recently said to be worth $100m, even though it has an untested service) or for anything involving China. There has been a stampede for shares in Renren, hailed as “China’s Facebook”, and other Chinese web giants listed on American exchanges.

Same again, only different

So is history indeed about to repeat itself? Those who think not point out that the tech landscape has changed dramatically since the late 1990s. Back then few people were plugged into the internet; today there are 2 billion netizens, many of them in huge new wired markets such as China. A dozen years ago ultra-fast broadband connections were rare; today they are ubiquitous. And last time many start-ups (remember Webvan and Pets.com) had massive ambitions but puny revenues; today web stars such as Groupon, which offers its users online coupons, and Zynga, a social-gaming company, have phenomenal sales and already make respectable profits.

The this-time-it’s-different brigade also points out that the 1990s bubble expanded only after numerous web firms were floated on stockmarkets and naive investors pumped up the price of their shares to insane levels. This time, there have been relatively few big internet IPOs (though that is likely to change). And there is no sign of the widespread mania in the high-tech world that occurred last time around: the NASDAQ stockmarket index, a bellwether for the tech industry, has been rising but is still far below its peak of March 2000.

In one respect the optimists are right. This time is indeed different, though not because the boom-and-bust cycle has miraculously disappeared. It is different because the tech bubble-in-the-making is forming largely out of sight in private markets and has a global dimension that its predecessor lacked.

The bubble is being pumped partly by wealthy “angel” investors, some of whom made their fortunes in the late-1990s IPO boom. Their financial firepower has increased and they are battling one another for stakes in web start-ups. In some cases angels are skimping on due diligence to win deals. When it comes to investing in more established companies like Facebook and the bigger web firms, traditional venture capitalists now face competition from private-equity companies and bank-led funds hunting for profits in a bleak investment environment. Gucci-shod leveraged-buy-out kings may appear to be more sophisticated than the waitresses buying dotcom shares a decade ago—but many of the newcomers are no more knowledgeable about technology.

This boom also has wider horizons than the previous one. It was arguably started by Russian investors. Skype was born in Estonia. Finland’s Rovio, which makes the popular Angry Birds smartphone game, recently raised $42m. And then there’s China. Renren and Youku, “China’s YouTube”, supposedly offer investors a chance to profit both from the country’s extraordinary growth and from the broader impact of the internet on commerce and society. Chinese web start-ups often command $15m-20m valuations in early financing rounds, far more than their peers in America.

These differences will have important consequences. The first is that the bubble forming in the private market could be pretty big by the time it floats into the public one. Facebook may turn out to be the next Google, and LinkedIn has a fairly solid revenue plan. But they will be followed by less robust outfits—the Facebook and LinkedIn wannabes—with prices that have been dangerously inflated by the angels’ antics.

The froth in China’s web industry could also lead to unrealistic valuations elsewhere. And it may be China that causes the web bubble eventually to burst. Few of those rushing to buy Chinese shares have thought through the political risks these companies face because of the sensitivity of their content. A clampdown on a prominent web firm could startle investors and prompt a broader sell-off, as could a financial scandal.

And after the angels have fallen?

With luck the latest web bubble will do less damage than its predecessor. In the 1990s internet euphoria caused a dramatic inflation in the price of telecoms firms, which were creating the infrastructure for the web. When internet firms’ share prices plummeted, telecoms investors suffered too. So far, there has been no sign of such a spillover effect this time around. But the globalisation of the internet industry means that many more people could be tempted to dabble in web stocks in the current boom, adding to the pain of the bust.

When will that be? Irrational exuberance rarely gives way to rational scepticism quickly. So some bets on start-ups now will pay off. But investors should take a great deal of care when it comes to picking firms to back: they cannot just rely on somebody else paying even more later. And they might want to put another bumper sticker on their cars: “Thanks, God. Now give me the wisdom to sell before it’s too late.”

Top 10 Patent Myths

Given that most businessesaren’t built on truly original ideas, patents can seem like more trouble than they’re worth. However, integrating patents into your business plan, regardless of whether you’re an inventor, is one of the most overlooked elements of a successful business.

Freelance licensing agent (read: Mr. I Know All About Patents So You Can’t Fool Me) Stan Weston gives us an idea of how important patents can be. He came up with the G.I. Joe action figure idea, and Hasbro offered Weston a choice of either $100,000 or $50,000 upfront, with a 1 percent royalty once sales passed $7 million. Weston chose the $100,000-and lost out on an estimated $20 million in royalties over the next 30 years.

While you may not see such drastic differences in earnings, there are 10 myths about patents that may be holding you back from getting the most out of the concept that got your business started in the first place.

Myth 1: The narrowing of equivalents makes it more difficult to get investors on my side. Reliable, leading venture capital firms and lending institutions bring on board consultants with excellent technical knowledge to pick out good businessplans. When you come to the table with a patent-pending idea that’s been well-researched and profits projected, you’re more likely to be taken seriously, even if you don’t have all the connections with the big players as a newly minted entrepreneur. I believe investors or lenders are very impressed by patent protection. Seldom will an angel invest in a project that does not offer patent protection.

Myth 2: Since it’s becoming difficult to avoid infringement regardless of what niche I’m in, I’m better off not taking a patent to advertise my company as bait.
True, if you took out a patent for a rocking chair, you’re possibly infringing on a patent someone else took out for a chair. That’s why the claims section of the patent is so important. It has to be worded carefully and with the help of a patent lawyer so that you actually end up having more protection from infringement lawsuit bounty hunters than you would without a patent.

Myth 3: There’s absolutely no competition out there for my business plans, so there’s no sense in spending money to patent any part of it. There is always competition out there. There may be no similar technology, but there are many things that can perform the same function. Take the humble aluminum washboard. They didn’t just disappear when washing machines came on the market, and in many ways, washboards are preferable to their mechanized counterparts. One of the most beneficial things an entrepreneur can do to continually outpace the competition is to trade marketing strategies, customer-retention ideas and tips with other entrepreneurs–in different sectors, of course. Patents give you an excuse to participate in inventors-entrepreneurship conferences, which is a great way to schmooze and get ideas you would never think of otherwise.

Myth 4: If the invention is “obvious to one skilled in the art,” as the United States Patent and Trademark Office terms it, the patent won’t be valid. Aren’t you supposed to be an optimist? The specific wording of the claims in your patent is the key to patenting an idea that is already out there or “obvious.” “Just about everyone who does a patent search is amazed at all the prior art that is identical, or nearly so, with his or her invention,” says Lander. Take U.S. Patent 5,771,778, for example. Just about everyone knows how to make coffee, and that the smell of coffee is welcoming and makes clients feel at home. That “obvious” application didn’t stop a coffee shop owner from filing a patent of “a device within a device, one part of which contains a sensor designed to emit an aroma when it senses a person’s presence.” So even a marketing idea that can be essential to a business can be patented if it’s carefully worded.

Myth 5: It takes a long time to license a patent, and I want to have something to show by the second quarter next year. The USPTO recognizes the time delay and is trying to speed things up by eliminating paperwork wherever they can. Go to their Web site to apply online, do prior art searches and check on the status of your patent application. It may be too early for you to boast profits in your press releases, but you can talk about how you’re different from competitors and why you’re the leader in your industry by grace of your expertise. Officially, they’re called “inchoate rights,” otherwise known as bragging rights. You can use them once your patent is pending.

Myth 6: “General” or wide-ranging patents are more likely to have higher returns or royalties than specific ones. Minutiae makes for successful niche-building, even though the thought of making your claims cover as much ground as possible is much more ambitious. Take CEPTYR ‘s lead, and focus on one area that is your core expertise to start off with. CEPTYR Inc. founders William Ettouati and Nick Tonks decided to focus exclusively on a very specific kind of drug, and they’re now sharing a sandbox with pharmaceutical giant Eli Lily just four years post-inception. Unlike most biotech start-ups, Ettouati and Tonks figured out what their unique specialization was and stuck to it.

Myth 7: If I need to change my business focus, then the money I invested in filing a patent will be wasted. You may not make money from a patent by applying it yourself, but you can pursue licensing royalties. Craig Nabat, 32, changed his focus from marketing his own invention, FINDIT , a device for locating keys and other lost items, to including other inventors’ products in his business. When determining the value of your product or service, there are two ways of pricing: “cost-plus” and “demand.” Cost-plus incorporates your fixed and variable costs and adds your desired profit margin (the “plus”). Demand pricing is based on what the market will bear-or what you can “demand” for your proprietary product. That said, you’ll have to find the intrinsic value in what you could’ve delivered to market. What cost savings, what productivity increases, does your product provide?

Once you figure out the monetary benefit, you can price your product accordingly so you deliver value, but you’re also maximizing your sale price. Don’t forget to factor in the lifecycle of your product or service: Will customers come back for more, and how soon?

Myth 8: Concentrating on a single patented product is amateurish-it gives the impression of a fly-by-night business that’ll vanish once the product novelty wears off. Patents can provide what is known as a “maintenance” aspect to your business that doesn’t require, well, maintenance. A healthy, small, continuous income is sometimes called a maintenance brand, product or service. Inventor-entrepreneur John Janning generated respectable profits from a product that needs very little maintenance, freeing up his time for marketing and inventing. It was the uniqueness of the product-a Christmas tree light string that stays lit regardless of whether a light burns out, falls out or is placed in the socket incorrectly-that finally got it into Lowe’s and Target this past Christmas. This type of underlying value attributed to your patented product prevents a low seating in terms of market share from being looked upon as liabilities to potential investors.

Myth 9: The industry I’m in is mature-I can rely on other, more certain, marketing tactics. Starting out in an industry that’s already mature means you have to work harder to communicate and reinforce the consistent values of your compan, instead of grafting on a mélange of different faces. There’s nothing like an in-house-developed patented product or service to build long-term trust and show that, even though you’re a newcomer, you definitely know what you’re doing. Not only can you name a patented product or service, but you can develop a consistent and distinctive advertising message around your company’s main focus instead of going with whatever promotion fads are hot at the moment among your competitors.

Myth 10: Everyone who was at the staff meeting where we brainstormed gets to put their name on the patent. You’d be paying honorariums like mad if this were true! Unless the inventor is yourself or a partner in the business, royalties from patent licenses generally go to the compan, not the employees who came up with the invention. The company is the assignee-the person or legal entity that has actual ownership of the patent.

Many entrepreneurs have figured out that aggressively pursuing patents is an integral long-term strategy that pays off. There’s nothing like knowing you can do something to build confidence, and holding a patent is a constant reminder to yourself that your business ideawill work!

The Cloud Revolution

Everyone is talking about the “cloud,” but is there anything new here? How is the “cloud” different from “internet” or “web?”

There is something new — and it’s a big deal — but it’s not what everyone usually talks about.

A few years ago, when someone would store his photos on Picasa, he would say, “I am using this website to store my photos” or “I put my photos on the Internet.” Now he would say, “I store my photos in the cloud.” What’s the difference ? In most cases, none. In consumer language, the word “cloud” has replaced “Internet” or “web” — it is just more trendy!

And yet, something real is happening.

In the business-to-business world, the word “cloud” is just as pervasive as it is in the consumer world. The National Institute of Standards and Technology has even attempted to define it, although the definition is incredibly complex:

Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.

This is actually accurate. But what is revolutionary and new here? Based on this description, the cloud is an evolution, not a revolution. It is the continuation of a series of changes initiated in the nineties with the advent of the commercial Internet, but its roots go back even further.

The first network-accessible “cloud” computing resources were already coming online some 50 years ago when American Airline launched SABRE in the early sixties.

In the eighties, bulletin board systems (BBSes) and Minitel were full of applications that were used through a network. The leading applications were yellow pages (search), travel reservations, order input systems and online dating.

In the late nineties, online services all converted to the Internet to benefit from lower costs and larger audience. Shortly after, a new concept appeared: “SaaS” or Software-as-a-Service. Some innovative software vendors realized that the Internet had become reliable enough for corporations to depend on it. We all know the success of Salesforce.com, essentially continuing and enhancing the order input systems from the BBS era.

A decade later, bandwidth has become so ubiquitous that it is in the air, and it is now common to access the Internet using smartphones. Most users have multiple devices from which they want to access their service, to the point that location has become nearly irrelevant.

With decades of improvement in available bandwidth and reliability, it is increasingly possible to rely on systems that are not on the same premises as the end user of the system. An innovative vendor, Amazon.com, saw that not only software but the computing infrastructure itself could be offered as a service. And thus the cloud was born. But fundamentally, there is not much difference between provisioning an instance on Amazon Web Services (AWS) and using a distant computer on a BBS 30 years ago.

And yet, a revolution is happening, but it is elsewhere. It is the consumerization of IT.

How consumerization has driven infrastructure

For decades, innovation in information technology has been driven by enterprises, government, and military needs. With the cloud wave, the place for innovation has changed, and it is now the consumer which is the driving force in IT.

Serving consumers at the scale of the Internet is mind-boggling. The service has to be on, all the time, for everyone, despite the variety of situations, devices, time zones, character sets…. When you address such a large population, there are no ‘safe’ maintenance windows. You can be almost certain that someone is using your service at any weird hour of the day or night, even on Christmas eve! Not only do you need to deliver 24×7, ubiquitous, highly reliable computing, but you need to do it cheaply, so cheaply that you can sell it for pennies or make money from advertising.

Large web sites such as Amazon, Google and Facebook have faced these challenges since the mid-2000s. They have independently found the same solution: distributing IT over many generic servers in a completely distributed architecture, where components can fail and be upgraded or changed individually without material impact on the whole system, thus reducing manual operations to a fraction of those required with traditional IT systems. This approach is now the foundation for the cloud wave.

Amazon founder and chief executive Jeff Bezos documented through many interviews the process by which Amazon became the leader of public cloud services. Here is an excerpt of an interview with Bezos in Wired:

Approximately nine years ago we were wasting a lot of time internally because, to do their jobs, our applications engineers had to have daily detailed conversations with our networking infrastructure engineers. Instead of having this fine-grained coordination about every detail, we wanted the data-center guys to give the apps guys a set of dependable tools, a reliable infrastructure that they could build products on top of. The problem was obvious. We didn’t have that infrastructure. So we started building it for our own internal use. Then we realized, “Whoa, everybody who wants to build web-scale applications is going to need this.”

Google and Facebook had to build similar technology; they just took different business routes to get there. Google kept everything in-house powering its multiple applications, simply publishing a few white papers on what it had created (notably MapReduce, which is the foundation to Hadoop). For its part, Facebook contributed much of its infrastructure work to the open-source community (including projects like Cassandra and OpenCompute.org).

This kind of infrastructure has revolutionized software development. Now instead of having to deal with infrastructure as a hindrance (because it is too slow or too expensive) developers can program the infrastructure to deliver exactly the amount of computing power, network resources or storage capacity that is required.

A new kind of developer

I am too old to talk about this revolution with any level of detail. However, I can notice that the kids developing applications today use completely different languages and paradigms than what I was using twenty years ago. Their approach to development is completely focused on what they want the application to do. They do not have to manage the hardware in any way.

Typically these applications leverage a “web service” type of software architecture, making it extremely easy to link applications together. Look at how easy it is to have your Twitter feed show on Facebook and LinkedIn at the same time, or how you can easily log in to a site using your Facebook credentials. This is the result of a web service architecture.

Furthermore, since the infrastructure is programmable, these developers can treat the infrastructure itself as just another service. Now, an application can request 1,000 servers but only for the time it needs to get your result, and then free up these 1,000 servers for some other task, all without any manual intervention. That’s the cloud!

In fact, the NIST definition with “with minimal management effort or service provider interaction” is really a understatement. If an application becomes popular and requires more resources, it will simply request those resources from the Infrastructure-as-a-Service. This is what has made Amazon Web Services so popular with start-ups. Now developers can program the infrastructure and operations as part of their software development. That’s led to a new term, “devops,” that makes explicit the merger of what used to be completely different skill sets, software development and IT operations.

This new style of application development results in applications which are more fun, easier to use, more practical, and more reliably scalable, both in terms of functionality and capacity. All of this can be achieved with a higher productivity in the development process.

The old man’s initial reaction is to dismiss the young kids’ approach. But when you see the success and stability of applications that have been built this way, such as Facebook, SmugMug or Dropbox, to name a few, I am willing to bet the opposite. Within ten years, this style of development will have become standard in the enterprise.

On the hardware side also, innovation is also driven by consumer technology. The cost of silicon-based components is mostly capital cost: the cost of R&D plus the cost of building a fab. Consequently, the cost of silicon based components is inversely proportional to the number of components sold. This is how solid state drives, which were originally used for digital cameras, smartphones and USB keys, got down to a cost point where they are now competitive with hard drives for certain business applications. Without the billions of SSDs sold to the mass market, there would be no way for startups to use SSDs as a viable storage alternative today.

Employees seizing control

Finally, there is yet another way in which consumer technology is driving innovation. Until recently, employees had to make do with what was supplied by their IT department. They would sometimes complain that an application was slow, or a process not practical, but at the end of the day, they would use the tools they were given.

With so many applications and business processes now available through the web, this has changed. How many times have I tried to send a large attachment to someone, and after it was rejected by the corporate mailbox, the person recommended I use their private Gmail account? Actually, the more senior the person and the more confidential the document, the more likely it is to happen!

The tables are turning. Employees are savvy users of IT at home. Devices such as the iPad, Kindle, and Android smartphones, websites such as Facebook or Netflix, applications such as Xfinity, Skype or Evernote have become part of daily life. People can easily listen to the same music at home, in their car, or on vacation. With Xfinity, they can select a movie on their iPad and launch it on their home HDTV. They can share pictures and videos of their last party with all their friends, or with only some of them at the touch of a button.

And then they arrive at work, only to discover that it is impossible to validate a purchase order from their corporate enterprise resource planning (ERP) system from their smartphone. The gap between the amazing technologies they have at home and the lame ones they have at work is widening, and it is becoming intolerable for employees. Intolerable situations cause revolutions.

The consumerization of IT is the real revolution. It is the wind pushing the cloud. The real debate is not about public or private cloud. The real challenge for corporate IT is to embrace this revolution, and accept the fact that an IT made of many simple web processes and many generic servers actually delivers better applications, more functionality, more agility and more reliability, at a fraction of the cost of the big iron.

It is counterintuitive, but it is real. This is what the cloud is about.

How to Raise Venture Capital

Ask anyone who has tried to raise money for any endeavor and the response you get usually goes something like this:     ‘it ain’t easy.’ While that is true there are certain things you can do to not only improve your chances of success, most importantly, by getting in the door. Having coached many entrepreneurs on how to raise capital, here are 5 tips that should help you along:

1. Start talking to investors early. The earlier you bring them into the process, the better they will understand what you’re doing and see the shifts you make over time. They will feel a part of the process in building the company and become much more comfortable working with you.

Although you want investors to be a part of the process early on, you also want them to be able to see things progress. If you’re not going to be able to make a measurable impact within about a 30 day time frame, then it may be a bit too early. This, however, doesn’t mean that you shouldn’t go out and try to meet investors and seek friendly advice.

2. Talk to other entrepreneurs. Ask other entrepreneurs who have raised capital how they did it. Learn from their mistakes and value their advice and guidance. Also, leverage their network and seek introductions.

3. Research venture capital firms. All firms have defined investment theses that describe the type of criteria that they look for in their investments. Seek firms that are a good fit by stage, focus, area, etc. You should also be aware of potential conflicts. VC’s avoid investing in competing companies.

Another reason why it’s so important to research your investor is because you’re taking on more than just capital; you’re bringing on a partner. And it’s a partnership that will last for a long time. They’re going to be there for 3, 5, 7 years. You want to have a strong understanding of who they are and be comfortable with their management style and focus. Thankfully, the Internet is a great tool to find all this information. Use it.

4. Identify the top 10 funds that you believe will be great investors (i.e. partners). List potential lead investors, syndicate investors, angels, etc. You can then build off your network and ask for specific introductions to firms on your list. Obtaining a warm introduction is always the best way to get your foot in the door.

CAUTION:  One of the worse things to do (once you’ve made this list of top 10 VCs) is to target your first 1 or 2 right off the bat. The first time you pitch is not going to be very good, especially if you’re very early on. Once you’ve gotten some initial reactions, go back and improve on this feedback, and then you can go after the investors you really want. Save your best potential lead for when you’ve really perfected your pitch.

5. Make fundraising a part of your job. If you’re a high growth startup, chances are you’re going to need investment capital. Unfortunately, the fundraising process is very difficult and can take a long time. Don’t wait until the last minute. Allocate time to it each month like you would any other job function.

Doing your homework and having a very focused, targeted approach will go a long way in gaining attention and successfully obtaining venture capital.

What’s the best corporate structure for an early-stage start-up?

I got the following question emailed to me from a friend whose son is working on his first start-up. Figured it could benefit all looking to start:

A project I’m involved with is aiming to go from a team of “4 founders with a great idea and a prototype” to a full fledged online service. I believe that even at an early stage, structuring ourselves to allow for growth/investment is critical. Naturally passion for our core mission, competence, and an ability to connect with the existing team are critical. Yet compensation (with an equity component) is a big part of the equation. I want people to have a sense of ownership and our current back of the envelope structure just isn’t suited at the moment for bringing people onto the team. To avoid reinventing the wheel, is there a “best practices” template for early stage companies with respect to structure/incorporation? What’s the smartest structure for an early stage company?

There are two logical choices (S-Corp or C-Corp) and a third one (LLC) that pops up occasionally.  The best choice depends on the financing path you are ultimately planning on going down.  Rather than define each of them in-depth, I’ve linked to the Wikipedia definitions which are very good.

S-Corp: If you are not going to raise any VC or angel money, an S-Corp is the best structure as it has all the tax benefits / flexibility of a partnership – specifically a single tax structure vs. the potential for double tax structure of a C-Corp – while retaining the liability protection of a C-Corp.

C-Corp: If you are going to raise VC or angel money, a C-Corp is the best (and often required) structure.  In a VC / angel backed company, you’ll almost always end up with multiple classes of stock, which are not permitted in an S-Corp.  Since a VC / angel backed company is expected to lose money for a while (that’s why you are taking the investment in the first place!) the double taxation issues will be deferred for a while, plus it’s unlikely you’ll be distributing money out of a VC / angel backed company when you become profitable.

LLC: Often an LLC (Limited Liability Company) will substitute for an S-Corp (it has similar dynamics) although it’s much harder to effectively grant equity (membership units in the case of an LLC vs. options in an S-Corp or C-Corp – most employees understand and have had experience with options but many don’t understand membership units.)  LLC’s work really well for companies with a limited number of owners; not so well when the ownership starts to be spread among multiple people.

Based on your question, it seems like you’ll ultimately want to raise money in which case a C-Corp is probably best for you.  An established lawyer who does corporate work with early stage / VC backed companies can set this up quickly, easily, and inexpensively for you – they are often the best source for the equivalent of a “best practices template” since this is routine work and requires simple, boilerplate documents and filings.

Bootstrap, Bootstrap And Oh, Don’t Forget To Bootstrap

I recently spent some time with a long time friend and entrepreneur who I’ve funded in the past. He’s working on a new company which I think is really neat and I’m already a user of. He called me for feedback on his fundraising strategy as well as to see if it’s something that we’d be interested in investing in.

It’s outside our scope and different than the type of business we invest in. Given our long relationship and the fact that he’s an awesome entrepreneur, I squinted hard at one of our themes, turned my head sideways, and decided to take a look. We spent a few days applying our process to it (each partner touches it and we give each other real time qualitative reactions) and quickly realized that it really wasn’t something for us as it was far outside anything that we felt like we could help much with beyond money and moral support (which my friend is going to get from me anyway.)

So – I sent my friend a note with my explanation for why we are passing. I offered to help with introductions because (a) he’s an awesome entrepreneur, (b) it’s a very fundable business – just not by us, and (c) I have a lot of confidence that he’ll build a successful business and there are several VCs who I know that I think would like what he’s working on.

His response was dynamite. It was

“No sweat. I knew it was a longshot, so I appreciate you even considering it. I know how many deals you have to pick from.

I’d like to take you up on your offer to help us get funded, but I have a better idea … help us avoid the need for funding (700 clients gets us to profitability).”

He then went on to detail a handful of things he’d like me to do assuming that I’m a happy user of his product. All of them are easy, low maintenance for me, and in several cases actually benefit me.

I love that my friend is much more focused on ramping up his customers than raising money. It’s easy to get lost in the soup of “X company raised $Y” and forget that it’s not about fundraising, but building a business.

Don’t forget to bootstrap.

Failing Fast

What makes a better CEO of a new startup – an experienced entrepreneur who’s last company was a failure or a big company executive with a stellar pedigree who has never worked in a startup.

Give me the experienced entrepreneur whose last company was a failure 100% of the time.  The cliché “you learn more from failure than success holds true”, but more importantly the dude that just came off a failure and is ready to go again is super-extraordinary-amazingly hungry for a success.  It doesn’t matter how much money he’s made in his past companies – once he decides to go for it again he’s going to be ready to crush it.

Being able to fail fast and recover faster is a massive asset as an entrepreneur, and the sooner you’re able to get past the stage where you feel sorry for yourself when something goes wrong, the better. Students of entrepreneurship talk about the J-curve of returns: the failures come early and often and the successes take time. America has proved to be more entrepreneurial than Europe in large part because it has embraced a culture of “failing forward” as a common tech-industry phrase puts it: in Germany bankruptcy can end your business career whereas in Silicon Valley it is almost a badge of honor.

But simply “embracing” failure would be as silly as ignoring it. Companies need to learn how to manage it. The first thing they must do is distinguish between productive and unproductive failures. Companies must also recognize the virtues of failing small and failing fast. Chris Rock, one of the world’s most successful comedians, tries out his ideas in small venues, often bombing and always junking more material than he saves. Jeff Bezos, the boss of Amazon, compares his company’s strategy to planting seeds, or “going down blind alleys”. One of those blind alleys, letting small shops sell books on the company’s website, now accounts for a third of its sales.

Placing small bets is one of several ways that companies can limit the downside of failure. You should emphasize the importance of testing ideas on consumers using rough-and-ready prototypes: they will be more willing to give honest opinions on something that is clearly an early-stage mock-up than on something that looks like the finished product. Chris Zook, of Bain & Company, a consultancy, urges companies to keep potential failures close to their core business—perhaps by introducing existing products into new markets or new products into familiar markets.

But there is no point in failing fast if you fail to learn from your mistakes. Companies are trying hard to get better at this. India’s Tata group awards an annual prize for the best failed idea. Intuit, in software, and Eli Lilly, in pharmaceuticals, have both taken to holding “failure parties”. P&G encourages employees to talk about their failures as well as their successes during performance reviews. But the higher up in the company, the bigger the egos and the greater the reluctance to admit to really big failings rather than minor ones. Bosses should remember how often failure paves the way for success: Henry Ford got nowhere with his first two attempts to start a car company, but that did not stop him.

Fail Fast Folks.

Advice on How to Pitch a VC

The one thing I think I do know is how to give better advice on pitching VCs now that I’ve sat through thousands of pitches and made 32 investments.

I’ve mentioned in the past that there are some key things you should include in your presentation when you are pitching a VC.  David Cowan wrote a great post on what to include is a great starting point for anyone looking to raise capital from a VC.  I thought I would expand on this and add some of the nuances within each section. This may not apply to all types of companies but I think it works for internet-related businesses.

Also, I’ve found that if all the information below is addressed succinctly in an executive summary or first pitch deck, it can help us make a much faster decision —which is what the entrepreneur wants and so do we.  If we believe the story is lacking in too many areas, sometimes we just pass as there is too much else going on. At the same time, providing too much information is a problem as, like you, we are time-strapped and attention-starved.  I think most of the points below can be addressed in a few compelling sentences or slides.

1. What Do You Do? The first thing we want to understand is what you do, very simply.   What’s the problem/solution or what’s the new experience that you think is exciting?  Why is this important to your customers?  For mass-market internet businesses we want to understand if this appeals to a wide or narrow audience and if it’s a frequent (daily) habit or something done once in a while (which is tougher to build a brand in the consumers mind).  Don’t talk vision or market at this point.  Zero in on what you are about.
2. Reveal Your End Game. VCs typically don’t invest in just the first product or service being the end game or in a company’s whose biggest goal in life is to be a feature of a platform or “add-on” acquisition.  We want to understand that your product has really big potential and could be a platform possibly for others—like Facebook or Twitter.  Don’t be afraid to dream a bit.  Here’s an example from one of my companies –  “Rubicon Project will start solving the sharp pain point of optimizing ad networks for publishers and will leverage this position to be the trusted platform to help monetize all inventory for a publisher – the Control HQ for all revenue for web publishers”.  You won’t be penalized for having audacious goals.
3. What Is The True Size Of Your Market?  No, Really.  The important point here is whether it’s a big enough market to be interesting to a VC.   Too often entrepreneurs simply state the size of the online ad market for an internet content business or the size of a retail category for e-commerce sectors.   We’re less interested in the top down market sizing and more focused on your Total Addressable Market (TAM).  If you sell widgets, how many customers are really out there that are interested in your widget (segment the market) times what price you get for your widget.  The more thoughtful and realistic you are about how you define the customer set, the faster we can make a decision.  We don’t mind getting surprised on the upside later on.
4. The Secret Ingredient Is People.  Teams are critical and too little time is spent on them in pitches.  Don’t just include where you’ve worked but include in your slide or exec summary why this team is the best for this opportunity.  In many businesses, domain expertise matters a lot, so highlight that.  In some consumer businesses, its less about experience and more about product insight and relentless execution—highlight why you have that.  In other words, figure out what’s most important to the task at hand and make sure to tell us how each person will help accomplish that—not just where everyone worked and went to school.  In an early stage deal, Team and Market are the most important factors as everything else will change and a great team with wind at their backs will make it happen.  Also, be upfront about your holes/weaknesses in the team (and your own weaknesses) and if and when you believe you will need a new CEO.  Self awareness is one of the most important traits we look for in leaders.
5. Go-To-Market Strategy.   This is often ignored or not given enough thought.  What is the path of least resistance that you can take in terms of customers (be specific here), channels, and initial product focus.  Your go-to-market strategy should ideally be in your control (versus reliant on big, unproven partnerships) and take as much risk off the table as possible in the least amount of time.  You need to go through customer acquisition economics if you pay for customers (lifetime value vs CPA) and why you will spread for free if you don’t require marketing.   Address how you will make it as painless as possible for consumers to adopt the solution and how you will build on top of that.  Also, your go-to-market focus should not force you into a niche that’s hard to maneuver out of.
6. Be Honest About What Stage You Are At.  We need to understand what stage your company is at.  Are you at the idea stage or pre-traction in terms of customers and momentum?  Do you have momentum but are still working out the business model?  Or do you have both momentum and a solid understanding and proof behind the model.  The clearer you are about where you are, the faster we can make a decision.  Be upfront and honest on the risks and how you will deal with them.  If you have momentum, show graphs of key metrics over time (not just a snapshot of where you are)—we want to understand the shape of your growth curves and how your key metrics are performing against your expectations.
7. Your Real Competitive Advantage is Being Different In The Long Term.  On the internet, there are at least 25 companies that are or can compete with you on almost anything you do.  Often times, it’s all about execution but we want to see if there are fundamental factors which will help you outdo your competition—very hard technology/IP, network effects in your business that will make it hard for others to catch up (such as with Wikipedia, Google AdSense, Facebook, Twitter) or a fundamentally different business model that will be hard for an incumbent to change (for instance, it wouldn’t be easy for Electronic Arts to cannibalize its retail games with free to play online versions).  While we want you to list all your competitors (be exhaustive otherwise we won’t have confidence you know your business and have done your homework), its not useful to only show a chart of your competitors comparing features or positioning on a 2×2 chart.  That is a very static view and any competitor worth their salt will morph and/or expand features to keep up with competition.  If its all about execution and there are no fundamental advantages, then you should focus on why your team will out-execute all the others (a tougher sell but possible).
8. Product, Product, Product.  If it’s a live pitch, a demo is really key—but keep it short and to the point.  Don’t go into all the cool features—we are most focused on how its simple, intuitive, solves the problem and how well built it is and frictionless from a user experience point of view.  You can talk about some of the cool new features but the first meeting isn’t about going through your product requirements.  If it’s part of an executive summary or deck, this is harder but at least a few screenshots of the key experience flow are helpful.
9. Plausible Financials.  It’s tough to create believable projections for an early stage company.  I suggest showing what it takes to get to $50M or $100M of revenue in terms of customers, products, pricing, and so forth, as that’s what we are focused on.  Show a simple table of key assumptions to get there and speak to why its believable.  We also want to know how much capital you think you will consume to get sustainably cash flow positive so the nitty gritty forecasts do matter—but be able to explain the key drivers and why its capital efficient (profitable under $5-10M of investment) or requires significant investment.
10. The Ask.  Make sure to put down how much you want to raise.  Often a range is a good strategy as it usually depends on the valuation/dilution.  But there should be a minimum amount that makes sense to significantly reduce the risks in the business.  Importantly, highlight what risks you will remove and what momentum you expect to have about 6 months before you run out of cash.  We are very focused on whether we will be able to successfully raise a round at a higher valuation, so tell us what you think it will take to do that.

I hope this helps.  If you can nail the  points above, it can be a 30-45 minute meeting and I think you’ll get a quicker and more definitive answer from a VC.  Good luck with your pitch!

Great New Start-Ups (and Founders)

I get inundated with roughly 80 email pitches a day and out of those maybe 3 are interesting enough to have a call on. Of those, usually one team gets to present to our team. In other words, the odds aren’t in the entrepreneurs favor – at least with our firm.

Recently, however, I have met several exciting young entrepreneurs that are doing some pretty interesting things. Without going into too much detail, I attended an Entrepreneurs Summit hosted by New York University this week and was thoroughly impressed by some of the young start-ups that presented as well as the innovative people I met there.

Innovation is bubbling here in NYC and institutions like NYU, Columbia, and Cornell are embracing this urban tech revolution. Of the people I met at the conference, here are a few highlights

Ben Kaufman

Ben Kaufman, a young entrepreneur working on his second start-up which focuses on Crowdsourced product development . The start-up, quirky.com, turns two community-submitted ideas into sellable products each week. Hopefuls pay $10 each to post an idea online for the 85,000-member Quirky community to vote on. Ideas must be physical goods (not software) that can retail for less than $150. An in-house team of engineers and designers examines the two most popular submissions and builds a prototype. If enough units are presold to cover the cost of bringing a product to market, Quirky will contract to have it manufactured and distributed. Quirky retains all rights to the products and takes 70 percent of the revenue; the rest goes to the product creators, many of whom earn tens of thousands of dollars from their ideas. Pretty cool concept and it surely makes it easy from boot-strapped inventors to bring their ideas to life.

Ryan Garelick

Ryan Garelick, also working on his second start-up aims to redefine the customer/retailer relationship on a localized level by creating an authoritative, user-driven database populated by true value of most consumer goods, regardless of geographic location. Through scan technology (Smartphone) and web-mapping the consumer is provided absolute knowledge on price and locational information of most consumer goods, essentially leveling the playing field and disrupting how retailers price out their products by making markets more efficient / competitive. To benefit the retailer, Ryan has developed a hyper-targeted marketing platform that leverages the customers buying pattern and interests to engage/target them specifically as soon as they enter the store with relevant content such as product deals and virtual coupons for the products they like. This product could transform the retail sector from the bottom up.

Darian Shirazi

Darian Shirazi, a former employee of Facebook and eBay has developed a really unique platform that geo-organizes news online by the places to which its most relevant. The product, Fwix, essentially acts as a news aggregator that attaches locations to online content, a process more formally known as geotagging. Shirazi then sells the data to companies, including Groupon, the New York Times, and NBC, who use it to target online ads to local consumers.

Andrew Kortina

Andrew Kortina, a veteran of Bit.ly, and his partner Iqram Magdon-Ismail, are developing a light mobile payment system called Venmo. The idea is instead of using cash or writing checks when transacting with friends, colleagues, dinner buddies, you use this  free service with no transaction fees for any and all payments you make. By linking a credit card or a bank account to your phone and by setting up direct deposit, Venmo automatically transfers any money you receive through the service into your bank account every two weeks. You can also cash out manually at any time. No wallet, no problem.

These are just a handful of interesting, innovators I met at the NYU summit. If you haven’t heard about them yet, you will. As noted above, email pitching is one of the least likely ways to get noticed. Head out to expo’s and conferences if you are looking to meet people in the VC or Angel community.