WHAT ARE VENTURE CAPITALISTS LOOKING FOR IN THE NEW DECADE?

By Marc Kramer

Jeffrey Bussgang, a successful serial entrepreneur for ten years, wrote an insider’s guide to what venture capitalists are looking for in the start of the second decade of the new millennium entitled, “Mastering the VC Game,” published by Portfolio.  Currently Bussgang is a general partner at Flybridge Capital Partners, an early-stage venture capital firm with more than $500 million under management.

 Before becoming a venture capitalist, he was the cofounder of Upromise, the largest private source of college funding contributions in the United States. He currently serves as an entrepreneur in residence at Harvard Business School, where he earned an MBA.  The following is an interview with Bussgang about his new book.

How did you become a venture capitalist?

Bussang:  “In truth, I was born to be an entrepreneur.  My father was a Holocaust survivor who immigrated after the war and became an entrepreneur and in many ways I saw entrepreneurship through his eyes. His entrepreneurial experience and immigrant mentality forged me into the person I am today, and guided me through many life decisions. Following my graduation from Harvard Business School, I decided to join a VC-backed start-up, turning down a far more lucrative opportunity to join a VC firm. 

“The company went public in 1996, and I became a member of the executive team over time.  I later co-founded Upromise, which also became VC-backed.  A few years later, I was approached by two VC friends of mine who had invested in my previous companies.  They had recently started a new VC fund and invited me to join them.  So, I joined Flybridge Capital Partners in early 2003 and have been there since.  I guess when you’re an entrepreneur that has been involved in companies that make VCs money, they want to hang out with you!” 

Why did you write “Mastering the VC Game”?

Bussang:  “I wrote the book to help demystify the VC business for entrepreneurs. I tried to make it a mix of “how to” and “war stories” so that it’s entertaining and accessible, yet detailed and directive enough to be helpful.  In my interviews with over a dozen entrepreneurs and a dozen VCs, I draw out their lessons learned as well – folks like Twitter’s Jack Dorsey, LinkedIn’s Reid Hoffman and Union Square’s Fred Wilson.”

What has changed about venture capital over the last 10 years?

Bussang:  “You know the old adage – the more things change, the more things stay the same?  The VC business today is far more global than it ever was.  In the book, I profile Henry Nguyen and how he has brought Venture Capital to Vietnam. I also talk about the VC business in China, where the “John Doerr of China”, Quan Zhou, leads IDG-Accel.  But despite the globalization of the business, it’s still a hands-on, not very scalable, local business.  Great opportunities exist to build interesting companies, but it requires patient capital, hard work and great people – just as it did 10, 20 and 30 years ago.”

How long is it taking typically for companies to raise money today?

Bussang:  “The time it takes to raise money is very case by case, but as a rule, entrepreneurs should plan for a 4-6 month process. Funding opportunities are harder to find in this environment, but although the VC community is an extraordinarily small one (probably no more than 500 active firms and 1000 active decision-makers who can write a check), there are numerous options for founders.  Angels, super angels, incubation groups and seed funds compliment VCs as potential funding sources.” 

What characteristics and qualities do VC’s look for in entrepreneurs they invest in?

Bussang:  “They are looking for a team that works well together and has some unfair advantage in what they are bringing to the market. There are a million good ideas out there, but strong execution of the good ideas is a defining factor for success. VCs also tend to have sweet spots in terms of the types of investments they make and the amount they invest.  Entrepreneurs need to invest the time to the firm and particular VC professional they’re pitching to in order to ascertain those important elements.”   

Is there a preference for VC’s to invest in Ivy League/elite school grads over state school grads?

Bussang:  “Generally, no. Most VC portfolio companies have a mix of individuals from many different schools and backgrounds. That said, great entrepreneurs usually exhibit excellence is some aspect of their life and, for some, that aspect is academic.  Scientifically-minded start-ups often have strong academic pedigree.  Further, the many Ivy League graduates may have strong alumni networks.  For example, schools like MIT, Harvard and Stanford are legendary training ground for start-up executives and that might be helpful in getting initial meetings. I would say, though, that a great deal of teams have mixed backgrounds. We pick great teams made up of very different members all the time.” 

How often do VC’s invest in companies where the plan is mailed traditional or e-mail?

Bussang:  “Nearly never. Your worst chances are with sending a cold email or mailing in a traditional business plan. One of the important elements of the book is that I discuss how to get in the door and what to do when you get there. A great deal of entrepreneurs think a well crafted email will get them a response, but in truth VCs pay most attention to the people closest to them who they respect the most.  To get a warm introduction from one of them is the key to getting a warm welcome.” 

How important is a business plan?

Bussang:  “A business plan – either in the form of a well-done PowerPoint pitch or Word document – is important in outlining the market opportunity, providing the background of the entrepreneurs and why they are uniquely well suited for this opportunity, and providing a window into the quality of your thinking and writing.  Business plans also help and in laying out the assumptions behind the business (“what must I believe for this to be a success?”) and setting the VC on the path to vetting those assumptions during a due diligence process.  I would say, though, that the entrepreneur’s record and accomplishments are more important than a well-researched or written plan.”

What do you focus on in business plans?

Bussang:  “I focus on the background of the entrepreneurs – is it a track-record of accomplishments and is it relevant to this market such that they may have a unique perspective on it?  I also evaluate the company’s approach and assumptions about the market they are pursuing. I also focus on their assumptions, their facts, and the raw material that goes into that framework. The business in many ways is about working through and finding the most compelling vision of the future, the market and the companies role in the market. So it is less about they financial projections and more about the way they approach business.” 

The IPO market is starting to come back, will we ever see times like the late 1990s?

Bussang:  “I do not think we will see anything like the mid- late-1990s ever again.  My company, Open Market, went public in 1996 with $1.6 million of trailing revenue and had a market capitalization of over $1 billion.  That said, the market is returning somewhat – in the first quarter of 2010, we had nearly 10 VC-backed IPOs.  It won’t be as easy as it was in the late 1990s, but that’s OK.  There’s less confusion nowadays about whether you are lucky or smart in this business.  And, thankfully, there’s a lot more humility!”

Published 13 June 2010 - 0 comments (View/Post Comments)   

NEW TELECOMMUNICATIONS TECHNOLOGY TO SIGNIFICANTLY IMPACT THE WORLD
By Marc Kramer

Dr. Scott Snyder, a serial entrepreneur, is president of Decision Strategies International and the author of “The New World of Wireless: How to Compete in the 4G Revolution.”  Dr. Snyder is an international technology expert that provides strategic advice for both the private sector and the government.  His new book talks about the changes we are going to see because of the increased speed and bandwidth of telecommunications that will impact every facet of our lives and how business leaders can use it to take advantage of new opportunities.  The following is an interview with Dr. Snyder, whose book is a most and quick read for strategic thinkers, leaders and investors.

Why did you write the book?

Snyder: “I have always had a deep interest in communications.  At Penn I developed a course on 4^th generation wireless several years ago.  At that time, 4G was just a glimmer of hope.  Now 4G is emerging all around us and I thought it would be good to make people more aware of it. 

“That course brought together executives across domains from finance to healthcare to retail.  The objective was to stimulate what was possible and to think about new applications.  The course was a combination of what 4G could be and an internal venture course about using 4G applications to get a competitive edge. 

“The other thing I see as a strategy consultant, we work with many large firms where they get blindsided by new technology.  I wanted to make sure business leaders were aware of 4G as a new technology and and how it would effect their company and how they could take advantage of it.

Who is this book for?

Snyder: “One of the reasons I did it with Wharton Publishing was to go to a broader audience.  I wanted a book that was accessible for a business executive or a  working professional.  It’s a crossover book.  It has enough meat to appeal to a tech person and is not so intimidating to a non-tech person.”

What major changes do you see for telecommunications in the next 10 years?

Snyder: “Clearly, everyone talks about the Internet of things.  This is going to be true in spades.  The number of connected things is going to dwarf the number of people by a factor of a thousand.  Consumer to consumer communications may get the most attention, but it will be machine to machine communications that will have the greatest impact.  This will be driven by more capable networks, open standards, and micro-processors embedded in everything.”

What industries are going to be most effected?

Snyder: “They are all ripe for change.  Publishing is going to be greatly effected as we have seen with the advent of the Kindle. The one’s I get most excited about are energy, health care and transportation due to the size of the problems that wireless can address. 

“They are three massive problems screaming for better solutions and this platform provides an opportunity to rethink the problem sets in those industries like remote health care and energy management.   It gets back to things to monitor and making decisions we could never make before because we didn’t have the information. There will be sensors that work cheaply that will open up a whole new set of applications..”

Why does it take the US longer to adapt telecommunication innovations such as using the phone to watch television and carry personal information?

Snyder: “My main theory is that the innovations are usually founded here, but the Japanese and others are good at standardization.  The reasons the Japanese have 160 million e-wallets is because they chose a standard.  We chose two different mobile technologies and the rest of the world chose one.  They chose GSM and they standardized.  We haven’t learned our lesson as fast about selecting standards.”

What current companies do you see as the winners?

Snyder: “You have to break up the value chain.  It depends on the future we end up in.  As I talk about in the book, the big linch pin for me is security and privacy.  If people openly embrace these newer networks and I will be connected to many more networks than today.  It will be less about the pipes and how will you improve the quality of life for consumers and business. 

“The one’s that can create smarter devices!  The network providers can’t make money on a flat data plansso they have to figure out how to go upstream.  There are now viruses hitting mobile phones.  If  big companies abuse their power then people will lose trust.  People really trust the networks and are willing to have their health care information or retail profile available to wireless applications, as long as these services provide benefit for consumers. 

“Companies that look at wireless as an innovation platform will take advantage of great opportunities, so if a company like Aetna wants to get customers out of clinics and hospitals, it could collaborate on wireless solutions with medical device products and get them to come together.  To make this work,  you have to have the customer in the loop..  An example is a consumer-driven I-Phone App to scan and fax a check.  Big applications for banking!”

What new businesses do you think will be launched?

Snyder: “A great question!  There are a couple in the book I talk about.  One is pervasive retail.  Because of the intelligence of the handsets and if 4G is out there concierge services will take off.  You will be told about your preferences (health care, retail, other)and you will find out where the ideal products and best deals are.  It will happen proactively instead of you looking it up.  There will be virtual tour guides. 

“If I am touring Philadelphia it may start telling me about historic sites in my language.  It knows where I am standing and what I am looking at.  Some people call it augmented reality.  The other piece that is going to be big is people as sensors.  We see a little today with traffic sensing such as the Tom-Tom or Garmin devices. 

“We can learn about what traffic is like from gathering all of the GPS users.  There is an application that will tell mall and store owners where people go through tracking their cell phones.  NASA has come up with a chemical sensor to pick up bio agents and air quality via cellphones.”

How much more of a productivity gain can the US wring out from 4G?

Snyder: “It can be enormous.  It’s one of our great opportunities to spring board back.  We bet the farm on life sciences and other countries have learned from us and have disrupted us.  We are still very strong in wireless. 

“Our military is one of the lead users of wireless.  We are well positioned as a country.  Two things have to happen and for this to occur.  We have to embrace standardization.  We have to engage industries that don’t talk to each other like insurance guys don’t talk to transportation and wireless operators.  It could create some fantastic innovations globally.  We won’t solve any of the big problems without wireless.”

How will cyber security be effected and will this level the playing field with terrorists?

Snyder: “That’s a real challenge for the military.  The commercial technology is changing so quickly.  It’s creates an opportunity to source ideas from all over the world, but I can’t protect him.  Everyone has the same capability.

“An example is the military software defined radio that can su0port a large number of different wireless channels, but soon someone will come up with a lot cheaper commercial solution that does 80% of this.   We have had an edge for so long, but now we don’t have that edge because we have to outsmart the bad guys.”

Published 18 May 2010 - 0 comments (View/Post Comments)   

PROBLEMS CREATE OPPORTUNITIES: INNOVATION X

By Marc Kramer

Innovation is the key to developing new revenue streams, staying competitive and creating jobs.  Adam Richardson, creative director at global innovation firm frog design, inc., where he has worked with companies such as HP, Intel, Motorola, Logitech, and Yahoo!, has come out with a new book entitled “Innovation X” published by  Jossey Boss.

Richardson writes regularly on design and business, and speaks at conferences worldwide. In addition to teaching design and user research, he is a guest lecturer at the Ecole Nationale Supérieure de Création Industrielle in Paris, and at the IESE University of Navarra in Barcelona. Richardson earned his BFA in Industrial Design from the California College of the Arts, and a multi-disciplinary MA from the University of Chicago.

Why did you write this book?

Richardson:  “I began to see a pattern with companies who sat down at the conference table at frog design. They knew they had a problem, but they couldn’t figure out what it was. But there were some common symptoms that came up over and over, regardless of the company size or their industry: they’d lost touch with who their customers were, they were getting disrupted by unexpected competitors, and they were needing to create ecosystems of offerings for customers rather than stand-alone products.

‘So I wanted to see how these ambiguous, vague problems, which I started calling X-problems, could be better understood and tackled.’

Who should be reading it?

Richardson:  “Senior executives, division leaders, and product managers – people who are struggling with these tough X-problems and must answer the fundamental question, “What should we make?”.

“It is a business book about innovation, not a design book. It’s a from-the-trenches, hands-on book with concrete tools and methods for dealing with X-problems and making innovation work.”

What companies are good at innovating and why?

Richardson:  “Beyond the usual suspects of Apple and Google, many companies are succeeding at innovation and tackling X-problems. I profile a variety of them in the book: Autodesk (architecture and design software), Clif Bar (energy snacks for athletes), Progressive Insurance, MINI, Logitech, Twitter, and others. Some of these are startups, some are large companies, so innovation is not exclusive to either. However, breakthrough innovations tend to come more consistently from small companies taking bet-the-farm risks.

“These companies share a few attributes. Leadership at the top that sets the expectations around innovation and the “panic threshold” for how long radical ideas are entertained before being dropped. A combination of restless experimentation and relentless attention to detail on execution. A focus on deep customer needs, and innovating on behalf of customers rather than just doing what customers ask.’

Can you tell walking into a company that their culture is either receptive or not receptive to innovation?

Richardson:  “I often feel like a corporate tourist – I land in a new client culture and new landscape, and all I can see is the people, behaviors and beliefs that are right in front of me. It’s not always clear from this first exposure how the larger culture is set up for innovation.

“But it quickly becomes clear if the people have passion and drive, and if there is the support from top-level management. All of these have to be present, or innovation is not going to take root broadly.”

There are less than a handful of companies that were on the Fortune 500 a half-century ago that are still on the list.  How important is innovation to maintaining success?

Richardson:  “That is a great question. It is true that innovation can seem to be a flash-in-the-pan phenomenon. Too often innovation is treated as an end in itself, rather than a means to an end. Not that many companies last fifty years, whether they are considered innovative or not, but fundamentally for a company to continue to thrive it needs to differentiate itself by providing unique value (which can be defined in many ways) for customers. If done well, this is what innovation can help deliver. And today’s competitive environment is far more turbulent and fast-paced than fifty years ago, making innovation even more important.”

What is the profile of the leaders that embrace innovation?

Richardson:  “They must be curious. For example Jeff Bezos of Amazon spent a week on the floor of one of his warehouses, seeing what he could learn about the “boring” part of the business. I firmly believe that joie de vivre and lifelong inquisitiveness are essential to innovation, which at its core is about optimistically trying out things that have never been done before.

“They must have a passion for the details of the end product. Too often business strategy is divorced from product development, as though one doesn’t affect the other. They exist symbiotically.

“Innovation leaders must be patient and persistent. Google’s 1200 quarter (300 year) vision of making all the world’s information available is an exaggerated case in point, but let’s at least get a perspective further out than 1-2 quarters. Big innovations take time.

“And leaders must be willing to take risks based on informed instinct, even if it goes against what market research is saying. For example, Gary Erickson, founder of energy snack maker Clif Bar, took a “damn-the-torpedoes” approach to launch a radical new product for runners, after a long period of investigation that yielded ambiguous results. Fortunately his instincts were right, and the product rapidly outsold its predecessor.”

What is the profile of the type of employees innovative companies should be looking for?

Richardson:  “Pretty much the same qualities as I just described for leaders, actually, with the added ingredient that they must play well with others from different disciplines and organizational groups. And there’s no escaping the fact that when you’re dealing with tough problems, talent matters.

“Ed Catmull of Pixar says, “If you want to be original, you have to accept risk and have the capability to recover when it fails. What’s the key to being able to recover? Talented people!” At frog we are very picky about who we hire – we hire less than 1% of the people that apply for a position.”

In the book you mention about capitalizing on your own and your client’s problems, how do you identify problems and find out if clients are really willing to pay for a solution?

Richardson:  “I like the quote from David St. Hubbins, lead singer of the fake rock group Spinal Tap, “It’s such a fine line between stupid and clever.” It can be hard to sort out the good solutions from the bad ones. You cannot rely purely on market data when assessing an innovation – that data is about the past. Motorola’s market research said that the Razr would be a low-volume, money-losing phone. It went on to become one of the biggest selling phones of all time.

“So you have to triangulate on new opportunity spaces and innovations from many different angles, what I call multi-vector analysis – customers, technologies, trends, competitors, sales channels, brand, and other vectors. From this you build a holistic business case about the value of the solution and what it will take to build it.

Is there one process and methodology that you follow for identifying problems and then creating a revenue producing solution?

Richardson:  “In part this book is an attempt to demystify  many of the processes and frameworks that my colleagues and I use at frog use on a daily basis. But you cannot take a cookie-cutter approach. At frog we have a broad set of tools and a loosely defined process for putting them together. We are pragmatic rather than dogmatic about choosing which tools to use, and when to use them.

“But the common denominator is that we combine qualitative and quantitative approaches – ethnography with market research for example – and creative and analytical methods. It’s the combination of these that produces the magic, which can then be backed up with rigorous logic and data.

Is there one company that truly understands innovation that you consider the model for other companies?

Richardson:  “There is no one-size fits-all model, though many look to Apple these days. Apple is an odd-ball in many respects, and it’s hard to replicate. But there are lots of other archetypes. One of my favorites is Zappos, the online shoe retailer, who took a fresh look at their organizational toolbox. In it they realized that they had two core assets - their reputation for great customer service and their quirky, fun organizational culture–which they could actually sell. They set up a little experiment, called Zappos Insights, which is a consulting service for small business owners who want to get better at customer service and improving their company cultures. This is a great example of a company being innovative by rethinking what it does without throwing out its old business, and taking risks in a sensible but effective way.”

Published 20 April 2010 - 0 comments (View/Post Comments)   

Published 12 March 2010 - 0 comments (View/Post Comments)   

WHAT SHOULD WASHINGTON DO TO FIX AMERCIA

By Marc Kramer

Lori Ann LaRocco, senior talent producer for CNBC, and one of the most connected and respected business journalist, was feeling like many Americans over the last 12 months and that was frustrated with the progress of the economy.  She wondered why the American and world economy at large have a massive heart attack, what could be done to fix the economy and where are the future opportunities?  So this journalist did what you hope the President of the United States would do and that is bring together the best business minds in a cross section of industries and ask them what happened, what the government needed to do to make America healthy again and where the opportunities are for investors and working people of all levels. 

LaRocco : “I wrote the book because I am lucky enough to talk to the most engaging minds in the economy.  During the crisis I started thinking to myself people have to be making money regardless of the circumstances.  In capitalism you should be able to make money during the highs and lows.  I opened up my rolodex and I realized there was a story here. 

“It wasn’t something that could be told on television in a meaningful way.  I wanted the rest of the world to get into these great minds.  It is the how and why in the strategies these leaders employ that make them so great.  To understand their secrets is so invaluable and that is what they share in the book.”

Who should read it?

LaRocco: “This book is for anyone.  From a college student, a mom and pop business owner to a corporate executive!  I think anybody who wants to be inspired and want to learn techniques on how to handle challenges should want to read this book.”

What did you learn that surprised you?

LaRocco: “There are a couple of things.  One was Richard LeFrak President of The LeFrak Organization. LeFrak is a real estate developer and by trait they are optimistic.  He said for the first time in 15 years he didn't have one new foundation in the ground. That statement screams volumes on his outlook on commercial real estate. But despite his outlook on real estate, Richard is still thriving and putting his money to work. Be it with his venture with WLR LeFrak and buying up the real estate assets of the Corus Group, to being part of a consortium and owning BankUnited. Richard isn’t standing still. He is still moving forward.

“Another thing  that surprised me is the common theme many of my contacts referred to during the interviews. The majority of them said don't get caught up in crisis. Recognize you have a problem, solve it and move on. It didn't matter what industry you were in. None of them got swallowed up in the moment and let it consume them. They had the vision to look past it and move on."

What was the overall consensus for America’s future from your experts?

LaRocco: “They were all bullish in their own way, but they were worried about the populist drum beating in Washington.  They all believe Washington should be working with business and not against it.  Wayne Huizenga set the tone of the book about Washington.  Capitalism is what we are built on and government should work *with* business; not against it."

“It isn’t that capitalism is bad.  It was the greed and arrogance that brought down our financial sector. I would also add the lack of understanding of the financial instruments as well.  In a capitalistic system, we are going to have ups and downs and you will need leaders in place to go after opportunity.  If you don’t have the right leaders then it is an opportunity lost.”

What industries based on your interviews do you think have the greatest chance of success?

LaRocco:  “I think the industries that are going to thrive are education and healthcare. Many of the jobs lost this recession will never come back.  Ron Baron said this is a great time to invest in these two sectors because many people who lost their jobs are going back to school. DeVry and Strayer Education will attract the blue collar workers for retraining.  Ken Langone and Baron are also investing into the R&D side of healthcare because of the innovative tests being created by some companies.

“I think we are going to see a change in the financial markets and I don’t mean because of the 'Volcker Rule'.  There is a dynamic trend occurring in the financial services business according to Peter Cohen and Don Marron, who are buying brokerage firms and retooling their businesses to a more client-oriented business.  It isn’t going to be about the big institutions, it is going to be about serving the individual customer.  Marron and Cohen believe in this trend so much they are putting their money behind their words.”

Are large money centered banks like Citigroup and Wells Fargo, which are really the only banks capable of providing large multi-billion dollar warehouse and credit lines, necessary for the future of America’s large corporations or should they be dismantled?

LaRocco: “I don’t think they should be dismantled.  How are you going to do it and do it right?  It sounds great in theory, but can you really do it?  What is going on in Washington right now is that you have career politicians, depending on staff research and making decisions based on that.  Everything is so inter-connected. We need to really think about the unintended consequences. The government thought Lehman was ok to fail. ”

Did anyone think the Obama administration was on the right path?

LaRocco: “Not really.  Larry Lindsey summed it up beautifully.  He said while the President is a beautiful orator he has not really developed a track record.  With Brown winning the Massachusetts Senate seat, the Administration and Congress are seeing that people are voting with their pocketbooks and pink slips. "

What does administration need to do to support the advice your experts give in the book?

LaRocco: “They need to realize tax cuts aren’t a bad thing.  Innovation can’t be forecasted.  In order to innovate you need to have incentives. Tax cuts are a great way to do that. 

“There needs to be tax cuts for research and development, as well as tax incentives for hiring people. Senator Charles Schumer and Hatch's jobs bill is a good start.   Wilbur Ross who has sat down with policy advisers to both Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi has a great idea to help spark job generation. Ross has suggested cutting the payroll costs of a new hire employee between 20-26%. The Federal government would send the company a payment equal to the total with holdings from each new employee's pay in addition to the employer contribution.

“This tax incentive would be available to companies who added to their staff since January 31, 2010. Ross uses the example of a worker making $60,000 per year. The rebate would be between $12,000 to $15,600 per job created, costing the government between $24,000 to $31,200. Comparing this to the Obama Administration's $787 billion dollar stimulus program where supposedly 3.5 million jobs were created, that means it took more than $224,000 to create a single job. And that 3.5 million jobs created has been debated around the country among economists for months so the figure could actually be higher. Government needs to be creative.”

The president is publicly encouraging banks to loan to small business, but yet you hear small business leaders saying they can’t access capital.  Why is that?

LaRocco: “Some regional bank CEOs have told me while banks are being told publicly by the President to loan small businesses money, the bank regulators are discouraging them from doing it even if it is profitable for them because they are considered "risky". The banks are stuck in the middle.”

It’s hard to predict the future, but what do you think will happen with the economy over the next 12 to 24 months?

LaRocco: “I think until the job picture is solid and the uncertainty is
over when it comes to Washington's plans on job creation, bank tax, financial regulation and healthcare the markets will be up and down. There is too much uncertainty and the markets like certainty.  Too many of the plans in Washington can affect a companies bottom line because of the costs associated with them and until businesses know what they will be facing, it is a big question mark."

Published 15 February 2010 - 0 comments (View/Post Comments)