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the risks and rewards of entrepreneurship
taking the leap

page four of four | previous page

mario morino: a market realignment

First, thanks to everybody for being here.  It continues to amaze me that this keeps going on like it is, and it's because of you.

          I want to thank Tom.  I don't think his talk was at all pessimistic.  I think it was remarkably realistic, and what you heard was very personal and very intimate.  I could feel so much of what you went through because I lived it myself in a different era.  It was stimulating but remarkably pragmatic.  You should heed what Tom said because it's going to get more like that.  That isn’t bad, it isn't bad at all.

          We are experiencing what we politely call a “realignment.”  The realignment is going to continue and it's going to get tougher.  That isn't bad, it's needed.  Things have been a joke, a fantasy.  There are people who started businesses in the last five years that should never have been allowed to open their doors.  It means that you are going to have to do your homework better, but the chance of succeeding is still remarkably high.

          What's taking place today?  The wonderful theory that eyeball aggregation was the key to success is baloney.  The key to success is making money.  We are beginning to realize that again.  Nothing changes¾at the end of the day, you have to make money.  That's the game.

          Traditional brands are asserting themselves. The theory that the online brand was going to prevail is not holding up.  Traditional brands, if they own the space, are still holding that space today. is clearly an aberration.  The brick and mortar has awakened.  There are thousands of organizations out there today with the normal intellectual assets, but do they know how to deploy them?  Not totally, not even nearly.  Are there people very anxious to deploy it for them?  You better believe it.  Do they have an advantage once they deploy?  Yes, an enormous advantage.

          As anybody from the Internet world knows, in a wired society large organizations begin to disaggregate.  We are beginning to see that take place.  When disaggregation take place, the assets of the major corporations and organizations of the world get broken up.  Each of those becomes business opportunities, and it's a staggering opportunity.  It's why the real innovation of the incubators is not what you see today.  There is a stunning need to work with the General Motors, the Sears, the Mercks, the Deutsche Bancs and the Barclays of the world because they are disaggregating.  They need talent, they need relationships, they need business models.  You are seeing companies like General Atlantic Partners, CMGI and SoftBank beginning to create formation centers that will work with those people to do three things: aggregate talent very rapidly, aggregate relationships very rapidly and help them develop new business models.  We are in the middle of a major economic transformation on the high end with stunning implications that will switch consulting firms from the fee-based retainer model to equity-based compensation structures.  It is a remarkably profound issue that we will see unfold in the next five years.  It opens up tremendous opportunities for you, because they will create cottage industries and spin-offs.  This has never been a short-term window.  The people who thought it was short-term were absolutely myopic.  We are in a transformation period, but there is a 15-year pattern ahead of us, minimum.  With bioscience it could be a 25-year window.  This is an enduring movement, not a transient pop.  The mania we lived through recently, that was a pop.  As Tom, said, there is a lot of strength underneath those covers.  It's a strength that dwarfs what we saw in the '70s, '80s, '90s and the decades past.

          One reason is that there is a massive amount of money and it's not slowing down.  The money available is actually going up.  The interesting part is that we have yet to see the market efficiency issue going after the private placement markets, the e-offerings of the world.  Those things have yet to evolve and take their effect.  Once again, that will channel new capital bases into emerging businesses.  That is all something that will play out in the next five to eight years and will put even more money into the emerging element of the business sector.


          There is a macroeconomic factor going on that we in the United States haven't totally absorbed yet and is not fully understood globally.  I am not trying to say that I understand it, but we have seen a fundamental change.  It probably started in the early '80s when entrepreneurship became a driver to the economy.  Prior to the '80s, this was not so much true in our economy.  The personal computer began to kick that model off, and the Net absolutely accelerated its movement.  When you realize that, the opportunity for individuals changes dramatically.  That's one of the self-empowerment points about taking “the leap.”  It's a very real thing today, and it’s open to many more people.

          The world is not over; it's just that sanity is coming back to the game.  Tom mentioned Ted Leonsis, who I think is brilliant and the ultimate comic at the same time.  He led off the Mid-Atlantic Venture Association’s conference last year and said that we need to establish “the moron hall of fame” for venture capital firms.  He was dead serious and, when one sees some of the deals that are funded, I would second him.

          Some one asked about advisory boards.  You need to get the best, but Tom is right, people just don't know what to tell you.  Sometimes, the best people are even making guesses.  The train is moving, but it is still unknown.  Everything goes back to the point Tom made¾know your industry cold.  What is absolutely appalling is to watch somebody come in with a business plan for how they are going to change an industry.  You ask them what their background is and they have none in that field.  None!  That means they have no concept of the cultures they are going to deal with or the channels they are going to have to operate.  Yes, certain channels will get disintermediated, but other channels will dominate you.  You have to know the market intimately to make those calls.  When a venture person is talking to you, he or she wants to know your background in order to know how much of your knowledge is based on a real, pragmatic understanding of the space you are trying to conquer.  That's what they bet on, and it's part of what you go through.

          Another healthy thing that's taking place is that we have to stop the concept of “wealth entitlement” that has set in over the last four years.  People go into business thinking that they should win.  It doesn't work that way.  You have to earn it.  We have allowed people get rich without earning it.  That's a mistake, because then they have no appreciation of what they’ve achieved, and there is no way they can balance or deal with this issue.


          When Tom talked about being two years in the desert to get an architecture in place and content in place, what he created was barriers to entry for competition.  Many people have brought me business plans where the model shows them going out the door in five or six months.  That means anybody else with a similar brain can come out the door in the same amount of time, probably less because you did it the first time.  Your perishability, your exposure is very high.  Where are your barriers to entry?  All the myths are gone now, folks.  Forget the time to entry, forget eyeball aggregation, it's about making money again, and you are going to hear that more and more.  I still think that we are going to see a lot more unraveling, and that isn't bad.  At the end of the day, it's going to be very good because it will allow the people with the best skills to succeed, as they always have in the industry.

          Tom talked about pitching to VCs.  They may have been asking, “Where is the nut?” but they loved your passion.  When you are selling you have to have the pragmatics at the table, but you also have to have the passion.  Tom clearly demonstrates that.  When you go in for those meetings they want to see the plan, but they know that the plan is going to change a thousand times before you get out the door.  They are looking for your stamina and intestinal fortitude.  You are going to find walls and rivers and gaps and chasms that you have to somehow get over and around.  They are betting on you to overcome the obstacles, especially the ones you can't even see today.  I still put a very high value on that passion and commitment.

          I thought Tom had a very insightful way of talking about the risk.  At a couple of the mega-events we talked about this, and perhaps I turned a few people off, but I'll risk doing it again.  You're betting your life.  I mean that, and don't kid yourself.  When you create a company, you are making choices.  “Mom & Pop” firms are fine, just be honest about what you are creating.  Don't delude yourself.  You may create that kind of business because you want to be close to your children or to get out of the traffic jams or for many other reasons.  You can make a very good living and be very proud of what you do.  That's fine.  There are people who create “quality of life” companies.  That's a step above the Mom & Pops, building a business that has more employees and such, but not going for the gazelle-style growth or an IPO.  You just want to get the business and draw a good income out of it.  You will get a better balance in your life over time, but you are still going to work your buns off.


          Then there is the third category of businesses, the ones that say, “I'm playing in the big leagues!”  If that's the case, then put everything else aside or you are going to get your clock cleaned.  That's the choice you are going to make.  If you are going to make that leap, find out who you are going to play against because Charles Wang will eat you alive, Bill Gates will eat you alive, Larry Ellison will eat you alive.  You name them, they will eat you alive.  They will leave no survivors, so you have to be ready for it and you have to think the same way¾you don't want to leave any survivors either.  You want to be a predator and you are going to dominate your industry.  That's your choice, and that's what the venture person is looking for you to convey and accomplish.  That's risk.  If you are sitting with three kids at home, you’d better believe that's risk.  I will always remember a very powerful moment back in the old Morino Associates days.  A good friend of mine had three kids at home and I was pushing him to get a deliverable out the door.  At the time, I didn't have kids at home.  Sometimes I look back on this, not necessarily with pride, but I made the right business decision, fortunately.  He was mad at me because I made a comment about how the productivity of some people who weren't married was much higher.  He asked how could I make that comment¾by the way, I was almost godfather to his kids.  I said, “I'm just telling you what's straight.  The fact that you have a family is your choice and you should be proud of it, but don't fault the other person who is here 110 hours with me.  You can't have your cake and eat it.  You can do one or the other.”  It's a hard mixture, and I applaud anybody who gets the balance.  I didn't get it.  I screwed up relationships in the process.  Many people do.  That's a choice you have to make consciously, and it’s critical that you negotiate with your spouse.  We would do product releases and our teams would go home and negotiate with their spouses that they weren't going to be home much for the next six months.  That actually saved some marriages because then the spouses knew and understood.  It gets hot if you are going to be a gazelle and play that game.  When you get the venture guys at the table, it's only a first step.

          Somebody asked, “Does it get easier?”  It never gets easier, it always gets harder because all the pressure keeps mounting. When you get a lot of shareholders, it gets harder.  Ask Michael Saylor of MicroStrategy how hard it is right now.  That's not a knock, I'm just being honest.  It's a lot harder for him today than it was one year ago, and it could still get harder.  Ask Bill Gates how hard it is today.  It always gets harder.  That's the irony.  You are always proving yourself because if you’re not, it means that you are stuck in place.  If you are moving forward, you are always on new terrain.  You have to prove yourself to larger clients, to larger investors, to analysts, to bigger companies, to bigger media.  You are always proving yourself in the process.

          Tom made a comment about intolerance for nonbelievers that I think is very important, both the good and bad.  It’s one of the keys to success, but I would phrase it differently¾not to be intolerant of nonbelievers, but to be stubborn with them.  Always heed what they are telling you because they are probably telling you something you should hear.  You can't let it distract you, you can't let it take you off target, but don't ignore it.  When you ignore it, you have allowed arrogance to take over.  Arrogance is being totally intolerant of any other opinion, and that will undermine you every time.  I agree that you want to be obsessed in order to drive past obstacles, but when people start telling you something else is out there, listen.  You are looking at the king of stubbornness here.  I'll go along thinking I'm right, I'm right, I'm right, and, finally, when the eighth person tells me, “Hey, you know, there could be a flaw here,” well, it begins to sink in after some time.  You have to be open, and it's a very hard balance because you're so committed to your own vision.

          Taking the leap is a tremendously difficult decision depending on where you are in your life. When you have the opportunity to make the leap and you have a dream, you have to do it because you don't want to wake up 20 or 30 years from now and say, “If only I had done it.”  Woulda, coulda, shoulda doesn't count.  Did does.  In your heart, if you want to do something and you have the opportunity, take the leap.  Thank you.


the audience: q&a with mario morino

Q:  Do you have any comments about seeking corporate strategic partners early on versus the venture capital route?

Mr. Morino:  Well, they are not necessarily exclusive, first of all.

          I don't think there's a single answer to that question.  I'm not trying to be evasive, but so much depends on the industry you are in and more.  Strategic partners can be risky.  You have to choose them carefully because they basically inhibit valuation over time.  If you are in the software industry and a software firm buys into you, you've basically cut your valuation.  End of discussion, that's it.  It's that cold and brutal.  It doesn't mean it's wrong, however.  When Microsoft bought into UUNET, it was a very positive move for UUNET at the time.  The most positive part wasn't Microsoft's ownership, it was the fact that Microsoft was paying for a big pipe that UUNET was building which they could resell a few times and which had tremendous margins for them.  That was a great example, but you have to be very careful with strategic relationships early in the cycle.  I'm not talking about distribution deals; I'm talking about when a company is really in your knickers with you.

          As far as venture money, you've heard me say that going after smart money is the only play you make.  The trouble is that when you are small, getting the smart guy at the table is very difficult.  What you are seeing in all the venture houses today is that they have gone stage independent.  VCs that have always considered themselves downstream players now define themselves as stage independent because you don't know where the opportunity is really going to come from today.

          When you see the big kahunas going after early stage investments, what's deceiving is that they're not really early stage investments.  It's often a person who's probably done it once or twice before and has a remarkable track record or industry knowledge.  It's not a shoo-in, but it's far different than the person coming out of the box and trying to do something for the first time.  I would always go for the smart investor, given a choice, but they are hard to get early in the cycle, which means that you have to make sure the investors you bring in early won't preclude you from getting the very strategic investor on your second or third round.  I'm a believer that you always bring your strategic investor in before your IPO.  Some of the mistakes we've seen in this region might have been avoided had they been at the table.


Q:  What are some of the Web’s greatest weaknesses and vulnerabilities that are making it difficult for folks such as us to jump in and actually make money now?

Mr. Morino:  Again, that’s a hard thing to answer without more specificity.  I'll come back to the point that it's all about basics.  We had a group of very enthusiastic people come through.  They talked about a specific business that actually sounded good and you wanted to work with them in the worst way.  They left, and one of the guys in the room, a truly august investor in this region, simply looked at everybody and said, “Lousy market, lousy margins.”  End of discussion.  That was it.  Great idea, lousy market, lousy margins.  You were not working with anything.

          You have to go back and look at fundamentals.  We have seen businesses go out the door on assumptions about margins where all you had to do was look at the industry to know they weren't real.  What were they thinking when they came up with this idea?  Fundamentals are key, and we lost track of fundamentals.  I'm not talking about in-depth market research or business plans, but know your business model.  Know how you are going to make money.  It's critical.  Know the milestones, because that's what you are going to be judged on.

          The betting on the come is not over yet, but whether it's 6 or 12 or 18 months out, it's going to happen.  The game is distribution; that's the big change. Tom brought up some very insightful comments about understanding the nature of distribution channels.  I think that's the big mistakes you have seen in some of the models today and why you are seeing brick and mortar come back on the scene again.  They own some of the channels and you're not going to disintermediate some of them.  I don't know if this fits with your thoughts, Tom, but I have always tried to use a balance of several different rules, especially that which is efficiency versus that which is experiential.  The experiential thing is very difficult to do online, but the efficiency thing is being done very well online.  To paraphrase Bob Pittman of AOL, when you take something that someone does repeatedly and make it very simple to do, then you have a winner.  We've just lost focus on fundamentals, and we have to come back to them.  Sorry to be that boring with that answer.

Q:  As an entrepreneur, how do you draw the line between being overly aggressive when trying to get in front of someone and showing real commitment by pursuing them time and time again?


Mr. Morino:  That's a great question.  It's the art of salesmanship.  You don't want to give up, but you have to be creative in how you approach it.  You don't keep going back to the same well over and over again because that just wears out.  It probably wears out about the second time, actually, maybe the third.  Here’s something that was one of the most creative things I ever saw.  One of my best friends was a sales guy trying to land the MCI account but they could never get through to the CEO, Bert Roberts.  He snuck into the building and hid in the executive washroom, knowing that sometime during the day Roberts would have to make a visit.  Guess what?  He closed MCI.  That's creative marketing.

          There is one person I corresponded continuously whom, frankly, I should have cut off long ago.  Why I continue talking to him, I'm still not sure.  I've tried to convey to him that he's callous, he is rude, he turns off the people I introduce him to.  I keep trying to convey that to him.  There are people who are flat-out obnoxious, and you politely deal with them because that's part of your job.

          Your communication skills in selling your business are absolutely crucial¾picking the time to make your pitch, reading your audience, doing something unique, listening to them.  Ask them what they are trying to do.  You get people coming in who don't even want to take the time to ask your name.  They start giving you the pitch before you’re ready to hear it.  That person has already blown the deal.  He could have the biggest business idea on the table and now no one is listening to him.  There is an issue of picking your time.

          To answer your question, it's a case of salesmanship, opportune timing and perseverance.  A good VC will always respect perseverance if it's properly couched.  They actually want to see it.  Many times I purposely throw the idea back at a person because I want to see what he or she does.  That's not unusual with a venture capitalist.  Often the rejections you get are not rejections, they want to see what you do with it.

Ms. McPherson:  Thanks very much, Mario and Tom, and thank you, everyone, for coming.

Page four of four | End


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