“Entrepreneurs are, by their very natures, optimistic or they couldn't keep plugging away 24x7,” says venture capitalist Patty Abramson.  But in today’s tighter market, she adds that it must now become a more realistic optimism.  With Internet euphoria coming down to earth, what can netpreneurs learn from those that have failed or stumbled?  At this Netpreneur.org Coffee & DoughNets meeting held July 20, 2000, Abramson joined a panel of experts to offer advice in avoiding the dot.bomb minefield.

Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, Netpreneur.org or any of their affiliates, agents, officers or directors. The archive pages are provided "as is" and your use is at your own risk.

Copyright 2000, Morino Institute. All rights reserved. Edited for length and clarity.

 mary macpherson: introduction

      Good morning and welcome to Coffee & DoughNets.  This morning we have taken a timely topic, “When Startups Stop,” and we have brought together a panel of experts to talk about what they have learned that can turn that topic into “When Startups Go And Grow.”  I noticed that the cover story of the current issue of Business 2.0 is entitled “Crash and Learn.”  What we are going to talk about this morning is “Learn Not To Crash,” something more preventative than historical.  The topic was inspired by April's Coffee & DoughNets, A View From The Valley, where the panel explored some of the lessons to be learned from our friends in Silicon Valley, including conversation in the Q&A portion about failures and successes.

     We have an incredible panel today, but they are not here to talk about “dot.bombs” or to gossip about who's hot and who's not.  They are here to share experiences from their individual and professional perspectives and to morph what they have learned into practical information that netpreneurs can use today and tomorrow.  You will hear stories and anecdotes about companies and management teams and boards, markets and service providers.  Be open to this new information, and be honest with yourselves.  Scrutinize your own situations.  Although some of the lessons may not apply to you right now, the times are so unpredictable that they might come to apply later.

      Let me introduce our panel.  We could spend the whole morning on their bios, but we won't, since you can follow the links.  They are the lawyer, Mike Lincoln, Partner at Cooley Godward; the finance guy, Jon Shames, Partner at Ernst & Young; the venture capitalist, Patty Abramson, Managing Director of the Women’s Capital Growth Fund; Esther . . . well, there is no single categorization for Esther Smith, Principal at investor relations firm The Poretz Group, but today she will be playing the role of the board member; and last but not least, the entrepreneur, Jamey Harvey, CEO of iKimbo, who has just returned at 0:dark:30 from Europe, so we are glad he is here with us today.  They will each talk for a few minutes, then we'll open it up to your questions.  Let's get started by turning it over to Mike Lincoln.

mike lincoln: it’s a control thing

      Good morning.  When I think back over the last year, particularly the last three months, and try to identify the reasons that companies failed or struggled, it occurred to me that you really have to divide them into two categories.  One is the factors or reasons that you can control, the other is the factors or reasons that you can't control.

          Starting with the latter, one of the things you can't control is marketplace trends, which will often change overnight. For example, a year ago, companies were often valued based on eyeballs or users or page views¾these were the only metrics for valuation.  If you were building a company and a user base, you did exactly what the marketplace said you should do.  Today, of course, that metric is disfavored in the marketplace, and now it's revenues, sales and profitability.

          Another example is large portal deals.  If you think back to when DrKoop.com announced a large portal deal for which they paid many millions of dollars, it was viewed in the marketplace as a positive.  Today, those deals are often viewed as anchors that a company has to struggle to get out from under.  Another example, in my experience, that's changed dramatically overnight, is burn rate¾how fast you spend cash.  Just six months ago, one of the positive indicators for a company that had succeeded in raising capital was how fast it was ramping up, spending cash and building.  Today, we have moved to a cash conservation mode.  It's still important to build and ramp up quickly, but simply burning through cash is no longer necessarily a positive sign because that next round may not be right around the corner.

          Finally, the last marketplace trend over which you have no control is acceptance or commercialization.  I remember being at a board meeting five years ago for a telemedicine company.  As it turned out, that very day, on the cover of the Wall Street Journal, left column, was an article predicting that telemedicine would be a $4 billion industry by the year 2000.  The company went on to raise, as I recall, $30 million, became one of the leaders in that space and did all the right things, but the marketplace just didn't materialize.  It still hasn't completely materialized.  In their case, they were just ahead of the marketplace.

          Obviously, other factors over which you may not have control are things like the emergence of a superior technology, economic downturns, a tight labor pool or the funding of your competitors who just simply get to the money sources before you do.

          On the list of factors over which you have control, there are the obvious ones like execution, management team and technology development.  Just to quickly focus on a few, one mistake that is in your control, that many companies have made recently, is a lack of focus or trying to attack too many markets at once.  For example, if you have a five-person sales and marketing team, chances are that you are not going to succeed in attacking two or three multiple verticals with different distribution channels.  Rather than take that approach, the conventional wisdom, today, is to try to attack one vertical, succeed with that vertical, then move on to the next.

          Another example of where companies struggle or fail actually comes on the back end.  There are companies that have actually done very well, but they fail to execute when it comes to an exit strategy.  A well-publicized example of that is PointCast. Many of you will remember that a few years ago PointCast was really on fire.  It had a great viral marketing concept and, as I recall, they were offered $500 million by Rupert Murdoch’s NewsCorp.  The board rejected the offer, saying it was too low.  Within the last six months, PointCast was sold for salvage value; I think it was $7 million.  The point is, mistakes are not always made on the front end; they are also sometimes made on the back end.

          I think I'm going over my five minutes, but I'll touch on solutions and remedies for just a minute.  One is your ability to remake or reposition your company.  If you see that you are not getting traction in the marketplace, one thing you can do is be decisive and nimble.  A great example of that is SingleShop, a company that saw the B2C space was a challenge and quickly, before the market downturn, repositioned itself into more of a B2B play where it has done very, very well since.

          One problem that founders and entrepreneurs have is to have blinders on and charge full speed ahead¾ although it's also a good trait¾but not when they fail to see the point at which they need to scrap their original plan or model and move in a different direction.

          Another thing to think about, if your company is struggling, is that, if you are fifth in a three-way race, you need to consider talking to numbers one through three before it's too late.  I'm talking about the possibility that you may have to consider a merger or a combination of some sort with one of the leaders in the space.  If you think back a few years ago, for example, when drugstore.com got funded by Kleiner Perkins, a major West Coast fund, it was like dominoes-- MotherNature.com,  planetRx.com, and everybody else got funded.  That race was over.  It's not such a great space to be in today, of course, but, at the time, you could just see the winners emerge.  If you had the fifth online drug company, chances are that you needed to go talk to numbers one through three, sooner rather than later.

          The last thing on the solutions/remedies side is that, if you are struggling to raise money, consider that you might need to do one of two things.  Instead of going out to raise a $5 or $10 million dollar round, you may need to raise a modest round of $250,000 to $500,000, hit some milestones, then go back to raise a larger round later.  The second thing to consider is the possibility that you may¾just to survive¾have to seek some non-core revenue sources.  You may hate to pull people on your development team off your core mission or core competency, but, if it means revenues, you may have to go out and find a revenue source to weather the storm, then go back to your core mission later.

jon shames: five lessons learned

When Mary called me to speak about this topic, my first reaction was, “I don't know if I have any startups that have failed or stopped or anything like that recently.”  We have had some very good times lately, but I went around the office and talked to people, and we did come up with a bunch of stories.  We remember our successes a lot more than our failures. We came up with five lessons learned, and I would group them under leadership, succession, cash, revenue and exit strategy.  I want to talk briefly about each of them.

          From a leadership perspective, it's important to make sure that you, as the founder or CEO, have a complete management team.  It's very important to make sure that you have people from different backgrounds and experiences.  You must be prepared to spend a lot of time in this area building the right management team with the right chemistry and loyalty, and you need to pay for this in a lot of ways, so you shouldn't be worried about paying for the best.  As the financial guy on the panel, I think a key part of that is the CFO or controller.  In today's startup world, the CFO or controller has a lot of hats, including the admin person, the operational person, the HR person, so it's important to make sure that you hire a strong CFO.

          Also under leadership is the issue of making sure that you don't continue to have any sort of tunnel vision.  You need to surround yourself with people who are independent and dispassionate about your business.  It may not be your board of directors.  It may be your board of advisors; it may be your service providers; it may be some friends of yours, but you need people who are willing to speak.  Many of you have heard Mario Morino talk about Ego & Greed.  It's important to get people outside of that who can tell you when you are developing those traits, and be able to change.  As Mike said, it's important to be nimble and quick, to be able to make that management team change from a leadership perspective.

          The second point is succession, and this is really about two areas.  The first is that a lot of founders believe they can take a company from beginning to end.  Our experience has been that this is not the case.  It's a very emotional issue, and you and your investors should deal with it up front, whether you, as the founder, can take this company from where you are today to some point in the future.  Have a plan for when you will go out and hire a CEO or COO.  If you look at some of the successful companies in this area, Blackboard or Cidera, for example, have strong founders with a lot of skills, but they went out and hired CEOs.  Those CEOs run the day-to-day operations, even though the founders continue to be very, very strong influences on the company.  I would encourage you to think about that, because most founders don't make it to the IPO as the key person or sole person running the company.  In addition, you will go through many different management changes, and that's very healthy.  If you take a look at a company like America Online, sure, Steve Case has been around from day one, but Bob Pittman came in several years ago, and he has brought a different perspective into the company.  That's actually very, very healthy.  Over the years, they have had a lot of people leave, a lot of good people, and they have replaced those people with new generations of management who have fresh ideas.  That's one of the reasons why it is successful today.

          A third point is cash.  We have heard from a lot of people that most companies underestimate the amount of cash they will need.  The rule of thumb is: double the amount of money you think you will have to spend to get where you want to go, and double the amount of time you think it will take to raise it.  As a result, you must focus on your cash burn rate and be very disciplined about it.  Make sure that you have a budget, and make sure that you stick to it.  You really have to watch your pennies and plan well in advance for when you are going to need cash.  As Mike mentioned, we are seeing some companies that should go for a smaller round, but we are also seeing some successful companies raising more money because the VCs are saying, “You say you needed $10 million, but we think you need $20 million, and we would like to give you $20 million.”  While it doesn't happen that often, and it's a great story, it's probably an indication that people recognize it's an important area you need to stay on top of.

          The fourth area is revenues.  Many organizations, especially in the last year, have gotten enamored with product development¾getting a wonderful product and spending a lot of time fixing it.  As Mike said, spending a lot of time spending money.  That's changed now.  Revenues cure all ills, and, from that point of view, you should make sure that your company is market-focused, that you have the appropriate sales team right away and that you look to make revenues as quickly as possible.  I will tell you, as the accountant on the panel, that the revenue recognition issue is a big one, today, so make sure that the revenues you think are revenues, actually are revenues.  The accounting rules are very complicated.  Some people find them to be almost unreasonable, but they are the rules.  You have to listen to your advisors on that, and I encourage you to do so early on in the business.  We have had too many clients who said that they had $10 million in revenues, but, when we come in, it’s actually $2 million.  That's not a good sign.  One of the guys that works for me has done this about eight times in the past year.  I call him The Grim Reaper, but, unfortunately, that's just the way it is.  People understand that more, and I would encourage you, especially if you are a software company, to spend a lot of time in this area.  It is an organization-wide issue, and it's not just an accounting issue.

          The last item is exit strategy.  You really must be disciplined and focused on your liquidity event.  Your investors are there to make money.  They want a liquidity event, but they don't want a 10-year liquidity event; they want something pretty soon.  Having said that, in most cases the liquidity event is not an IPO.  You might want to think it is, and, in fact, we tell our clients that the IPO process begins today, but that's really to make sure that they understand that in the future there will be scrutiny over your operations, either from a third party who is buying your company or from the Securities & Exchange Commission and others involved with an IPO.  So, I encourage you to be very disciplined and focus on documenting things.  Our new clients still tell us that they are going public about 80% of the time.  Even in today's environment, half of them are still telling us that they are going to go public the next year.  We just don't think that's realistic anymore.  While you can plan for that, don't be too aggressive in your expectations.

[continued]

Go to: Summary | Transcript | Video | Speakers |  Resources | Back to Archive