patty abramson: big surprises,
every single day
First of all, I love being called an
expert because the truth of it is, none of us are experts. Everybody is living through this market for
the first time. What we are trying to
do is simply stay a little bit ahead of you so that we can sit here on this
panel. We are getting these big
surprises every single day. For me, as
a VC, this was a wonderful exercise to go back and give some thought to our
portfolio companies and the companies we are looking to fund, and to think
about what we are thinking about as people say the party is over, the spigot
has been turned off and you see dot.coms imploding.
have discovered, this year, that some businesses flop. Some of us thought that was not going to be
the case, that all we needed to do was give them more money. This is not really a surprise. Selling goods for less than they cost is not
really sustainable. Many of us
questioned that assertion before, but, somehow, we kept throwing money at these
companies in the hopes that they were going to make it. In some way, all of this turmoil is part of
the natural shakeout of marginal Internet companies, many of which would never
have been funded without the overheated IPO market and the push towards going
the entrepreneur's perspective, when it comes to negotiating financing, the balance
of power has shifted a bit back to the VCs.
What we saw before were very high valuations set by the entrepreneur;
what we are seeing now is a move towards VCs saying here’s what they are
willing to pay. It's becoming a buyer's
market, but this doesn't mean there is not money available. As one entrepreneur said, it has gone from
shooting fish in a barrel to having to do a considerable amount of work to
raise your money.
a VC perspective, the question we are faced with is, which of our companies do
we let die and which ones do we plow more money into? Truth be told, all of us have companies we are looking at with
that in mind. We have to see our funds
at the top tier companies, and, therefore, we are going to make some tough
decisions over the next short period of time.
Being an entrepreneur today is not for the faint of heart. It's not just, “Let's go out and start a
business and we are sure to make it.”
want to look at the signs, for us, that something is wrong and the factors that
contribute to failure; or, looking at it from a positive angle, what are we
looking for in this market?
you asked a VC about his or her criteria for investing, all of us would have
said, “Management. Management. Management.” We continue to say it today, in fact, because it has never been
truer. Building a company is about
leadership, and that leadership is based on three factors.
it is now leadership grounded in realism.
This means realistic optimism.
Entrepreneurs are, by their very natures, optimistic or they couldn't
keep plugging away 24x7. They are also
optimistic¾some people would say that they are blind¾about their traffic estimates, their
revenue models and the pace of the deals that they think they are going to
close. Successful entrepreneurs must
continue to be optimistic, but they also need to be realistic. They need to begin to see the glass as half
empty. We are now beginning to hold
their feet to the fire, which we really weren't doing before. We are beginning
to ask, “What could go wrong? What
happens if this doesn't work? What if
you don't make these estimates?” We are
beginning to decide those things today, not tomorrow. If you don't make your estimates, if the traffic isn't what you
say it's going to be, if you don't close these deals, we begin to say, “Let's
not come back to you next month or the month after that; let's come back next
week and figure out what we are going to do about it.”
the past, the answer to all of these problems has been marketing dollars¾if you get them there, they are going to
buy. Obviously, that is not true. The entrepreneur who keeps saying, “Traffic
is going to grow if we just fund more marketing or sign this partnership
agreement,” is not going to build confidence.
The other piece of that is that affiliations and partnerships do not do
anything in and of themselves. Deals
need to be cut contingent on what they will achieve. We have a company in Boston that was very happy because they
signed a very large deal with AOL. They
paid millions of dollars for an exclusive in AOL’s small business market. They didn't realize that AOL still had the
ability to put competitive advertising on the site and to bring other people on
to sell products and services that in some way infringed on where this company
was. The assumption that this was going
to drive enormous amounts of traffic and sales didn't prove to be true. Entrepreneurs are not spending nearly enough
time on negotiating those contracts or understanding what they say and what is
being provided. This is a time to bring
in a lawyer to look at them with you, whether it's in-house or outside counsel.
other piece about leadership is that it needs to be flexible. The market is changing so fast that
leadership needs to change on a dime. A
company's inability to move from B2C to another model meant sure failure. It means the necessity to move on all
fronts. While I certainly agree with
Mike that you can't be moving everyplace at the same time, you need to look at
what the market is saying. Don't be
positive that your model is right, and don't ignore what other people are
doing. Don't have the blinders on. If there are other people in your space and
they are doing something differently, you ought to know what that is. Be out there. One company in our portfolio, VIPdesk.com,
built their model thinking about eCommerce as a very, very crucial piece. They spent a lot of money doing that in
their early funding, but they quickly found out that the amount of money being
transacted in eCommerce was incidental to what the business needed to do. They were quick enough to drop it so that it
didn't mean spending additional months and additional people pushing it as
their revenue model. That's a flexibility
that you need to look for.
other piece of leadership is building a team as quickly as possible. While we know that it takes the next level
of funding to really build out the management team, right from the outset you
need to think about that team. Think
about a team of six, seven or eight people from a governing perspective. This could be three or four inside the
company and several others outside the company. Get a board sooner rather than later. Get your advisors on deck, because you need these people to help
you execute on all fronts. We used to
be willing to wait for later rounds, but you need to make sure that you have
strategic people in place who are going to help you close the deals, raise the
next round and build the team.
a little bit of advice to entrepreneurs. This is the time to bring in smart
money, not just money. Of course,
that's easy for me to say sitting here when I think that we are smart money,
and you are sitting there hoping to just get money, but you have to think about
what those funders bring to the table.
Are they going to work with you?
Are they going to help you build the team? Are they going to help you get access? In some ways, from your perspective, you say, “Gee, I know what
I'm doing, so I just want the money.
Tell these people to shut up.” That is not what you need. You
need help building the team and you need help on the advisory board level.
summary, be flexible, watch the market and watch the competition. Listen to your advisors since they often
know quite a lot. Design realistic
revenue models, sooner, rather than later, and build to profitability. Think about an exit strategy sooner, rather
than later. The answer is probably not
esther smith: the other p2p
I also believe that there are multiple
exit strategies but, as an old philosophy major, I have a canon about acting as
if you are going to go public, whether you actually do so or not. That way you won't screw up. That's just an overriding word of wisdom.
was thinking, anecdotally, about some of the issues that we are supposed to
discuss today. One of the big issues is
the personality of the CEO. All CEOs
have to have a driving personality that's reflected either in vision or
charisma¾the ability to attract people to the idea
and to the company. This is great, and
you have to use it positively. What
happens, sometimes, in thinking about people who weren't entirely successful,
is that it's dangerous to get sucked up in the idea that publicity for you is
necessarily good for the company. If
the publicity about you is about your company, that's great for the
company. If you just become a
personality with no real tether to your business vision or your business model,
in the long run, you are undercutting your own position.
other characteristic that I think is critically important is flexibility. An old friend of mine, Dennis Hayes, is the
guy who invented the modem and one of the great business disaster stories that
ever existed. He built this fabulous
technology and created the de facto standard.
He sued the world and won.
Meanwhile, continuing to build his company, he never established any
financial relationships because his company was doing so well and he wanted to
have total control. He didn't want to
be bothered with the “vulture capitalists” or even the banks except to have
automatic deposit for his payroll. When
hyper-growth hit, when everybody wanted a dialup modem and if you weren't
buying a Hayes you were buying somebody who had licensed Hayes technology, they
couldn't keep up with it. All of a
sudden, he had no place to go for working capital because he hadn't made the
make a long story short, Dennis, who had been extremely arrogant in every
respect, went bankrupt. What was really
bad was that he put the company back together, dug them out of bankruptcy,
started over again and went bankrupt again.
At some point, if he had given away a little bit of the control and the
equity, if he had created some relationships and thought he needed some help,
that might not have happened. He is a
great visionary and a fabulous guy, but it can happen to you when you are
small, and it can also happen to you when you are big.
let's go beyond that. It's very
difficult in an early stage company to do much in the way of metrics that will
make much of an impression on someone like Jon. I would say, however, that I do think any kind of cash is good,
whether it shows up as revenues or not, especially at an early stage. You have to create alternative metrics, and
that is how page views and such got to be important¾they are a way of looking at things. You need metrics that are going to reflect
whether what you are doing is working or not, and you might want to try
multiple metrics. When one of my
clients, VerticalNet, first went public
it was not on a Path to Profitability¾that’s the other kind of P2P which I'll
talk about in a minute¾but that was
in the early days when no one was exactly sure what was going to show
performance. Clearly, revenue growth
shows that, but they were at such an early revenue stage in the first couple of
quarters that it was hard to get any real visibility on where that was going. We created a number of other measures, and
any company, especially in the Internet space, needs some of this. If you are in a situation where some sort of
adoption has to occur to validate the fact that you are on to something, you
had better have a way to measure it and you had better be willing to look at
the measures. This is one of the great
things about viral marketing, vis-à-vis other environments. If it's working, man, you know it, and you
usually know it pretty fast.
being the case, if you can get the money, I think it's okay not to have profits
if you have a Path to Profitability. Everybody needs to come up with this
P2P. It buys you a lot of
credibility. It buys you credibility as
a public company if you can demonstrate that you are on the path and each
quarter you hit the milestone that you set out on the path, and it's also good
for a private company, as well.
other thing that I think is a symptom of lack of adequate metrics, and it’s
something that boards can use as a window on performance, is how are you doing
not just closing on your deals, but maximizing them. I couldn't agree more with the comment Patty made that you have
to put resources into managing a relationship.
It's not just enough to say, “Oh, I got a deal with Yahoo!.” You have to have somebody who is there every day, every week making that
relationship work. If you are closing
deals and nothing is happening, if you hit a road bump and you say you have the
next great deal on the horizon, that’s a big red flag.
are my anecdotal thoughts of the morning, and I'm going to turn it over to