jamey harvey: the moment of opportunity
I'm curious. How many people here are either CEOs at startups or founders at
startups? Can you raise your
hands? [It is nearly the whole group of over 300 people.] I'm going to talk directly to you. Everybody else can feel included anyway,
because I'm sure you'll start a company sometime if you're hanging out here.
iKimbo is the third company I have started. I
started an interactive comic book/CD-ROM company in Mountain View, California,
and did that for two and a half years, then I started a company called Digital Addiction in Laurel,
Maryland, which did online game distribution technologies. iKimbo is a new platform for group
communication that we are delivering to companies so that they can let their
customers communicate with each other P2P¾Peer to Peer.
Somebody was laughing before, asking how long we have been calling
ourselves a P2P company, “Ever since that article came out in The
Washington Post?” I said, “Yes,
we have only been saying it for three days, but we have been building it for a
year.” So, there you go. We are going to be one of those “path to
want to talk a little bit about what the job of a CEO is. I realize I have a vastly different
perspective than anybody here on what we are talking about today. At every
company I have started, there has been a moment where you realize that what you
are doing isn't working¾every company, including the one I'm in now. That moment is the moment of greatest
opportunity an entrepreneur can ever have.
It is in that moment when you get to recreate yourself. You get to see what the new opportunity is
because, when you start a company, you are projecting yourself into the
future. You had better be projecting
yourself into the future because, if you are dealing with the market that is
here today, you have already lost; you are already starting the wrong
company. You need to be starting a
company that will be relevant one year, two years, three years from now, so ask
yourself before you get started: “Is what I'm doing a fad?” If it is, you have already lost.
goes to what Mike was saying, that there are things which are out of your
control. Yes, the marketplace is out of
your control, but, if you are the CEO of a high-tech startup, it is your job to
get it right. Bottom line, you are
accountable for getting it right. You
are accountable for making sure that the business you build is relevant to the
marketplace you are addressing. It
doesn't matter if the market changes; it's your job to get it right. You always need to be out there a year, two
years in the future asking, “What's going to happen next? What is the next trend? What are we doing wrong?” Constantly cycle in your own doubt, adjust
the plan and communicate it to your team in a way that makes a difference.
things to avoid. When you get to that
moment when the company needs to transform, you need a good relationship with
your shareholders. Your other job as a
CEO is to create value for your shareholders.
At the end of the day, that is the metric that you will be measured on
for your success¾they bought
at 25 cents a share and sold at $5 a share.
Okay, base hit. Right? If you are growing the value of the company
for the shareholders, you are succeeding; if you are not, you are failing. There are moments in any company's history
when it's growing and moments when it's tapping out. You have to be profoundly aware and realistic about which is
happening, and you must adjust your plan to succeed. It's very important to be . . . two-faced would be the wrong word
. . . let’s say “of two minds” at the same time. You must be able to be optimistic and realistic at the same
time. The key to having a good
relationship with your shareholders is not to mislead them. Do not get all airy-fairy with your
shareholders in your board meetings¾ “Oh, it's great!
Oh, we have this deal coming!
Oh, look at our projections!” They see right through it. They
have sat on boards before. They have
been in train wrecks. Bring your doubts
and your fears to your board meetings.
Partner with the people who have money in your company. Depend on them. When they call and ask you how things are going, tell them the
truth. Ask them for help. If you do that, they will back you when you
go to make this transition. You don't
want to get caught in a situation where you have to recreate the company and
they all look at you and say, “We don't believe you anymore.”
is a very practical lesson I have learned.
When you get to that moment when you intend to recreate your company,
it's just as easy to build a company that is going after a huge market as it is
to build a company that's going after a small market. The truth of the matter is, it took just as much work to grow to
35 people and build a software product that addresses a $100 billion market,
which is what iKimbo is doing, as it took to grow a company that was addressing
a $1.6 billion market, which is what Digital Addiction is doing. The big difference is that you can get the
second company funded, but you can't get the first company funded. It's that simple. What we tend to do, as entrepreneurs, is go after the
opportunities that are easy to recognize, and those tend to be smaller opportunities
than the ones that change the world.
you get to that moment when you are recreating yourself, you need a good
relationship with your shareholders; you need to be able to present the public
face while adjusting in the private face; and the other thing you need is
cash. If you are running out of money
at the moment of the transition, you will die.
Even if you don't die, you will become one of the walking dead, one of
those companies that's going nowhere.
Here’s a couple of stories. It's
gotten progressively better for me. You
do learn, and that's a big relief to me.
first company built interactive comic books.
Originally, we were writing original comic books on CD-ROM and
distributing them worldwide. The first
order came in and we made $400,000 having only spent $100,000 to develop the
title. We cranked out another one and
we made $20,000 on the second order. We
said, “Uh-oh.” That's the moment of
truth, when the business seems great, but you know it's just not going to work
doing what you are doing. I'll give the
CEO of Inverse, Inc. a lot of
credit. He saw it. I came to him with an alternative and he
jumped on it. We implemented it. We went out and licensed Superman, Batman
and The Tick. We changed the model and
started delivering the comic books into K-Mart
and Wal-Mart instead of software
stores. We went very, very low-end
consumer, highly branded comic books, and then we raised a round of financing
from very, very dumb money when we were running on fumes. The very, very dumb money came and said,
“Well, this is fine. I know you need
the money to make payroll next week. We
have added an extra term to the deal.
You have to give us all of your technology, all of your patent applications
and the software engines. All of that
belongs to us.” We were out of
money. They took the deal and the
company was dead. It was completely
unfundable after that.
it's your job to get it right. If you
are running out of money and trying to restart the company, it means you made a
mistake and you will suffer the consequences.
Your employees and shareholders will suffer the consequences. You need to be making those transitions when
you have enough cash in the bank for a year.
Digital Addiction we had a much better story, but it had its bumps as
well. We brought out the first game and
the business model just sang. One out
of five people who downloaded the software bought, and they were buying $70
worth of virtual collectible cards.
Nothing. They were paying $70
for nothing. It was so beautiful. Then they lived on our site and never
left. The name Digital Addiction was
completely appropriate, but we couldn't drive enough downloads and we had no
money for marketing, so we created this new viral marketing technology to take
that business model and move it everywhere.
When we started talking to investors about it they said, “This new
marketing technology is awesome; we want to fund that. Why don't you forget about this game thing?” That's the moment of opportunity. You are making the transition. What you did before didn't work. It is an opportunity because that's the
moment when you can recreate yourself.
I did wrong was that I took nine months of hemming and hawing before I made the
split. That has iKimbo coming to market
nine months later than it should have, and it made life very difficult for
everybody at Digital Addiction for nine months while we were essentially
straddling two strategies. Make the
decision. Make the change. Live with the consequences. It's your job to get it right.
it worked out, Digital Addiction is doing great as a game company. I expect that the investors in that company
will do just fine. iKimbo is singing
along. You need to be decisive at the
moment when you recreate yourself. At
iKimbo, we have been going through that over the past six weeks. We built this incredible system for
delivering service; we brought it out and found that there was a lot of
interest. I started talking to companies
about partnering, and every one of them said to me, “We don't want a piece of
this, we want the whole thing. The
system you built is great. We can see
how your business is going to be awesome, but we want that business, we don't
want a little corner of it.” We banged
up against them and we kept saying, “Oh, man, this isn't working right.” Then, one day, my partner Eric walked in and
we looked at each other and said, “Heck, let's sell it to them. Give them what they want. We already have it built, we have our first
couple of beta clients signed up. They
are going to come and take the system and distribute it all over the world.”
said to somebody this morning that it's like being shot out of a rocket, the
moment you make that transition from what doesn't work to the new opportunity
you create out of the barriers you hit.
I truly believe that the moment when you realize that what you are doing
isn't working is the moment to seize. It can be painful. It can be scary. There are people around to support you, if you are doing it
right. . you have a team, you have a board and you have advisors who can
help you. Do not hesitate because
things move very fast in this world.
the audience: q&a
MacPherson: Thanks, Jamey, for sharing those real
experiences and to the panel for their insights. We are now going to take questions
Mr. Kayatin: My name is Justin Kayatin with microCreditCard.com. My startup, which provides a number of
different services for eCommerce merchants, recently completed seed funding and
we are burning through our cash at a fairly rapid rate. As we go out for more money, should our
messaging focus on all of the services we provide or on the one of paramount
Harvey: That’s hard to say without knowing all that
you provide, but the general answer is that you should see how it works. I'm a big believer that when you start
talking to investors, you tell them a story.
Start with a couple that aren't that important and listen to what you
hear from them. Write it down and go
back. Rework your story and tune it to
what the investors are looking for. Actually, what you want to do is research
each VC to find out what they are interested in, then put a slant on it that
works for the VC you are talking to.
Smith: It's very important to have a scalable
message, and it's dangerous to focus on one thing you are doing well now if
it's not part of the vision of where you are going. Never position your company entirely for what it is today, but
for what it can do. I think you have
another step to that message.
Abramson: We are certainly looking for a path to
profitability, not just to build market share.
We are looking for return on investment, so I agree that we need to know
the whole story.
Mr. Makowski: I'm Mike Makowski, one of the co-founders of Mighty Acorn. We are a million dollar management team that has brought in some
money and things are going well. Is this
the right time to bring on a CEO? Is
there a point that's too early for that, or one that’s too late?
Lincoln: I don't think there is a single answer to
that question, unfortunately. You have
to be opportunistic, first of all. If
you have an early stage company and that person presents himself or herself to
you, if he or she is willing to work for a low salary in exchange for 5% or 10%
of your company, you might have to seize that opportunity. Many companies, of course, will hire the
“rock star” CEO on the eve of an IPO or other major funding event. In my experience, it varies widely.
Abramson: You have to be realistic about your skills
and the skills of the existing management team. Given what you need to accomplish, are the people in place able
to do it? It isn't that you are looking
for somebody to come in and create an entirely new company, you are looking for
somebody to come in and take it to the next level. Be realistic about who's onboard and what you need, then begin
looking sooner rather than later for the person who can take it to the next
Q: Should a small company consider the Over The Counter Bulletin
Board (OTC BB) instead of VC money? It
can bring more awareness to the public about the company.
Shames: The accepted route is to do an IPO, but you
see some companies do what's called a Direct Placement Offering (DPO) and there
are other variations. I will tell you
that we, as a Big Five firm, don't really deal with anything but IPOs. We tend
to get a little nervous when you're dealing with other types of offerings just
because they are more complicated and there is more risk on our part.
Smith: The OTC BB is sort of the tail end of the
Nasdaq¾you are a public company but you are not
really in a market . . .
Shames: You are very thinly traded and there are not
Smith: Your stock is usually a buck or less a
share. It's really a sick
scenario. A business starts going well
and they say, “Well, gosh, we have a pretty good company and we want to get
some recognition . . .”
are dead before you start. Nobody, not
significant analysts, nobody is going to pay any attention to a company that
took this path because they are going to say, “If these guys were smart, they
wouldn't have done anything so dumb. We
don't want to mess with them.” That's
really what it boils down to, so, no, don't do that unless you are going to go
out of business. Even then you might
still go out of business and then you might have shareholder liability suits on
top of all your other problems.
Esther, how do you really feel about this?
Shames: It really is the absolutely last
resort. It wouldn't be something where
I would start, and you shouldn't go there unless you really are desperate and
there is nothing much more you can do.
Mr. Kling: I’m Arnold Kling with homefair.com.
As a follow-up to the last item, one of our competitors went public that
way and we referred to them as having gone public on the Yugoslavia Stock
Exchange. We didn't worry about it and
we had no need to.
I have interviewed various entrepreneurs
and have been surprised at the number who say that they messed up in the way in
which they gave away equity. For example,
giving away equity to somebody and ending up in a lawsuit with them. What are the right and wrong ways to give up
Lincoln: One of the mistakes that is often made is
the failure to properly paper equity incentives. Later, there is a falling out and you have some disagreement
about what the arrangement was for somebody who has been brought in. If you are going to give away equity, the
other thing to do, of course, is to provide a vesting schedule or a forfeiture
clause. That's like golden handcuffs in
which people have to earn the equity over time or through performance-based
milestones. You need to make it clear
that their equity or some portion of it is subject to forfeiture if it doesn't
work out and they leave.
Shames: Obviously, equity is an extremely important
commodity for a startup, and I would encourage everyone to be very careful
about when and how much equity you give out.
There are a lot of service providers and other people who will come to
you asking for equity, and I would encourage you to say no. Give it only to those who are really
necessary and need to have it, such as your board of advisors, your board of
directors and people like that. Even
then I would be very careful how you give the equity out.
Abramson: On the other hand, once you are raising a
venture round, a venture fund is certainly going to want to make sure that your
management team is properly incentivized, committed to the company and has
equity. By the time we come in, we are
not looking for the ownership to be pushed only into the CEO's hands.
Shames: That's a good point. There is one group that should get equity,
your employees. Typically, when you do
a VC round, there is something like a 15%-20% pool that that gets allocated to
your employees, and that's very, very important.