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a dose of realistic optimism
preventing startups from stopping

page four of four | previous page 

Q: I have trouble with a company wanting to focus on a niche, and would like to hear your opinion on whether you think the message, marketing and communications should be focused on a niche.I think the benefit is that you have a better chance of succeeding in that niche, but the risk is that you leave a lot of the broader market on the table for competitors.

Ms. Smith:There is a great commentary on that very topic in Living On The Fault Line, the new Geoffrey Moore book.Moore is my favorite economist, even though he is considered a marketing guru.He wrote Crossing The Chasm, Inside the Tornado, The Gorilla Game and now, his newest book, Living on the Fault Line.He talks about disintermediation by going into a niche ahead of the crowd and using that as your platform for building out to other segments of the market.It's really great.

Ms. Abramson:People are looking for you to achieve somewhere.If the market is too broad for you to show any real success, focusing on a niche allows you to get some traction in one place, then build out from there.

Q: This is a two-part question.First, how do you deal with two co-founders who no longer agree on the strategy for a company when the two strategies are mutually exclusive?Second, is it up to the shareholders to decide on a direction if there is an impasse?If so, how does one do that?

Ms. Abramson:Go in a room, duke it out, then come out and tell us who's in charge.That's a real issue going forward, and it's one of the problems when you have two co-founders who are 50/50 partners.You need to work it out, and your investors are going to have a pretty big say in the result.One of you is going to have to go, and the company is going to go one way or the other.You will need to bring in your investors and your advisors and have a real strategy session to try and work it out.Hopefully, you do it in a nice rather than an adversarial way before you bringing in someone like Mike Lincoln to run up your legal bills.

††††††††† Absolutely, your shareholders are going to have something to say about this.They backed a company with a certain kind of direction and, unless the shareholders think the direction ought to change, itís probably going to stay the same as what they were bought into.Your hope is to bring people together and to begin to work that out.That said, it would be great to bring in an outside advisor and see if you can negotiate some kind of an agreement.

Mr. Lincoln:I would agree with that.If it's a healthy disagreement, debate is a good thing.If it's clear to you, however, that it's reached a point where there is a fundamental disagreement, at that point you go sit in a room with your co-founder, or perhaps the board, and make it a quick divorce.If it's an insurmountable problem and it drags on, in my experience, that's a recipe for disaster.

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Ms. Abramson:Most of us, as investors, feel that it's a big enough challenge to deal with the outside world.We hope that we have things working okay on the inside.

Mr. Harvey: In a way, that's not a dissimilar situation to what happened at Digital Addiction.We had two strategies.One was a highly risky strategy of going out and trying to create a new Internet platform for which we thought we could raise money; then we had a very safe strategy which was to keep developing games and make money from big game companies that want us to develop games for them.Both are valid strategies and valid businesses, neither of which contributed to the other, so they needed to be separated.At the end of the day, if you focus on growing value for your shareholders, you will make the best decision for the shareholders.At Digital Addiction, that was to keep the game company intact and position it for a possible exit event, and spin out a new company that had the chance to go very big.That's a very good solution.If you are in a situation where you are at loggerheads with one of your partners, look for an ďoutside-the-boxĒ solution.There may be ways that you can take care of your shareholders without having to kill one strategy or the other.

Mr. Kay:My name is Ed Kay.I run Practical Marketing, and I'm a cashed-out CEO and a venture catalyst.Please talk about the importance of having a passion for your customers and their success.

Mr. Harvey:When you get to that defining moment when the people are telling you that what you are doing doesn't work, they are generally your customers in one sense or another.Your customers are the people who can best tell you where to go, although sometimes it may get you on a road that's not where you want to go.A lot of times, that may mean abandoning your customers.The hardest thing about leaving Digital Addiction to come to iKimbo was that I had 100,000 friends all over the world who played a game that I built.When I see them, they thank me for building it.They love that game, and they are hurt that I left.I still interact with them online all the time.I have a very tight relationship with those people, but it would have been a very bad business decision for me to let my passion for my customers decide the strategy for growing the value of the company.Sometimes, they are at loggerheads.

Mr. Forgy:Iím Larry Forgy with HomeTies, Inc.We are currently considering a merger with another company that's very similar to ours.We think the two companies together would be a lot stronger in the market than either one of us by ourselves.Do you have any pointers on what makes a successful merger and what makes a merger disaster?

Mr. Lincoln:We could have an entire discussion about the subject of mergers and integrating the two companies.That is the real challenge, of course, combining your forces and making sure that the chemistry works.In the current marketplace, that is a very valid strategy, and I think we'll see a lot of consolidation in the next year.If you can get over things like the two founders, integrating the management teams, maybe shedding some divisions or business units or customers, then obviously it's a way to make your company more viable.

Ms. Abramson:Hopefully, we will see you up on this panel in the fall because there are going to be a lot more of you.We are going to see a lot of mergers in the next six months, as there should be.We have very crowded spaces in a lot of different verticals, and success for most people is going to be some sort of affiliation.

Mr. Shames:Mike mentioned integration, but I wouldn't underestimate chemistry, either.I think that too many mergers have failed because of the chemistry among the founders.If you don't have the same vision, it's not going to work.Don't gloss that over as part of the negotiations.

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Ms. Abramson:Then it's probably not a merger.It's some kind of a buyout.

Ms. Butler:My name is Sue Butler.I'm a director of business development for Teamwork Company.We are kind of in a Catch-22 on money in that we are completing an angel round right now and we know that we are going to have a positive cash flow before the end of the year.We are launching our product in September, have signed some multiyear agreements with major national companies and plan on doing a VC round near December.Although we don't really need much more than $500,000 to $700,000, we have been told by some potential investors that you are defined by the money you ask for, and that maybe we should ask for more.What do you do?

Ms. Abramson:You are not in a Catch-22.Get the money.

Mr. Harvey:Take the money.More money.

Ms. Smith:You will hear people who tend to bottom fish, say ďTake the minimum.People having too much money is a big problem.ĒYes, it can be a big problem, but it's not nearly as big a problem as not having enough.

Ms. Abramson:Seriously, one of the things that you have to think about when you are looking very positively at all of these things that are going to happen is: What if all of them don't happen or they don't happen as quickly as you think they are going to?Big companies take a long time to make decisions.They tell you that they have decided, but, by the time the paperwork is in, you don't want to be looking for money when you are backed up against the wall.The key is to get enough money to last you for a lot longer than you think it has to last you.

††††††††† A company in our portfolio is in the biggest difficulty right now.It is a very, very successful company that raised $8 million out of the box, headed by a woman who is a three-time CEO.She had a very bad experience with venture funds, so she decided very early not to raise venture money.She raised $8 million from somebody who put together a group of individuals because her product was going to be up and ready and on the market and selling.Well, the product was eight months late and she was out of money.She had to go out for a first venture round at a time when her product was not out, yet she had raised $8 million which pushed the valuation up.VCs weren't looking to come in when she was backed up against the wall unless they were going to give her a real hit, so take the money when you can get it.

Mr. Harvey:As much as possible.

Mr. Jordan:Iím William Jordan with MelaNet.A quick, two-part question. First, my understanding is that venture funding and a lot of other types of funding expect high risk, but, when there are failures, all of a sudden everybody seems to be panicking.Isnít that the name of the game?Second, when these companies do fail, are you stigmatized for life or are you allowed to resurrect?What is it about a failure that allows you to come back and play again, and what may mark you for life?

Ms. Abramson: Well, first, yes, it's high risk and everybody that invests in our funds knows that this is a very high-risk part of the game.We do expect failures.If you have 10 deals in your portfolio, you are looking for at least four of them not to do well.Nevertheless, you don't invest in any companies thinking that it is the failure.A lot of things are going to go wrong that you didn't anticipate in the beginning, but we are hoping and working our best to make every one of them succeed.

††††††††† That said, if you fail, you are absolutely not marked for life.One of the things that VCs are looking for is experienced CEOs.You have trouble raising money when you have never raised money; and you have trouble raising money if you have failed.Theoretically, though, you will have learned something from your experience and you will be a better CEO next time around.I wouldn't get in the McDonald's line yet.

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Mr. Harvey:The only time people get marked is if they behave badly.If you behave without integrity, that gets around, or if you get in a situation and you lock up or panic or some character flaw gets exposed.That will get around, too.

Mr. Lincoln:Interestingly, some recent studies have identified the lack of stigma associated with business failure in this country as being one of the principal reasons why there is so much venture capital and entrepreneurship in the United States compared to some countries.For example, in the Far East where there is such a great stigma attached to trying to start a business and failing, people are much more likely to take a safe job with a large conglomerate and not break out on their own.Silicon Valley has long had the reputation for being a place where failure is something of a badge of honor, at least for a few times, and I think that has caught on here as well.

Ms. Abramson:In a Wall Street Journal article a couple of months ago, the CEO of Cosmo.com, who had just raised a good deal of money but was having some trouble, said something to the effect of, what's the difference if I fail?It will be a real learning experience.I will tell you, as an investor in Cosmo.com, I really didn't like hearing that he didn't think it was anything to worry about.

Mr. Jarriel:Iím Steve Jarriel with Bystander.com.One of the things I often say in leading this company is that I'm not going to be seduced by my ambitions of what this company could become.As someone pointed out, you need to conquer one vertical, then move on to the next, and that's the philosophy I'm bringing to Bystander.Where, however, does one balance sound business principles with the excitement and grandeur you are looking for when considering an investment?

Ms. Abramson:Usually, as an entrepreneur, you are thinking about the grand vision and I, as a VC, am trying to hold you back and focus you.Hearing you come from the other side, we are certainly looking for you to be cognizant of the market and the potential and to be out there studying it.What we are looking for, however, along the way, are some accomplishments that you can point to and success in some verticals.

Ms. Smith:Let me also say that there are a lot of wonderful businesses that are not appropriate for venture funding.You don't have to want to be the next AOL to have a successful business and raise money, but you probably won't raise it from venture capitalists.

Ms. Abramson:You know, all of a sudden it's as if it was a negative to want to run a business and stay with it for life.Most people don't want to change jobs every three years, and there is nothing wrong with building a company, making it into a good, profitable firm and passing it on without worrying about whether you are going to raise the next dime.

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