SOPHISTICATED FINANCE

The Overlooked Intangible in Healthcare—What Abstract Thought Teaches us about Entrepreneurship

 

Photo credit: Nelson Designs https://www.youtube.com/watch?v=jOrwlhBNu3Y

 

Takeaways:

1. Technology attempts to solve problems of matter, energy, space, or time,
2. To apply technology to mental health and emotional problems, look to make the abstract tangible
3. Some of the best entrepreneurship was the conversion of abstract aspirations into tangible solutions

 

I have been working recently with a talented young professor on commercializing her mental health idea based in AI. This is just after finishing up a medical device project to design a wearable for monitoring symptoms of a particular disease. Both of these projects have the same challenge, and it is the biggest challenge in healthcare. Both company solutions have to change human behavior in order to have any benefit of value and that is a hard problem. It is also why so much of healthcare is so ineffective and eventually wasteful.

 

The question becomes why do some technologies in healthcare (and any industry) succeed and others fail. Yes, sometimes we get the problem wrong or the solution, but less well recognized is that the technology itself may never be purposeful. As stated so well in the blog Code Simplicity:

“In general, when technology attempts to solve problems of matter, energy, space, or time, it is successful. When it attempts to solve human problems of the mind, communication, ability, etc. it fails or backfires dangerously.”

 

If we look at the categories in healthcare with notable commercial success, we easily arrive at diagnostic devices and pharmaceuticals. Diagnostic devices give us a window into the human body (matter and energy) and pharmaceuticals change matter. If we look back at my two examples from the first paragraph, how could we turn changing human behavior challenges into problems of matter, energy, space and time. Although my solution follows, it should perhaps not be overlooked that these four factors related to technology mirror fundamental concepts from physics.

 

When we think about changing human behavior through healthcare technology, this is akin to taking abstract problems and making them tangible. If you are not following, remember Schopenhauer’s insight into art:

“Art makes the emotions tangible.”

Art is in effect a technology that translates the abstract emotion into a tangible form in matter. If we consider Maslow’s hierarchy and the highest level of satisfaction—self-actualization or aspirations, we realize that some of the greatest commercial successes translated abstract aspirations into tangible solutions. One might argue that the iPhone, the Model T Ford and photography made tangible respectively creativity, freedom of movement and self-esteem (at a whole new level).

 

If we can translate an abstract problem, changing human behavior, into something tangible, then we can apply the logic of the four factors from physics and effectively use technology. An example may help to illustrate. Before money we had barter, but in order to transition from barter to money what was the abstract thought that had to be made tangible? Value! Coins were the tangible vehicle, gold showed physically value and the monarch’s picture created trust (all consumer behavior is based on trust). If you did not notice we also just proved that money was a technology. Every change in money—bank accounts, credit cards, derivatives, etc.—were all changes in the tangible form of money. If you cannot see money as a technology, read Daniel Goetzmann’s excellent book, Money Changes Everything: How Finance Made Civilization Possible.

 

Now to consider how to use our abstract-tangible model in healthcare, lets think about smoking cessation. Suppose we put a $25 device on your wrist, which is only removable by a device that costs $500. The wrist device loudly alarms when it smells any smoke including cigarettes. We could add a CO2 monitor as well to add value for the customer. A loud embarrassing alarm would translate the desire to stop smoking into a tangible energy format—sound waves—and increase the likelihood to stop—especially if the smoke alarm continues throughout the entire cigarette. Chantix beware!

 

I like the concept of alarms to transfer intangible concepts like emotions and behaviors into tangible sound waves. With all the AI, sensors and cyber-physical research underway, many behaviors could eventually trigger alarms. I am sure there are other ways to make tangible desired behaviors, but the alarm illustrates the point. I think it is more energy efficient and effective than shocks on the wrist. The point, we only need some creativity around the solution to use the abstract-tangible framework in healthcare.

 

 

 

My Latest Writing on Entrepreneurship and Complexity

For the last five years most of my thinking and teaching has revolved around three major areas:

1. Entrepreneurship
2. Creativity and learning
3. Complexity science

Today on Medium I published an essay on these subjects and how they explain many of the large market opportunities that consistently have repeated throughout history:

The Foundation of Entrepreneurship: Large Market Opportunities that have Repeated for 40,000 Years

If anyone thinks the essay is suitable to develop as a book, let me know by email.

Excellent Book on Pitching Investors

 

I am starting to put together the content resources to help the teams in the new incubator at FIU--Startup FIU. Everybody has their favorite book, article or SlideShare deck on pitching to investors. I just reviewed a book from HBR, "Get Backed: Craft Your Story, Build the Perfect Pitch Deck and Launch the Venture of Your Dreams". The book is very well done. Filled with 10-15 examples of good pitch decks, all of which raised money. Also a lot of advice on content, format and design. I have not seen such a comprehensive (and correct) collection of useful advice anywhere else.

We will be accepting applications to Startup FIU hopefully within two weeks and throughout the summer. Students, faculty, FIU alums and the community are all invited to apply. More on this here at SF shortly. A graduating student from Morocco asked if his team could Skype in from Rabat. A meaningful number of team members need to be physically present in Miami to attend weekly events at the incubator. At an event last week we had everybody from high school students to post-docs come to hear the speakers. We welcome applications from local high school students. 

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Understanding Digital Business Models

BCG.Perspectives has a very interesting new article, "Navigating a World of Digital Disruption". The article focuses on how the BCG clients (F500) can be disrupted and how they can position strategically and tactically to improve their performance. However, I found the more valuable parts to the article to be:

1. A new perspective on why Amazon has succeeded
2. A new way to look at the business model for digital companies 

I really liked the graphic below. One point to note, I think you can only strategically focus on one "architecture" at a time for an line of business. For example Amazon uses communities to do book reviews, but the Amazon strategy is a platform strategy for its original business. I THINK A LOT OF STARTUPS TRY TO COMBINE PLATFORM AND COMMUNITY AND THAT IS WHY THEY DO NOT GET FUNDED. YOU CAN ONLY BE ONE.

The article also has an interesting proposal for how NGOs and multi-laterals could re-organize agriculture to be more sustainable and effective through big data.

This is an article worth reading slowly and not speed reading. Thanks to @John_Menenzes for the heads up.

 

 

 

 

 

@john_menenzes 

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Thoughts on eMerge

I spent yesterday at the eMerge conference in Miami. While there was a nice list of speakers, I spent most of the day talking to the early stage companies exhibiting and catching up with people in the entrepreneurship community in Miami. 

My takeaways from the conference:

1. About ten of the companies exhibiting are working in the HR (human resources) space with all kinds of software and platform offerings. Not a space that interests me but apparently very popular.
2. Despite the cluster emerging in early stage medical devices and healthcare in SFL, I saw very few such companies exhibiting.
3. The portfolio companies of Medina Capital were the best looking collection of companies, with all of these companies reminding us what "high tech"  means. Talking to these folks reminded me of discussions I used to have with people at MIT Media Lab.
4. Several good looking companies were bootstrapping with no capital raising desired. They were characterized by a step by step caution in developing the business that is somewhat refreshing.

 

Would Y Combinator Invest in a Militia

 "To be merely useless, indeed, is perhaps the highest eulogy that can ever justly be bestowed on a regulated company" Adam Smith

Whenever people discuss Uber, the sharing economy comes up. Whenever the method or object of sharing changes, a big business opportunity is created. That's been true for at least 40,000 years. What intrigues me is that Uber is taking over the government controlled taxi market. The government's immediate response in several cases has been to enforce the existing law. However, it may be that what the government is doing is trying to maintain its usefulness. If more companies "disrupt" government regulated industries, eventually we start to question the usefulness or need for government. Lest you think I am completely crazy, there may be some data (on government and not my mental state).

 

An important function of government is what and how it communicates to the citizenry and what is prohibited communication. So if the role of government is to be challenged or changed it may well take place in the communications arena (guns being expensive, dangerous and to some extent outdated). Now for some possible data.

 

Y Combinator is funding a non-profit company in Argentina, DemocracyOS, that offers software for politicians to poll their constituents and has been used there to start a new political party. One of the first users is a serving government official in San Francisco. He is polling constituents on what they think about possible new legislation.

 

When did government ever put the populous view ahead of re-electing standing politicos and serving private interests. However, perhaps  San Francisco is the first case where government is trying to demonstrate usefulness by setting the populous agenda through the Internet, before the people get organized, set the agenda on the Internet and start passing laws without involving the government. The people passing laws without government involvement, that would be truly disruptive. If there were ever politicians who could see such a trend coming it would be politicians in San Francisco and Silicon Valley. (An historical note--when the feudal manor system broke down in medieval Europe, the kings created "relationships" directly with the peasant citizenry. Such an approach eventually failed to preserve the monarchies. Similarities to government polling the citizens are perhaps obvious.)

 

Of course, if the government would just be efficient and commit to serving the needs of 21st and not 19th century citizens, I would hold off on applying to Y Combinator for funding for the Hacker Militia Corporation.

 

Great name but I am going to forego being the first militia applicant to Y Combinator 😎. For an old post making fun of my name, checkout "The Hacker Universal Theory of Management"--HUTM.

 

 

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A Great Point About Startup Risk

I have been thinking a lot about risk recently, in preparation for a course I am thinking to teach on "Assumptions, Risks and Forecasting".

Peter Drucker defined a business as a set of assumptions, where the key task is to know the assumptions. Risk as I define it is "variance in cash flow" and not the traditional economic, government, market and technology risk factors most people think about. Those factors are not risks unless they impact cash flow. One of the benefits of this approach to risk is that one does not obsess about risks such as competitors until one sees their effect on  cash flow in terms of customer attrition, average selling price, repeat purchase rate. However, notice that all the numbers that show the effect of competition are hopefully all on your weekly/monthly KPI dashboard. Effectively, the assumptions captured in the KPIs are the risks. Note that all the "risks" in the business are properly identified at the time the assumptions for the first forecast are prepared.

In "How to Start a Startup CS183B", Marc Andreessen makes an interesting point about risk:

"So you come in and pitch to someone like us. And you say you are raising a B round. And the best way to do that with us is to say I raised a seed round, I achieved these milestones. I eliminated these risks. I raised the A round. I achieved these milestones. I eliminated these risks. Now I am raising a B round. Here are my milestones, here are my risks, and by the time I raise go to raise a C round here is the state I will be in. And then you calibrate the amount of money you raise and spend to the risks that you are pulling out of the business. And I go through all this, in a sense that sounds obvious, but I go through this because it is a systematic way to think about how the money gets raised and deployed. As compared so much of what's happening these days which is “Oh my god, let me raise as much money as I can, let me go build the fancy offices, let me go hire as many people as I can.” And just kind of hope for the best. " (excerpted from genius.com; my emphasis) 

At each inflection point one should have a clear idea of what assumptions are being confirmed and "eliminated". A roadmap/timeline of assumption confirmations would be an interesting idea in an investor presentation. Sure to raise money because of the quality of the insight, except maybe with Andreessen.

A previous post on the assumptions and risk theme: Business Model Assumptions.

Image credit: de.wikipedia.org

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What Microsoft Learned about App Development that Google Needs to Learn

Perhaps because Google won a big contract to provide Office apps to PwC  (the large  international accounting firm), they have recently launched a PR campaign all over the web for "Google Apps for Work". An example of the PR is this Silicon Alley Insider story, "Google shares its plan to nab 80% of Microsoft's Office business". A sentence in the article caught my attention:

"Google is constantly looking at how people are using Apps and trying to entice them to use it more."

Google is renown for using data in its product analysis, which perhaps makes the above quote mundane. However, I think it points out the problem with Google's approach to software. Data only describes current usage. If we examine saving a file in Google Docs, Google sees it saved online, perhaps Google sees it downloaded to the computing device...but Google never sees it then saved in Dropbox. You might ask why someone would prepare a document in Google Docs and save it in Dropbox. There are probably ten good reasons, none of which show up in Google's user data. 

Microsoft recently launched a new Outlook app for iOS 8, which I tweeted :

Nine days later, I think that Outlook is probably the best mail iPhone app ever...and it includes a good calendar app. If the Outlook calendar app had appointment multiple alerts I would stop using a calendar app. What I particularly like about the app is the seamless integration with Dropbox and Google Drive, both of which I use daily. (Dropbox holds the docs I produce and Google Drive holds third party documents.) It also seamlessly integrates Gmail and other mail providers.

I am not a Microsoft fan boy. For many years I competed with them and I intentionally avoided their products. The only nice thing I could say about Microsoft was to my entrepreneurship students--"Microsoft is an excellent example of monopoly, which economists tout as an attractive business model". With the passing of time I have mellowed on Microsoft. (A tweet rather than a full blog post shows that I am still conflicted.) I tried the new iOS Outlook partly because in 25 years of using email, I have never found an email app on any device that I really liked until the new Outlook. However, let's get back to Google.

How was Microsoft able to develop such a great new mail app, while Google is still constrained by its data. The answer is quite simple. Most of the design and code for the new Outlook came through an acquisition, where the previous company was not constrained by the corporate mindset of a Google or Microsoft or F500.

I imagine when the Microsoft execs saw the other company's mail app, they just thought OMG and quickly bought the company. I commend Microsoft for admitting somebody understood the customer better and did a beautiful design. I wish Google would make some app acquisitions, get a better understanding of the user and perhaps learn more about UI design. BTW I use a lot more  apps from Google than Microsoft, but I hope that Microsoft's new acquisition has some new ideas for other apps. Today I am less hopeful about Google.

 

 

Market Risk and Technology Risk

There was much discussion this weekend about Jerry Neumann's article, "Heat Death: Venture Capital in the 1980s", which chronicles the evolution of the venture capital industry from its start in the 1960s. 

One interesting part of the article was how the industry learned about the difference between market risk and technology risk. Market risk is "will people buy it" and technology risk is "will it work". In the current period, VCs generally take market risk and avoid technology risk.

However, as I thought about this dichotomy, the logic of "do something better" kept coming back to me. This approach minimizes both risks or at least frequently does, by taking an existing technology and customer base and offering something better. Google and Apple computers would be examples where the state-of-the art was advanced a bit but there was little breakthrough in terms of technology or customer base. (Amazon might have been an example of market risk and Akamai might have been an example of technology risk when they launched.)

Perhaps one is well served to understand where the business concept is on the continuum of both market and technology risk and to realize that great opportunities may exist with small changes in the market or technology risk factor.

 

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3 Lessons in Building Metropolitan Centers of Innovation

HBS Working Knowledge has an interesting new working paper by Gerald Carlino and William R. Kerr, "Agglomeration and Innovation".  The paper discusses the academic literature and the authors' views on the factors that explain the geographic concentration of innovation. Not surprisingly, innovation concentrates in metropolitan areas. Innovation is defined in a classic way as "invention that is commercialized", which in the vernacular would be described as entrepreneurship. Other findings from the article are quoted below:

• The benefits from local public subsidies for basic research may not stimulate growth in targeted communities, except for creating a few jobs for scientists and engineers.
• They relate co-agglomeration levels [of innovation] to the extent to which industry pairs share goods, workers, and knowledge. They find evidence for all three mechanisms, with knowledge spillovers again the most localized.
• For all industries, the localization effects of being near similar businesses decay rapidly with distance within cities—the positive localization effect from being within one mile of another company in one’s own industry is at least ten times greater than the positive effect realized when locating two to five miles away from said company.
• While most thoughts of innovation clusters today naturally begin with Silicon Valley, it is important to recall that innovation clusters do move over time.
• On the relationship between agglomeration and innovation… What is better established is the development and sharing of specialized business services. This has been especially true with the case of entrepreneurial finance (e.g., angels, VC). Traditional sources of financing, such as bank loans, may be unavailable to innovative start-ups due to their high risk, large financing requirements, and asymmetric information, especially in high-tech industries (Gompers and Lerner, 2001).
• The strong concentration of the commercialization of innovation... to the need for specialized business services (e.g., firms specializing in market research and product testing, specialized patent lawyers, and the availability of financing) and similar infrastructure.
• Knowledge spillovers are geographically concentrated
• There is general empirical evidence that R&D at local universities is important for firms’ innovative activity. Audretsch and Feldman (1996) and Anselin et al. (1997) find localized knowledge spillovers from university R&D to commercial innovation by private firms

Setting aside the academic speak, innovation and entrepreneurship benefit from:

1. Like minded people very nearby
2. Support by research universities, and
3. Support services nearby, most notably capital. 

The article should be required reading for politicians. Most government support for entrepreneurship appears to be mis-directed or wasted. 

Note: While Miami has made progress in developing the entrepreneurial community, certain theoretical requirements still need to be further addressed. 

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Some Thoughts on Google's Strategy

To paraphrase William Faulkner, I do not know what I think until I read what I wrote. Reading yesterday's post got me thinking about Google. In yesterday's post I wrote:

"I have been using Feedly as my RSS feed reader since Google shutdown Reader (which prompted me to use single product companies for all my important apps, e.g. Dropbox, Evernote, etc.)."

There are two exceptions to my use of apps from single product companies:

1. Microsoft Office
2. GMail from Google

However, maybe these companies are single product companies or should be.

As the market has evolved Microsoft has become a two product company--Microsoft Office and gaming. Office is reportedly the largest profit generator and gaming is in many ways the product new users see. I do not believe there are any real synergies between the two product lines except that both products require excellent programmers. Therefore, logically they could be separated into two separate companies and some say more value would be created for investors.

The Google case is a bit more complicated. Google has two major products in my opinion:

1. Search
2. GMail

I think the jury is still out on Google Drive. If I did not use GMail on my phone, I would see no benefit to Google Drive over Dropbox or Evernote or 20 other products. (Opening a doc attached to a GMail and storing it for retrieval from the iPhone is easiest with Google Drive.) 

I would love to ditch GMail in favor of a standalone mail app, but the ten new mail apps I try each year always have problems that bring me back to GMail. Would I give up Google search? Yes, in a minute. Google works and it is a little bit better than Bing and all the others, but I am nervous about how much Google knows about me, the search still lacks a lot of features I would like to see (e.g. academic articles showing up as preferred results based on my profile), and the ability to restrict sites from showing up in the results (e.g. Entrepreneur magazine).

Search and GMail probably have more compelling common characteristics than Office and gaming. The common characteristic is the use of artificial intelligence (AI) where GMail offers comparatively better search because of Google's expertise. However, I suspect that search is not a sustainable advantage in mail apps. I suspect that Amazon could duplicate high quality mail search in a year or less given their own work on search. Also, I suspect the mail search would improve faster if that was the sole objective in improving the AI. What this logic argues for is that Google should spin out GMail as a separate company, leaving Google as an AI/search company. (The spinoff agreement could still give Google certain exclusivity for a pre-determined amount of time.) Given the increasing popularity of notifications and messaging apps, GMail may be at its highest possible valuation today. Driverless cars and 100 other products based on AI could all be spun out. A more narrow focus to the continued development of the specific AI would probably produce better results (which Google could license back in the spinoff agreements).

If Google and Microsoft were to follow my advice and each spinoff one of their two major businesses, then almost every major software applications company would be a single product company. Hmmm, interesting.

Note: One could argue that both search and GMail rely on expertise in distributed processing, cloud computing. Therefore, they should not be separated. Were this to be the strategic insight to explain Google's development of both products, then Google has a much bigger issue because abnormal returns, even with scale, are quickly disappearing from the cloud space.

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Two Excellent Articles on Entrepreneurship

This weekend I read two very informative articles on startups.

The first article from Venture Beat, "How the tech elite teach Stanford students to build billion-dollar companies", is about the new course at Stanford. This article deals with Class 1 which discusses deciding if you are an entrepreneur. A video of the lecture is included.

The second article comes from Steve Blank's blog. The article, "Watching Larry Ellison become Larry Ellison — The DNA of a Winner", discusses the character traits of Larry Ellison the founder of Oracle who recently resigned as CEO.

The articles are both very well written and easy to understand. The points are worth considering for tattoos so you do not forget.

Dropbox should be a company again

If you teach entrepreneurship, Dropbox is a great case because it illustrates the startup concept that some ideas are features, some ideas are products and some ideas can be companies. The Brooks Review re-opens this question with a recent article, "Dropbox is a Feature". 

The article mentions Steve Jobs' comment during his attempt for Apple to acquire Dropbox:

"Jobs smiled warmly as he told them he was going after their market. “He said we were a feature, not a product,” says Houston."

Jobs post-acquisition integration of Dropbox clearly saw it as a feature, similar to iCloud on steroids. If Microsoft had bought Dropbox they would have seen it as a product, similar to SharePoint. However, products or features do not make companies and Dropbox, to date, has become a successful company with a multi-billion dollar valuation.

Dropbox now faces much intense competition from Google, Amazon and Microsoft. This competition has encouraged Dropbox to offer new lower prices for certain services. Always concerning when a company is forced to lower prices due to competitive pricing. Such reaction suggests that the product has become an undifferentiated commodity. 

If I was at Dropbox I would be thinking about how they built a company and did not get trapped as a  feature or a product. The vision that overcame feature or product should be restored. Just competing on price is insufficient to keep building a company.

Also, I think I signed up for Dropbox the very day it launched and have now used it for all my file storage for years. Effectively my digital life is on Dropbox. I sure hope Dropbox can figure out its path to continue as a company and not get caught up in "feature" or "product" or competitive pricing. 

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4 Investor Pitch Templates

Last night and today I have been inundated with capital raising decks for early stage companies. Each one was just terrible and these were not student powerpoints. My students do much better decks than were prepared by mature executives some of whom are "serial entrepreneurs". These weak decks had several characteristics in common:

1. They all showed how they were similar to a well known successful company, but they never came out and said what they do in a single, declarative sentence. In several cases it almost appeared they were trying to hide the real mission of the company
2. With no documented product/market fit they do not talk about customers or target customers
3. They all circled a need but never mentioned value proposition

Below are three recent links to good advice on how to do an investor pitch and the fourth one is my all time favorite from Sequoia Capital.

1. Canaan entrepreneur pitch workbook http://www.slideshare.net/canaanpartners/canaan-pitch-workbook?qid=c8d3f5d8-94b6-41b5-b2d6-e64c3eb518ea&v=default&b=&from_search=1
2. 8 tips for creating the perfect pitch deck http://venturebeat.com/2014/04/03/8-tips-for-creating-the-perfect-pitch-deck-from-someone-whos-raised-75m/
3. The best pitch deck http://www.slideshare.net/Sky7777/the-best-startup-pitch-deck-how-to-present-to-angels-v-cs
4. Sequoia Capital business plan https://www.sequoiacap.com/grove/posts/6bzx/writing-a-business-plan

I teach the Sequoia deck in all my entrepreneurship classes. I like the simple but elegant approach. Suggests that someone put real thought into the document.

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Why Crowd Funding for Equity Really Makes Sense

In a Timothy Lee interview of Marc Andreesseen, Andreessen says:

 “…growth companies go public much later. Microsoft went out at under $1 billion, Facebook went out at $80 billion. Gains from the growth accrue to the private investor, not the public investor”

 Tomasz Tunguz in a post, “The Five Forces Shaping The Fundraising Market”, reports that:

 “Startups require 50% of the capital of 12 years ago to become publicly traded companies or reach twice the revenue on the same dollars invested.”

 Putting these two ideas together we realize that the capital efficiency of recent tech investments has enabled the private investors (venture capitalists and private equity) to manage capital requirements more easily and keep for themselves a large amount of the value that used to accrue to public company investors. So what was the factor to explain the emergence of crowd funding for equity?

Crowd funding permitted investors not able to secure limited partnership interests in VC and PE funds the opportunity to invest and garner the returns of high growth companies that were no longer available in public market listings. While many, myself included, have found fault in recent years with financial markets, market makers do demonstrate an amazing ability to innovate to provide the desired returns to a specific group of investors.

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How to Work with a Mentor

This Fast Company post,"Startup Failing? You Might Be Asking The Wrong Questions" is an excellent article on thinking, learning and mentoring. Today I will just discuss working with a mentor.

Last week I did two mentoring events. The first event was the Women's Success Summit, produced by Miamian Michelle Villalobos. 300 women and me. What could be more fun? In a 30 minute session anyone in the audience had 30 seconds to describe their business and their problem and then I was supposed to give advice. Out of 7 questions, three people asked for specific solutions to problems. The other four had ideas and wanted to know how to turn them into a business. The three with specific questions could benefit from a mentor. The other four souls should probably come to one of my workshops on how to develop a business concept. They were pre-mentor.

The second mentoring event was the monthly session hosted by the FIU Pino Entrepreneurship Center. This group was all male except for my good friends Lauren and Karyne from Pino Center who organize this event. Four thirty minute mentoring sessions. 1 person had a specific question (his second startup). One person had a fully developed business concept and he wanted to stress test it before he talked to investors. That's fair and I think he got some good advice. 1 person without a business concept (workshop candidate) and one wacky person idea that will never, ever get done. . Doable, but one in a billion. Not suitable from mentoring. 

As Fast Company said:

"There are plenty of people who'd love to help you with your business; you just have to ask, but they don't have time to waste helping you figure out what your actual problems are. Get the most out of a potential mentor by approaching them with specific questions you've already identified and they've probably answered for themselves."

I struck out the point about "time wasting". Mentoring is not a billable hours business, but you get more benefit from the mentor the more well thought out the question. If you are not sure whether you have a business concept, you probably don't and you are a workshop candidate. 

I would like to do a radio show where people call in with questions about how to grow their business. Weekly co-hosts with specialties. Sponsor/advertising inquiries welcome. 

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Knight Foundation Leading Miami Entrepreneurship

The Miami Herald blog, The Starting Gate, written by Nancy Dahlberg provides the best coverage of the Miami tech scene. The Starting Gate has excellent coverage of events, company fundings and infrastructure development. Infrastructure would include new incubators, new venture capital funds and the other types of organizations required to support entrepreneurship. 

Yesterday's article in The Starting Gate, "A closer look at four organizations nurturing the ecosystem", highlights four infrastructure projects:

1. The Lab Miami
2. Venture Hive
3. eMerge Americas
4. Endeavor

Lab Miami (an incubator) and Endeavor (a venture capital fund) have backing from the Knight Foundation. The Knight Foundation also has a program to provide seed funding to early stage companies. The program, Knight Prototype Fund, provides grants up to $35,000 for companies to develop demos. In a perfect scenario, a company could be awarded a grant from the Knight Protype Fund, move into Lab Miami to work on its demo and then be funded by Endeavor. Effectively,the Knight Foundation has funded all the key parts of the startup ecosystem in Miami. Particularly insightful on their part is that each piece of the ecosystem is a private sector type initiative, which is the same way that Israel successfully launched itself as a high tech hub.

I commend the Knight Foundation. 

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Equity Crowd Funding Takes Off

The Jobs Act legislation that permits equity crowd funding was approved by the SEC in July 2013 and went effective this week. This legislation allows companies to publicly solicit equity investment from accredited investors. The key legal change permits "public solicitation" of investors without the need to use registered securities brokers and their big brothers the investment banks. 

Crowd funding was perhaps first popularized by Kickstarter, which prior to the SEC approval used the model to raise donations for projects. It has quickly been copied to raise money for charities, scholarships and other worthy causes. (I believe that Vittana was the first organization to use crowd funding, to provide student loans outside the U.S.)

Two noteworthy equity crowd funding platforms are AngelList and CircleUp. AngelList focuses on tech startups and investment opportunities are organized by syndicates, backers and accelerators. A sample backer at AngelList is Jason Calcanis and a sample accelerator is Techstars Austin 2013. In either example, an investor would participate in all the investments made by Jason or Techstars Austin. Such diversified investment is critical in early stage investing given the risk (and in any other investment portfolio).

CircleUp focuses on consumer products and investors select individual companies to invest in. One interesting feature of CircleUp is that it promises "access" to partners such as P&G and General Mills.

The evolution of equity crowd funding will be interesting to watch and I see several trends developing:

1. Celebrity platforms, where an investor can invest in Lady Gaga or Jay Z's angel investment deal flow
2. Special purpose platforms, such as social entrepreneurship, universities (to commercialize their research projects), broadway plays, etc.
3. New incubator funding, such as soliciting alumni to underwrite an incubator for equity investment in student startups (FIU immediately comes to mind)

There will also be many new spinoff opportunities such as rating agencies for crowd funded equity funds, "mutual funds" for equity crowd funding so investors can invest in 10-20 funds and, of course, the new consultants, marketing experts and newsletter offerings. (There is always an opportunity for more pundits and "experts" :)) An opportunity that I find interesting is to build the software infrastructure and website support for the equity crowd funding organizations. A Red Hat, open source, "best of class" model might have a real future if this funding model becomes as popular as I think it might.

The issue that equity crowd funding needs to handle well is the due diligence process for each investment. While a site like AngelList has very experienced investors behind it such as Jason Calcanis and Techstars, most sites should document a rigorous due diligence process to reduce the risk of fraud. Personally, I never thought that the SEC would see past this risk and approve the necessary regulation, but apparently the Obama White House gained meaningful securities law experience sorting out the financial crisis of 2008. (The other issue of some importance may be "conflict of interest". How does a celebrity or lead investor decide which investments they offer to the "crowd" and which ones they keep for just themselves.) 

As I understand the new regulations I may no longer be required to post a warning, but....I do not provide investment advice and this post is not a solicitation for investment in any organization mentioned here.

Additional articles on equity crowd funding:

• SEC Finally Moves On Equity Crowdfunding, Phase 1 (Forbes--most recent in a series of good articles on equity crowd funding)
• How much will this change venture capital? (Jason Calcanis--lesser quality firms are going to disappear)
• Leading vs Following (Fred Wilson--the importance of the lead investor in equity crowd funding)

Image credit: www.good.co

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The 3 Conflicts in Every Entrepreneurial Company-Part 1

This post originally appeared in The Starting Gate, the Miami-Herald blog by Nancy Dahlberg on entrepreneurship and the SFL tech scene. This post has been reformatted. Each post in the three-part series will appear first in the Miami Herald and then be reblogged here.

*****

The development of an entrepreneurial company can be understood in terms of the natural conflict in the objectives of the company. I believe the three most important conflicts to understand and manage are:

1. Revenue growth versus cash flow; 
2. Customer versus shareholders;  
3. Market opportunity versus execution. 

In this post I will discuss the conflict between revenue growth and cash flow. In subsequent posts I will discuss the other two conflicts.

Revenue Growth versus Cash Flow

A healthy business should be trying to achieve maximum growth in revenue without running out of cash and cash reserves for future operations. Essentially a company balances the risk of generating revenue growth against the risk of going out of business due to no cash. Many struggling companies sacrifice revenue growth to conserve cash, which generates a death spiral to oblivion.

There are many benefits to revenue growth:

• Product Market Fit. Revenue growth confirms and documents that the product is being accepted by the target customer
• Market Share. Revenue growth at a rate equal or greater than the competition insures that a company is maintaining market share, which is critical to maintaining cost competitiveness in terms of both fixed and variable costs
• Avoid Complacency. Aggressive annual revenue growth targets, perhaps 100-200% annually at startup and gradually declining to 20% for a “mature” company, force a company to constantly re-work and improve the value proposition, product, sales strategy and business model; effectively the pressure for revenue growth becomes the impetus for continuous innovation.

Recognizing the importance of revenue growth, how do we manage the risk of not running out of cash? There are two techniques that I use:

1.      Customer Acquisition Cost (CAC)

Customer acquisition cost is the marginal cost to acquire a new customer. As soon as a company starts to see traction in their market they should begin determining CAC. Over time CAC will stabilize and many industries have been shown to have fairly standard CAC. Once there is confidence in the CAC for a product, then it becomes highly predictable how much budget (cash) needs to be put at risk to achieve the desired revenue growth. (Note: using CAC a company is able to determine if a problem is the number of new customers, the spending to acquire the customers or simply a budgeting issue.)

 2.      Add-on Sales

The cheapest sale to achieve is typically the sale to an existing customer. These add-on sales are another, less cash intensive way to accelerate revenue growth. Most early stage companies overlook the opportunity for add-on sales as they struggle to grow revenue from their initial product. A good example of the add-on strategy is a premium priced software product where the customer pays additional money for an expanded feature set.

My last advice on how to manage the conflict between revenue growth and cash flow comes from Texas Hold’em poker. Professional poker players typically never go “all in” unless they know with a high degree of certainty that they have the winning hand. Unless you have a very high confidence that you understand the CAC, do not bet all your cash on forecasted revenue growth. Even then, I would hold a cash reserve in case of Murphy’s Law.

[The next post, on Wednesday, Sept. 18, will be on the conflict between customer and shareholders.Read more here: http://miamiherald.typepad.com/the-starting-gate/#storylink=cpy ]

 

 

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How to Be an Effective CEO

Brad Feld has a good post today, "Being a Great CEO", which references Fred Wilson's thinking on the same subject-"What a CEO Does". These two experienced VCs conclude that great CEOs do three things:

1. Champion a strategy and vision for the company
2. Recruit great executives
3. Manage cash to always have adequate reserves

In Brad's post he includes the list of behaviors a startup CEO recommends, which is shown below in the left column. My additional interpretation is in the right hand column. I added 8 to what I consider a better list than either VC, although I think 5 is the important behavior omitted by the VCs. CEOs must insure customer focus throughout an organization. As customer experience becomes more broadly defined to include customer service, social media and many other areas, I believe a customer focused CEO becomes increasingly important.

 

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