Chris Maresca

Client Success – Wavemaker

It’s always good to see a past client become successful.   In this case, it’s WaveMaker, a company for which I did business model, licensing and community strategy several years ago.   Looks like that work has finally paid off, thanks to good execution on the part of Chris Keene and the rest of the exec team.    They just announced profitability and that their community had grown to 15,000 participants.

Congratulations all around.

Link: http://dev.wavemaker.com/blog/2010/01/06/wavemaker-rides-the-cloud-computing-tsunami/

VC Math – Or why you’ll never get funding…

Yet another cleaned up post from a startup thread on LinkedIn.  This one is about VC math and TAM’s.

One thing that’s very much missing in most entrepreneur’s understanding of the fundraising process is the notion of total addressable market (TAM) and it’s relationship to fund size. Basically, it’s the understanding that fund size vs number of partners drives the available investment size.

An overview of how this works

Since partners can only typically manage at most 10 companies simultaneously, 2 partners at a $100million fund will invest in a maximum of 20 companies. Usually, the first five years of a fund are devoted to new investment, and the last five to supporting existing portfolio companies. Money is usually allocated 50/50 to new vs support, so this hypothetical fund would have about $50m to invest in 20 companies. $50m divided by 20 gives you roughly what the investment amount would be about $2.5m.

The flip side of this are rough calculations about TAM and exits. If the TAM of a company is $100 million and you assume they can capture 10% of the market in 10 years, then their revenue will be around $10m, with a valuation of somewhere between 3x to 15x revenue depending on the vertical. At the lower end of that, it would be a company worth $30m if everything works out.

Going back to fund size, if the fund is targeting a 10x return, then investing $2.5m in a company that might be worth $30m at exit is just about right, assuming no other dilution. Of course, this leaves out a lot of details and is uber-simplistic, but I can guarantee that every VC you talk to is doing these sorts of rough calculations in their head.

However, what’s really important about all of this is understand your company’s TAM and doing your homework about size and lifecycle of funds investing in your vertical. If your TAM is $100m and you approach NEA ($2b raised for their latest fund), then you will likely never get funding. A lot of entrepreneurs don’t seem to be willing to do the legwork in researching investors/funds/etc, but that’s one of the keys to success. I would add that the VC tool of choice for doing research is VentureSource – yes, it’s not cheap, but if you are looking for funding, it’s a goldmine of information on valuation and fund status

This is a very common mistake made by a lot of entrepreneurs, even experienced ones. I’ve given a presentation at a bunch of conferences about this very topic and it’s always shocking how many people don’t understand these dynamics.

Startup growth metrics for Silicon Valley

Last December, I was in an interesting meeting where the Bureau of Labor Statistics (BLS) presented a bunch of interesting stats several days before they were due to be released.

The most interesting statistic, however, was one that was generated specifically for this particular meeting and is not part of the regular dataset.  It was statistics about company growth in Silicon Valley, and it revealed the lack of companies growing to significant size.   For me, it just reinforced my gut feeling that the VC model was broken and that the real target should be lower exits, not monster hits.

First some definitions, in BLS terms:

• Small company – less than 50 employees
• Medium company – 50 to 250 employees
• Large company – 250+ employees

I would note that the BLS looks at payroll to determine employees, so contractors don’t count.

The BLS had put together data about companies growing from small to medium to large over the 8 year period from 2000-2008, it was summarized in the following table:

	2008
2000		S	M	L
	S	4400	214	8
	M	219	292	50
	L	34	45	119

What’s surprising about this is that only 8 companies became ‘large companies’ in 8 years. That’s one a year, and if you think of company size as a proxy for revenue, then it’s pretty stunning.

P.S. Sorry for the crappy table, turns out tables in WP are a huge pain in the ass….  The vertical numbers represent the state of affairs in 2000, whereas the horizontal numbers represent the state in 2008, so reading from left to right gives you the changes from 2000 to 2008…

What I look for in a pitch

Over the years, I’ve gotten many requests from people wanting help raising funds.   Most of the time, I find that they have failed to do their homework and that even the most basic elements are missing from their pitch.   I recently posted in a forum describing what I would look for in a pitch, so I thought I’d re-post it here, a bit cleaned up and expanded.

What I look for in a pitch

A pitch is several stories.  It’s the story about how you will successfully run your company if you get money and it’s much like a sales pitch.   But it’s not just your company’s story, it is also the story of you and the people on your team, the industry you are targeting, the story of your customers and finally, the ending chapter of your company.   Like every good story, these should have arcs that meet at some logic point.   And, like most good stories, it needs to be cogent, logical and progress along path.   All that said, what are the tangibles that I would look for in a pitch?  Well, here are some:

• Entrepreneurs should know everything about their business/market and I consider it a bad sign if I know even just a little more
• Know who I am, why you are talking to me and what your expectations are from me
• Have done their homework about investors, funds and criteria.
• Polished presentations & financials
• Business plans in the traditional sense are a waste of everyone’s time – I don’t really care if you have one
• A good, clear slide deck that lays out the future of the company (the story, see above)
• Detailed financials that are in sync with the deck
• Polished, articulate delivery of both the deck and financials (you need to know this stuff cold)
• A clear understanding of real and potential competitors, with a view of competitive differentiators
• A clear and complete executive summary that someone can grok in less than 10 min.
• A good website
• Finally, there should be some sort of working prototype or demo, esp. if it’s software.

There are tons of online and offline resources for learning how to do all of this and there really is no excuse for not doing it.  I would also point out that I don’t expect everything to be in the deck, just a good, compelling story about the future of your business, industry and customers.  That said, I expect you or your team to be able to answer every question I ask, in detail if appropriate.  And if you don’t know, don’t make it up.

So there it is, a basic outline of what should be in the pitch.   I would point out that there is a lot of other detail about what should be in there and that you should understand what your target investors are looking for when putting together your pitch.

TEDxSV – Not inspiring

I’ve heard a lot about TED over the last 10 or so years.  It’s always an event I’ve wanted to attend but have never been able to justify the cost.  Lots of brilliant people I know rave about it, so I was happy to see the TEDx series of local events emerge.   I missed TEDxSF San Francisco, as, like many other people, I only heard about it after it happened, but I was lucky enough to go to TEDxSV.

Or so I thought.

I couldn’t make the whole thing as it was an all day event and I had overlapping obligations.  Instead, I did my best to catch bits and pieces of the stream and show up for the afternoon portion.   Disappointing is an understatement.  I’ve watched many great TED talks online, and only one of the TEDxSV talks came close to any of those (Sekou Andrews – watch it here starts at about 22min).   Most of the talks seemed to be talking down to the audience, as in ‘you are lay people, let me preach to you’.   Not inspiring, not like Itay Talgam describing how performances are about telling many stories, including the story of the audience (see Itay Talgam’s presentation at TED here).   Most of the TEDxSV talks had only one story and it was about the presenter.

To bad, it could have been great, but perhaps this is what happens when you try to replicate something in multiple places.

Thunderbird 3 on Mac OSX – Not so great

I’ve been a longtime Thunderbird user, and I thought I would upgrade to V3 today.  Bad idea.   Although the UI was slightly updated (notably through the use of tabs), everything else was either the same or broken.   The mail compose toolbar wound up overwriting the From field section (with From, Subject, etc all in lower case) and nothing seemed quite right.  It was faster, but I decided that reverting back to the status quo ante was the fastest route to productivity.

It seems, however, the Mozilla makes it as hard as possible to download previous versions.   I never actually found the download for Thunderbird 2 and instead went looking for it in my ‘Downloads’ folder.   I keep it for occasions such as this when people decide that old versions are not good for you….

Finally, since Lightning did not work with Thunderbird 3, I decided to use Sunbird (a standalone calendering app) to extract the Lighting data.   Since I was doing this after installing TB3, I went hunting for the file containing my calendar data.   Not only was this the most obscure file in the most unobvious place, but Sunbird was incapable of importing.   Compounded with my basic problems with the buggy TB3, reverting back to TB2 was the thing to do.  After I’d found my download backup, it was relatively easy to do, although the whole adventure cost me the better part of 2 hours.

On another note, I have huge amounts of stored email.   It’s always been an issue, and it’s one of the reasons I use TB over Apple’s Mail.app.  Mail.app just can’t handle large mailboxes (e.g. 3gigs 70k+ messages).    Searching across all this is somewhat of a problem, however, and my solution was to run a local search engine on exported mbox files.   However, I’ve found a better solution, MailStewart, a Mac-only application that will archive all your mail and attachments, index them and make the whole think searchable.  It’s cheap and works great.

The problem with biometrics

I’ve always said that the security of biometrics is really problematic.  Once someone figures out how to hack a biometric device, it’s impossible for users to ‘change the password’.  Unlike most systems that provide authentication (e.g. passwords, SecurID tokens, drivers licenses, etc), you can’t just throw out the ‘token’ (e.g. your fingerprints or eyes) and replace it with a new one.

There have been numerous attempts to hack fingerprints in particular, such as gelatin overlays, cutting off the actual persons fingers, etc., but it seems that the ultimate hack has now come about:

From http://news.bbc.co.uk/2/hi/asia-pacific/8400222.stm

A Chinese woman managed to enter Japan illegally by having plastic surgery to alter her fingerprints, thus fooling immigration controls, police claim.

Apparently, this is quite a widespread thing and it should really worry people.   Not because of those bypassing the system, but because it’s only a matter of time before fingerprints are ‘cloned’ and innocent people are improperly accused/denied/arrested.  It’s compounded by the fact that laws and law enforcement sees fingerprints as one of the stronger ‘proofs’ of someone’s presence in a particular place.

How long before fake irises or even DNA?  Who knows, but it turns out that fingerprints are no more secure than any other form of identification.

VCs may be exempt from new financial regulations

Never mind the apocalyptic drop in funding for VCs, what would have really killed off the industry would have been financial regulations.   According to the Wall Street Journal, looks like these have been stopped by Barney Frank.

As a rule, VCs carry no debt, don’t use derivatives and don’t trade in the public markets. Since they had nothing to do with the credit meltdown, it remains a mystery why Treasury Secretary Timothy Geithner urged Congress to force them to register with the SEC as investment advisers, subject to staggering compliance burdens.Mr. Frank’s planned stay of regulatory execution will have a positive economic impact disproportionate to the small size of the VC industry. Venture-backed companies are responsible for supporting firms that now generate more than 20% of U.S. GDP and are needed more than ever to ignite a rebound in private-sector jobs.

From the Wall Street Journal

Hopefully this will lead to a revival of fortunes in VC land, although it’s probably false hope until the other end of the equation (SarbOx) is also dealt with…

New healthcare plan ignores small businesses

Kevin Kelly, a small business owner in Union City, CA, writing in Newsweek, outlines how healthcare plans are just not doing it for him.  One interesting datapoint is the way SMBs are defined by congress vs the Small Business Administration:

most legislation defines small business as companies with less than 50 employees. This stands in sharp contrast to the standard set by the Small Business Administration, which defines small business as manufacturing companies with less than 500 employees and nonmanufacturing firms with receipts of less than $7 million. The definition matters. Most plans in Congress set employer mandates at 50 employees or more, with no tax credits going to companies that are larger. Small businesses will have to offer the same levels of coverage as companies many times larger, and they’ll get no help to offset costs.

He concludes with some rather sobering thoughts about small businesses leading the recovery, or not, as the case may be:

[M]y costs continue to skyrocket each year, with little hope increases will ever end. This puts me at a competitive disadvantage against foreign competitors with state-run systems.Last year our health-insurance bill jumped $140,000. We decided not to pass any of the increase on to employees since they were already being hammered by rising gasoline prices. We worried that bumping their costs up might force some good, well-trained employees to look elsewhere for work. But in order to cover that cost, we had to find either $2 million in new sales or the same in cost cuts. Otherwise, it came out of margin. I’ll give you one guess how we covered the hike.

Today I am no more hopeful, reform or not, that our company’s lot will change. I will still think twice about adding jobs when I know that I am not just taking on a new wage or salary, but high health-care costs as well. “How can you have a job recovery when you worry about such things”

Source: http://www.newsweek.com/id/217136

Obama as Nobel-laureate – Not popular

Well, everyone is buzzing about it and mostly not in a good way.  This post by port1080 @  TnT provides a good series of comments from usually supportive websites:

If there’s any question that this decision was bizarre, it should be dispelled by the fact that even most of the left (from the center-left to the far left) is puzzled by it:

http://www.salon.com/tech/htww/2009/10/09/a_premature_peace_prize/index.html

“If he achieves all [his goals], he definitely deserves a prize. But not quite yet.”

http://www.tnr.com/blog/obama-wins-nobel-peace-prize

“Seriously. Should he turn it down?”

http://www.dailykos.com/story/2009/10/9/791325/-Turn-it-down,-Obama

“He has to turn down the Nobel Peace Prize.”

http://www.thenation.com/blogs/notion/482445/the_aspirational_nobel

“These Nobel sentiments, however, are aspirational in my view. Obama doesn’t deserve the prize, yet. ”

http://www.talkingpointsmemo.com/archives/2009/10/unexpected_developments.php?ref=fpblg

“This is an odd award. You’d expect it to come later in Obama’s presidency and tied to some particular event or accomplishment.”