Yearly Archives: 2010

Startup thought No. 124: How to divide the cadaver

How do you a startup has died (at least one that is pre-funding)? When the co-founders begin to argue about how to divide the assets of the once promising venture. It amuses me to see how vigorously they fight over the cadaver. If they invested as much passion in actually executing on their vision as they have invested on the backend I wonder what might have happened. Of course this isn’t always the case. Sometimes, say for example in the case of Facebook, one of the co-founders continues to invest in the vision and eventually it paid off for him (and everyone else).

In most cases, however, entrepreneurs are not willing to keep working on their startup given the ‘contingent liability’ that their co-founders represent – i.e. “why should I do all of the work and let my former co-founders get rich?” Of course, like Mark Zuckerberg, there are some developers who don’t even realize sort of risk they are taking. In Mark’s case it didn’t matter because there were billions to spread around. But for most developers who ‘take’ the code they developed at their former startup and use it are setting themselves up for trouble. Sometimes their former co-founders will take immediate action and shut down the developer who has misappropriated their assets. In these cases no one wins because the assets are likely worthless and the potential litigants are broke. In other cases former co-founders will sit quietly on the sidelines and watch their former co-founder build value. They will show up just before a funding event or exit event forcing a settlement. The sad truth is that most of these ‘re-starts’ fail. Without any opposition the original developer will likely lose interest and at the end of the day he has wasted his time for a pay off that he would have had to share anyway.

So to answer the original question, “How do you divide the cadaver?” My simple advice is to NOT divide the cadaver – everyone should move on together or not at all. Of course my advice would be completely different if you have received outside funding – that is what vesting and buy-sell agreements are for.

Is the Dallas Business Journal Relevant Anymore?

I would argue that for the Entrepreneurial Community in Dallas the Dallas Business Journal is irrelevant. We don’t read it. We don’t advertise in it. Of course it doesn’t have to be this way.

Gary Hooker, who is one of the owners of Imaginuity, copied me on an email he sent the editor of the Dallas Business Journal. According to Gary, the Dallas Business Journal decided to stop publishing the “web development” category in the Dallas Business Journal book of lists. He explained that he had been told that the staff of the DBJ felt as though Gary’s business was no longer relevant to the Dallas community. In response Gary canceled his subscription to the DBJ and sent an email to Juan Elizondo the editor.

Gary copied me because he wanted me to write about the issue as he described me as “a leader in the Dallas Digital community”. I am not sure I am much of a leader, but I am very much interested in the success of the ‘Dallas Digital Community’ as well as the ‘Entrepreneurial Community in Dallas’. I am not sure my opinion on this topic matters much, but I am happy for the excuse to write a post.

First, the Dallas Business Journal has never really been about ‘business’ in Dallas. Generally the DBJ’s primary focus has been commercial real estate. The last time I counted more than 80% of the articles and 50% of the advertising were real estate related. The remaining articles and advertising were from financial services companies and law firms. I think it might make a lot more sense to call it the Dallas Real Estate Journal.

The DBJ has never really had much interest in covering technology. Sure there are tech stories in the Journal from time to time, but more often than not they have something to do with the fact that the tech company in question had rented office space. In the late 90’s I was in my 20’s and I had just raised $11MM in venture capital to fund my first startup. I offered the story as an exclusive to Jeff Bounds, but he told me that I should come back to him when I raised more money. Ultimately we raised $30MM or so for the business and I joked that Jeff would only write a story about our company if we went bankrupt. Of course when we filed for Chapter 11 in 2001 he did. When we emerged from Chapter 11 later that year he didn’t bother to write another story. My latest startup, ShopSavvy, has been profiled in the Wall Street Journal, New York Times, Washington Post and Dallas Morning News  – but never in the Dallas Business Journal. Last month my father’s 3D seismic company was sold to an NYSE listed company, but the Dallas Business Journal  didn’t cover the story. Over and over again the DBJ ignores startups and emerging businesses in Dallas.

We host LOTS of startup events and every time we invite the DBJ to cover the events. Our Startup Happy Hour has been visited by every news outlet in North Texas EXCEPT the DBJ. Our Startup Weekend Event was covered by the Dallas Morning News and even in the national press, but again the DBJ chose to ignore the event. Over and over again the DBJ ignores the digital community. I am don’t know enough about the Book of Lists issue Gary is complaining about, but I think there is a chance to ‘fix it’.

The DBJ has NEVER contacted our company to run advertising. I have talked to several other successful startups and they say the same thing. I suspect a lot of us would be willing to support the DBJ through advertising if they would begin to cover the entrepreneurial and digital ecosystem here in Dallas. How about it Juan? How about coming to one of our events or happy hours? Lets come up with a solution…

Our latest version of ShopSavvy is LIVE!

I am really excited to announce ShopSavvy 4 is available in the iTunes store. The full story is over at the Big in Japan Blog in a post titled, “ShopSavvy 4 available in iTunes NOW!” Here is a short overview video we cut together last week:

How to sell your startup (Hint: hire a banker)

Dean Takahashi wrote an interesting story in SocialBeat describing a fireside chat with Jay Adelson the former Digg CEO. In light of the company’s recent decline and hopeful restart Jay was asked if he regretted not selling Digg when he had the chance. It was widely reported that Digg received offers to sell between $80-100 million at the height of their popularity. Interestingly, Jay argued that Digg never actually received a formal offer from any of the rumored acquirers including Fox, Yahoo and Microsoft. He explained, “Talk is cheap”.

I would agree with Jay – talk IS cheap. Half a dozen major internet companies have knocked on ShopSavvy’s doors and kicked the tires. Three of the six floated potential numbers and in one case we thought the deal made a lot of sense. But at the end of the day without a process and a timer it is in the interest of ALL acquirers to wait and see before actually buying the company. Once we had interest we seriously considered hiring an investment bank to put a process and time line in place, but once a startup takes that step it really limits your options – you will be selling your business.

Regardless of whether it is your first or fifth startup, the decision to exit is an emotional one. The reason most entrepreneurs start a business is to ‘build a business’ not to ‘sell a business’. It is easy to let prospective suitors in the door and offer them a tour of your ‘baby’. The hard part is when you have to sign the engagement letter and write a check to the investment banker. It is the farthest thing from ‘comfortable’ for most entrepreneurs. In ShopSavvy’s cases I couldn’t bring myself to sign the letter (also, not wanting to write the check made it easier not to sign). If you have interest and you want to sell you have to start a process and set a time line – most entrepreneurs suck at this and should hire an investment banker.

Jay explained, “it’s easy to advise entrepreneurs to maintain a professional distance from their companies, but it’s hard to do it in practice.” I agree it is easy, but I am not sure it would be the best advice to give. I believe that passion and emotion are why startups succeed when they should fail. I think professional distance is why startups fail when they should fail.

Is downside risk mitigation important to investors?

Over the years I have learned that my assumption that all investors seek to minimize downside risk is just plain wrong. For example, venture investors want to ensure their capital has a chance at generating out-sized returns. They have limited resources (time and money) to make the best investments as possible. Mitigating downside risk doesn’t pay very well because more often than not the investment opportunities with the greatest upside potential have horrible downside risk protection. Partners at venture capital firms have very little time and can only sit on a limited number of boards. They have to be VERY picky about the startups that get their attention. So don’t bother spending much time trying to explain why would be hard for a venture investor to lose his money in your deal. Angel investors, on the other hand, love to hear about how their money is safe. Of course they want the same sort of out-sized returns and they have limited resources (time and money), but there is one major difference: the money they are investing is theirs. Making money is REALLY hard and angel investors don’t like to lose their hard earned money in your out-sized investment opportunity. They really want to know how they can get their money out of your deal if it turns south.

For the past 30 days or so I have been working on putting together a $5MM round for ShopSavvy (our mobile app company) at a $19MM pre-money valuation. We have spent almost a million dollars building ShopSavvy into one of the leading shopping platforms for mobile phones. Today the app has more than 6.5 million users who are actively saving money by comparing online and local prices of the items they buy. Three months ago our biggest competitor with just 2 million users sold their assets to Ebay for $5/user. Using this as a comparable we should be worth at least $32.5MM. I would argue (and I have previously) that if you include our team and our backend systems (Pricenark) we are worth even more. Several potential acquirers have approached us about selling, but we have decided that ShopSavvy could be a billion dollar company in as little as three years. As a search/advertising business we think that each barcode scan our users conduct could be worth between $.05 and $.20 each (each Google search is worth between $.05 and .06 each) making ShopSavvy an important player in the mobile shopping game. Add platform opportunities like our payment wallet, couponing, rebates, deals and warranties and ShopSavvy could become the dominate player. If we wanted to sell ShopSavvy today I have no doubt we could get $50MM or more for the company, but we have convinced ourselves that it makes too much sense not to go for the grand slam. For a mere $5MM and 24 months we will know if we are going to be that billion dollar company – pretty cheap in the scheme of things. Again to reiterate: for a venture investor the problem isn’t mitigating the downside risk, but ensuring the upside opportunity. On the other hand, angel investors love to protect the downside. If ShopSavvy continues to grow at rates even half as fast as our current growth trends it will be worth significantly more than invested capital. This is just the sort of bet angel investors love – lots of upside and very little downside. Turns out it is a lot easier for us to raise capital from angels and super-angels than venture capital firms.

So what does this mean to you? If you have a great way to mitigate downside risk spend more of your time talking to angels and super-angels. If your downside risk story is horrible, keep talking to venture capital firms and the issue won’t even come up.

You aren’t the only who can or are doing whatever you are doing. . .

Lots of entrepreneurs spend a lot of time telling investors they are the only ones who can do this or that particular thing. While other entrepreneurs explain how their method or model is better than all of the other methods or models. Polite investors just sit back and hold their tongues as they recount how many entrepreneurs they personally know doing the same exact thing. Even if you think you are the only company who can do whatever you are doing, don’t tell anyone. Humility is a virtue that can help instill confidence. Of course startups aren’t the only ones guilty of hubris or condescension. Yesterday Mike Elgan asked “Why is Google so condescending?” explaining that Google spent the last week telling us just how backward we are. Some of the quotes were simply unbelievable:

Google’s Gabriel Stricker, director of Global Communications and Public Affairs, said that the reason Google holds events like this one was that “we hear from a lot of you that with the kind of breakneck pace of innovation that we go through at Google, it’s nice for us to kind of let you catch your breath.” He went on to tell the audience that they would “hear from our Search rocket scientists in a second who will hold your hand through the latest and greatest of what we’re up to.”

I share Mike’s sentiments when he notes, “So Google is so awesome that the company has to pause so the rest of the world can catch its breath? And we’re all so stupid that Google geniuses have to “hold our hands” as they explain things?”

Mike noted that the hubris isn’t confined to Google’s PR team, “Come to think of it, Google’s CEO Eric Schmidt often comes across as arrogant and condescending. He recently asserted that Google users actually “want Google to tell them what they should be doing next.” Responding to a question about Google’s ever-increasing invasion of privacy for profit, Schmidt said: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”

Google should be very concerned. Unlike an investor, users tend not to sit back on hold their tongues. Companies that talk down to their users for very long tend to lose them fairly quickly. Don’t make the same mistake.

Capital Factory Demo Day!

Today is Demo Day at Austin’s Capital Factory. The event runs through 3PM and features five startups including:

  • Hurricane Party – a location-based social networking application that helps users create, manage and discover events that are relevant to them.
  • RecycleMatch – an online market for waste and recyclables that helps companies make waste a resource.
  • Smackages – a makeup counter in your web browser.
  • Ripplefunction – a social media tool to track, manage and promote events online.
  • Keepstream  – a social media curation tool for saving and repurposing the best content from Twitter, Facebook, and sites across the web.

Entrerpeneurship Survey Request

Take a moment to fill out this LONG survey about entrepreneurship in Texas: http://www.zoomerang.com/Survey/WEB22B3CUQDYM8

Together with our co-sponsors, the Texas Emerging Technology Fund, the Institute for Innovation and Entrepreneurship at UT Dallas, the Dallas Regional Chamber of Commerce, the Metroplex Technology Business Council, the Houston Technology Center, the Rice Alliance, and IC2 at UT Austin, and many other partners statewide, Monitor Group invites your participation in a survey to assess the state of entrepreneurship in Texas.

Our focus is on capturing the perceptions of entrepreneurs, business service providers, investors, and government officials regarding Texas’ entrepreneurial environment and whether it enables or inhibits success in their enterprises. Your responses will inform a published report on Texas’ economic competitiveness and key microeconomic determinants—innovation, skilled human resources, and entrepreneurship. Survey participants find that in completing the questionnaire and reviewing the published findings, they gain insights that help them improve their enterprises.

Since 2003, Monitor has conducted entrepreneurship surveys in 30 countries, including the United States. Our partners in Dallas and elsewhere in Texas have helped us identify a strong base of respondents that include you and your organization. Through the survey instrument, we’ll assess and benchmark the standing of entrepreneurs in comparative country settings and conditions; identify comparative strengths, weaknesses, challenges, and opportunities; and distill useful findings that stimulate and support entrepreneurial activity.

Accordingly, we ask that you follow the Web link below and complete the online survey questionnaire, which should take no more than 20 minutes. We would also ask that, as appropriate, you help us identify and pass along this survey to other entrepreneurs, entrepreneurial financial and business service providers, and economic development policymakers. All respondent names and organizational affiliations will be kept confidential. Please submit your responses no later than September 24, 2010. Should you have any questions, please contact Pedro Arboleda at Monitor Group at +1-617-252-2000 or Pedro_Arboleda@monitor.com or Dr. Joseph C. Picken at 972-883-4986 or jpicken@utdallas.edu.

Paul Allen’s Legacy: Patent Troll

Last month my father’s old boss and billionaire, Paul Allen, announced he was going to give away the majority of his $13.5 billion net worth to charity. Kudos for Paul! When Paul and Bill co-founded Microsoft I wonder if they had any idea how big an impact their company and the resulting wealth would have on the world? In light of this announcement I was shocked to learn that Paul Allen is using four business method patents he owns to sue Apple, AOL, Yahoo, Google, Facebook and eBay for ‘existing’. Why would Paul do this? Does he need the money?

Who is harmed by Paul’s legal actions? First, you and me (assuming you have a 401K). Second, any startup (like ours) who uses web technologies. We need more innovation in the United States, not less. Software patents, like Paul’s, are bad for business, America and the planet. They simply don’t make any sense for software. When the government grants a monopoly for 20 years it should be for something unique or novel – i.e. a machine, a manufacturing process or pharmaceuticals – not an essential programming technique. Brad Feld has been a long time critic of software patents and he does a pretty good job of explaining why they are a bad idea:

The WSJ explained how broad Paul’s patent claims are:

Patent Claim: Browser for Use in Navigating a Body of Information, With Particular Application to Browsing Information Represented by Audiovisual Data

Implication:The specific example in the patent might be for a news aggregator, but the patent could have applications far beyond news. The suit says the defendants are infringing the patent “by making and using websites, hardware and software to categorize, compare and display segments of a body of information.” That quote describes a lot of websites.

Patent Claim: Attention Manager for Occupying the Peripheral Attention of a Person in the Vicinity of a Display Device

Implication: “AOL, Apple, Google and Yahoo are the only companies alleged in the suit to have violated these patents. But again, the patent is for a tool that is ubiquitous online, particularly on websites that give users real-time news updates.

Alerting Users to Items of Current Interest

Implication: “Theoretically it could apply to anything that uses technology to alert you to something you’re interested in. It’s important not only for news but for e-commerce — think about notices when an item you like is on sale or when a bid has been placed on something you’re watching. This patent is the only one in the suit that all the companies are alleged to have violated.”

Brad should add Paul to the list of folks who should see Patent Absurdity.

After post D&B revises our risk rating!

Just last week I wrote a post titled, “Dun & Bradstreet Class Action Lawsuit?” where I explain how D&B explained to other businesses that our company had a “High risk of severe financial stress of the next 12 months”. Here is what our potential customers saw:

This week, after I wrote the post, D&B has ‘updated’ our “Supplier Evaluation Risk” from an 8 to a to a 4. Here is what our potential customers see today:

D&B still suggests we pose a “Moderate risk of severe financial stress over the next 12 months”, but at least we are almost in the ‘green’ section of the chart.

Again, I stand by my previous post when I explained, “I think there is a potential for a massive class action against D&B on several counts – but most importantly their propensity to offer credit advice without sufficient data. D&B should have to disclose that on accounts, like ours, they simply don’t have enough data one way or another. They can’t possibly know whether or not our company is likely to fail based on the data they have collected. Their data is used by our potential clients to hire us. How many clients have looked at this data and decided that since we are ‘likely to fail in the next 12 months’ they will choose another vendor? How many other clients have low PAYDEX scores and ‘High Risk of Failure’ warnings where there is little or no data available? I would be happy to sign our company up as a lead plaintiff. I can show a loss of at least $1,000,000 in billings as a result of their 66 Paydex report on our company. Let me know if you want to join by filling out this form: D&B Class Action Sign Up