Newsflash! Entrepreneurs are richer. . .
January 31, 2008
After considerable research Harvard has uncovered an amazing fact: “Entrepreneurs are, on average, significantly wealthier than people who work in paid employment.” [via]
OMG! Who knew? Their research indicates that entrepreneurs represent 9% of households in the United States. This small group holds 38% of assets and 39% of total net worth. Of course Harvard’s analysis of the obvious concludes that “tax incentives or other initiatives intended to motivate the not-so-rich into entrepreneurship don’t really even things out, because even people with deep pockets can to reap the benefits of such programs.”
His point is that we shouldn’t ‘motivate’ the ‘not-so-rich’ to start businesses because rich people would be able to take advantage of the same programs. Huh? Let me get this straight, he is suggesting we shouldn’t help the poor due to risk that the rich might benefit as well? At the end of the day Ramana thinks that equality is reached only through equality of outcome. To bad he isn’t familiar with Sean Lemass phrase “a rising tide lifts all boats” used most famously by John F. Kennedy who employed the phrase to combat criticisms that his tax cuts would benefit mostly wealthy individuals. (Note to Ramana ~ the rich are going to get richer anyway, take a risk and help poor people get rich too)
Too many resumes? Add USMC to filter!
The unemployment rate is really starting to affect our hiring. This week we posted a standard listing for a network engineering position at Architel. Our normal response is usually 5-10 resumes per day. Within hours we had received 1,500 resumes and they keep coming in 5-10 per HOUR! Craigslist was always a great recruiting tool because the participants were often more technical and it tended to have more signal to noise than say Monster.com. But with the added ‘noise’ caused by the downturn we needed a way to ‘filter’ potential candidates. I had an idea, filter based on military experience. Need a ‘killer’ network engineer? Hire a Marine! We have had the best luck with candidates with prior military service. From CNN:
More than 200,000 veterans leave the service every year, according to Transition Assistance Online and nearly all bring with them a familiarity with computers. In fact, more than 40% of them have worked directly in IT as computer operators, programmers, systems analysts, LAN specialists and IT managers. Veterans also bring a mind-set that makes for great IT leadership. “John [Lochow] is an awesome CIO,” says Tony Ibarguen, CEO of Tech Data Corp. in Clearwater, Fla. “He has a very structured methodology and people work well as a team under that structure. There’s no confusion and very little politics.”
Replace the Founder? Not so fast. . .
You might be surprised to learn that 50% of venture backed startups fire their ceo/founder within the first year. Of course, if you happen to be a ceo/founder of a venture backed startup you won’t be surprised.
When I received my first term sheet (from Austin Ventures) the signature block included the title, “Interim CEO”. The good news? They were upfront, I was out the door as soon as they could find a worthy replacement. I kept looking until I found a venture capital firm that would back ME and not my 50 page business plan.
Peter Ireland has an interesting post title, “The Dreaded Lunch Invite from Your Venture Capitalist” about this topic. Peter quotes Barnaby Federer of the Wall Street Journal:
“If you ask a VC what value they add, and you get them after a few drinks, they’ll say, ‘We replace the CEO’ “, he said. And that, he indicated, does not vary with the economic climate.
He goes on to explain how the process (of firing the CEO) starts:
t usually occurs in this manner. The venture capitalist invites the founder out for a friendly lunch. During the meal the venture capitalist brings up a new person who would benefit the company greatly through his connections or industry experience. The venture capitalist explains that although this person is not available to serve on the management team, he could probably find the time to serve as a director. Yes, it would mean making the board larger than originally agreed to by everyone but this guy is a “star”. The founder wishing to please his venture capitalist reluctantly agrees to the change in board size. The new face turns out to be the extra vote the venture capitalist needed to make wholesale management changes. Within a week the board has fired the founding team and replaced them with friends of the venture capitalist. Oftentimes the new board member assumes the CEO role.
His advice is to stick to your guns. Hopefully your lawyers helped you negotiate a deal whereby you had a balanced board ~ fight tooth and nail to keep that balance. NEVER GIVE IN! Peter offers this advice:
The best tactic to employ when faced with this offer is tell the venture capitalist that you 1) can’t recommend someone for a board seat until you are satisfied that they can make an actual contribution, and 2) that since the board is working well it would be preferable to compensate this person–once they have made a tangible contribution–with consulting fees instead of a board position. Finally, if you sense a strong negative reaction from the venture capitalist you can be assured that there’s trouble brewing in River City and it’s spelled with a capital “T”. He will always have a Plan B for pink-slipping you and it won’t be pleasant. Call your lawyer immediately, and I mean your lawyer not the company’s.
What not to say to an investor. . .
This morning I got an email from a company we are looking at acquiring that really bothered me. I had to bite my tongue to stop myself from immediately calling ‘bullsh*t’. Understanding the risk that the company might read my blog I decided that it was worth sharing with you so that you don’t make a similar mistake when trying to raise money or sell your company.
Specifically, I saw a press release from a competitor in which they indicated that the company’s technology violated a patent they held. Evidently the competitor sent notice to the company’s primary vendors and clients. We asked for a copy of the notice and any other correspondence regarding the matter. The company responded to our request as follows: “We have completed a review of the ***** claim. There is nothing in writing that we can provide, due to attorney client privilege.”
The privilege the company referred to was THEIR privilege (i.e. the company’s privilege) which they could simply waive. It isn’t reasonable to suggest that some sort of attorney client privilege exists as a response to a diligence request. How can we value a business that may or may not have a significant contingent liability (e.g. a patent infringement case)?
The sad truth is that by offering a tenuous privilege claims one of two things might happen a) most investors would walk away or b) your investor may simply call the other party. I of course called the other party and they were happy to share their notice to me. In fact we discussed possible solutions to potential infringement such as licensing. With this information I can better value the business in light of potential litigation and/or licensing. Potential lawsuits, especially when notice has been provided, are MATERIAL to any discussion related to fund raising, mergers or acquisitions. You MUST disclose them. My advice is to quickly and completely disclose everything you know. There are often very simple solutions to problems that may seem insurmountable to you and your team. At the end of the day most investors would have walked away, I of course, smell an opportunity here.
Entrepreneurs and Spouses: Part II
January 30, 2008
In part one I talked about how my spouse made it possible for me to be an entrepreneur. I highly recommend that you make certain that you spouse is on board before you even consider taking the leap. In part two I thought it might be helpful to talk about the ‘one thing‘ that I learned very early on ~ entrepreneurs should have their spouses handle their financial affairs!
Why? Entrepreneurs quickly lose context for money. When I started my first business I was in my twenties. I had millions of dollars in the bank (other people’s money) and I was signing all of the checks.
Quick Tip - until you are doing $100MM in revenue, sign every check. My Dad gave me this advice before I raised a dime. He was right and I have stuck to this advice until this day (still not doing $100MM). It is very helpful to see where your money is going.
It became commonplace for me to sign a check for $5,000 for repairs to HVAC systems or $20,000 for rent. Before that, our biggest expense was our mortgage and I think it was $1,500 or so. When I would come home I wouldn’t think twice about the lawn guy suggesting $500 was a reasonable fee for mowing our yard each month and at that rate we would be out of money. Very quickly I realized that it would be smart for Michele to handle our personal finances. It was one of the best ideas I ever had.
Most entrepreneurs are type A, right brain thinkers. Rarely are we well suited to financial management (that is why we all have controllers and CPAs). By turning it over to Michele:
- I relinquished control to my spouse, something she lost when I started the business. She couldn’t control turmoil in the equity markets or terrorist attacks, but she could control our budget and our money. She knows were we stand each month and can make plans accordingly.
- Our bills were paid on time, every time. Managing cash flow in a business is important. Managing cash flow in your personal life simply ruins your credit. Our credit rating became stellar.
- We spent less. Michele is far more frugal than I am. It isn’t that I am a spendthrift, but the context of my spending (writing hundreds of thousands of dollars per month in payroll and other expenses) is out of scope to our personal spending (thousands of dollars per month in expenses).
- We have a sizable retirement fund. I didn’t think a 401K or IRA was important, but Michele religiously contributed the maximum to our accounts. I assumed (and still do) that the rewards generated by our businesses will eclipse anything we could possibly save in our retirement accounts and that having the extra cash flow now would be of far greater benefit than a few marginal dollars will after I am 65. Of course having a retirement fund is one more way Michele can offset the uncertainty that entrepreneurship brings.
At the end of the day, you need to realize that being an entrepreneur is hard on your spouse. The hours, the highs, the lows, the uncertainty, the money ~ it takes a toll on your marriage. Stop, take a breath, and thank your spouse because you are impossible to live with (you would have divorced yourself long ago…).
Entrepreneurs and Spouses: Part I
When I decided to quit my job and start my first business I couldn’t have done it without the support of my wife, Michele. I can’t imagine the suffering spouses of entrepreneurs endure. Fortunately for me, Michele is a smart woman. With a masters in international business and a promising career with GTE (now Verizon) she earned enough (earning more than I did the last time I got a w2 from someone else’s company) to support our tiny mortgage and her health insurance was stellar. Michele realized that I wasn’t going to be happy working for other people, she knew that I was better suited to be an entrepreneur.
Of course, it hasn’t always been roses. That first year I worked late every night, wandering home after nine most nights. I traveled around the country raising money, signing leases or doing deals. It was hard on our marriage. But as time passed I got a clue and realized that having a balance between work and life was better for my marriage AND my business. The truth was I didn’t have to make EVERY decision, it was better to empower others. Our business grew and things seemed great, Michele and I decided to have a baby. Of course right before the baby came the bubble burst and our clients were falling left and right. Finally Nortel and Enron collapsed and our funding dried up. The month before Ethan came I had to tell Michele that my business was bankrupt. We had waited until we thought things were stable, but things are NEVER stable when you are an entrepreneur. Our financial woes, coupled with a difficult pregnancy really put a stress on our marriage once again.
Things began to look up a month after Ethan was born and I had secured funding to reorganize the business. Michele was relieved. Of course her relief was short lived as 19 terrorists flew planes into the Word Trade Center and The Pentagon on the same day we were to close on the deal. I sat with my wife and newborn and I prayed. I realized how little control we have and put my faith in God (later that year I was baptized). The next day our investors agreed to close and we were able to save the business.
Over the years there have been ups and there have been downs and I can honestly say I wouldn’t have been able to do without Michele. Thanks honey, I love you!
How to: Stimulate the economy by March
January 28, 2008
The Bush administration, God love em, is planning to give $150 billion in rebates in the form of $600 and $1200 checks to individuals and families. The stimulus plan has a huge problem, it only works if people spend the money.
Earlier today Glen Hunter had a great idea, ’send your rebate to the troops’. I immediately got on board until my Dad pointed out that I wouldn’t be able to participate since I wasn’t getting a check (ironically, I am the most likely taxpayer to blow $1200 quickly). Then I had an idea:
What about doing both a) rewarding the troops and b) guaranteeing that economic stimulation would occur? We could simply give the entire $150B package to active duty military personnel resulting in rebates around $100K for each warrior. Who is more likely to blow $150K in a month than the average warrior? Give any 18-24 year old male $100K with the order to spend it in the next 30 days and I guarantee you will get immediate stimulation. We can count on our ‘economic warriors’ to help us out of our current malaise, while rewarding their service in a way our nation never has - with our treasure.
Great Idea ~ Send your rebate to the troops!
Glenn Hunter over at D had a great idea. Send your $600 rebate check to troops who are or have served in Iraq. Very nice idea. He suggest that Sessions or Johnson coordinate the effort, I second his suggestion:
OK, 117 million of us are getting a check ($600 per individual, $1,200 for couples) as part of the federal stimulus package, right? And, while we all “support” our U.S. troops fighting in Iraq and Afghanistan, it’s widely acknowledged that few of us civilians have sacrificed anything in the war effort, right? OK, so how about if we start a national campaign to turn over the free dough we’re about to get from the feds to the individual soldiers who’ve fought, or are fighting, on our behalf in the Middle East? Strictly voluntary, of course. Would any of our military-supporting local Congress members (Sessions? Johnson?) be willing to jump-start coordinating such a mammoth undertaking (probably through a private-sector fundraising administrator)?
The Tipping Point Debunked!
You know what they say about things that sound too good to be true? Fast Company has an article titled, “Is the Tipping Point Toast” where they point to data from Duncan Watts that suggests that Malcolm Gladwell might have been wrong. Duncan built sophisticated computer models and simulations to help understand how trends start. His results are 180 degrees from what Malcolm had original suggested in his best selling ‘The Tipping Point’.
Malcolm’s point was there were “rare, all-powerful folks” that if you could reach them you could “reach everyone else through them, basically for free.” Call the ‘Influentials’ theory for the last fifty years, it dictates more than a billion marketing dollars. Watts’ suggest that this money is being wasted. His models suggest that the opposite is true and he has developed ‘new technique for propagating ads virally, which can double or even quadruple the reach of an ordinary online campaign by harnessing the pass-around power of everyday people–and ignoring Influentials altogether.’
So if the ‘Tipping Point’ B.S. what is a marketing person to do? Clive Thompson from Fast Company explains:
Watts believes there is. In the past three years, he has worked on a new form of advertising he calls Big Seed marketing (this is part of his work at Yahoo, where he is a principal research scientist). Watts developed the concept with a friend, Jonah Peretti, a veteran of the viral wars. While a student at MIT in 2001, Peretti had an email exchange with
Nike that turned into an accidental pass-around hit, reaching 50 million people and catapulting him onto the Today show. A year or so later, a satirical Web site Peretti created in one weekend–blackpeopleloveus.com–amassed 30 million page views in a few weeks. Soon, companies were frantically trying to hire him to help their online ad campaigns “go viral.” Peretti partly disagrees with Watts about the randomness of trends; he thinks it’s possible to intentionally make a funny Web site into a pass-around hit online. But as Peretti discovered, real-world goods are harder. When he tried to pitch “some company’s shitty product,” he couldn’t force it to go viral.In their hunt for a practical way to create maximum exposure for any given ad, Watts and Peretti developed a way to marry the benefits of old-school mass marketing with clever six-degrees effects. Their first test case came when the Brady Campaign, the gun-control group, asked for help with an online petition.
Watts and Peretti set up a regular mass-market ad buy, running banner ads on several prominent blogs and news sites. Like many ads these days, they added a button on the ad that allows people to forward the ad to a friend–a way of collecting eyeballs for free. Typically, people ignore this “share with your friends” pitch. But Watts and Peretti included technology called ForwardTrack, which displays the route the ad travels once you’ve forwarded it. This turned ad forwarding into a piece of social cartography. People would pass the ad specifically to those friends most likely to keep it moving. It became a Facebook-like contest to sign up the most friends.
The technique marries Watts’s two main epiphanies: Cascades require word-of-mouth effects, so you need to build a six-degrees effect into an ad campaign; but since you can never know which person is going to spark the fire, you should aim the ad at as broad a market as possible–and not waste money chasing “important” people. And it worked. The pass-around effect doubled the number of people who saw the Brady Campaign’s ad. They paid for 22,582 hits and received an additional 31,590 for free. Another campaign they ran for the Oxygen network quadrupled the audience size, adding 23,544 hits to the initial 7,064.
Neither was, technically, a viral hit. Neither passed the disease threshold, where the meme spreads exponentially and engulfs the mainstream. “But you can double your impact, which is still pretty good,” Watts says.
The ultimate irony of Watts’s research is that, if you really buy it, the most effective way to pitch your idea is … mass marketing. And that is precisely what the wizards of Madison Avenue, presiding over our zillion-channel microniche market, have rejected as obsolete. “But that’s the thing about magic,” says Watts. “If it sounds too good to be true, it probably is.”
The LEGO brick turns 50!
One of our favorite clients at Big in Japan, LEGO, has an important anniversary today ~ the LEGO brick turns 50! What a legacy. Two weeks ago several LEGO employees came to Dallas to check on our progress and to give us a sneak peek into LEGO. Their corporate overview had some fascinating information, including today’s anniversary of the Lego Brick. Of course, Gizmodo scooped me on this one ~ way to go guys! Here are some fun facts (via Gizmodo):
LEGO brick curiosities
- There are about 62 LEGO bricks for every one of the world’s 6 billion inhabitants
- Children around the world spend 5 billion hours a year playing with LEGO bricks.
- More than 400 million people around the world have played with LEGO bricks.
- LEGO bricks are available in 53 different colors.
- 19 billion LEGO elements are produced every year.
- 2.16 million LEGO elements are molded every hour, or 36,000 per minute.
- More than 400 billion LEGO bricks have been produced since 1949.
- Two eight-stud LEGO bricks of the same color can be combined in 24 different ways
- Three eight-stud bricks can be combined in 1,060 ways.
- There are more than 915 million combinations possible for six 2 x 4 LEGO bricks of the same color
- 7 LEGO sets are sold by retailers every second around the world.
- The LEGO bricks sold in one year would circle the world 5 times.
- 40 billion LEGO bricks stacked on top of one another would connect the earth with the moon.
- LEGO bricks are so much more than just toys. They are used in classrooms from preschool to university level to teach everything from math, language skills and science to engineering and technology principles.
- The LEGO brick has inspired generations of innovators, like Jonathan Gay, inventor of Flash.
- World-renowned author Douglas Coupland believes the LEGO brick represents a “language in itself.”
- A January 2008 Google search produces 57.6 million references to LEGO bricks.
- There are 55,600 LEGO videos on YouTube.
- Google co-founders, Larry Page and Sergey Brin, used LEGO bricks to build the external low-cost and expandable casing for ten 4GB hard disks when they were busy developing the Google search engine (today, they have reportedly been used in Google’s college graduate recruiting exercises to test potential candidate’s creative horsepower.)
Thanks LEGO!!!
Term Sheets Revealed
January 27, 2008
I have received four term sheets in the last ten years (three of them were for one startup). Those term sheets were the result of more than a hundred meetings with various investors. The process of getting a term sheet is a lot like getting a bid for a fraternity in college. When I was at the University of Texas I visited three different fraternities Sigma Chi, Fiji and SigEp. I was a Sigma Chi legacy so they didn’t bother to ask me if I wanted a bid, they just gave me one. But SigEp and Fiji wanted to make sure I would accept a bid before they offered one. The last thing they wanted to do was offer a bid and have it rejected. Once I told Fiji I was going to accept a bid from SigEp they decided not to offer me a bid. Most venture capitalists won’t give you a term sheet until you basically agree to accept it. Why is this the case? They don’t want anyone to be able to shop their deal. What’s the point? What if you could see term sheets offered by various venture capital firms to companies similarly situated to your startup? Would this give you leverage? Well Adeo Ressi wants to help you get some leverage.
Adeo’s site, The Funded is building a database of VC term sheets provided by members. Mike Arrington explains why this is such a big deal:
Venture capitalists have a lot of leverage negotiating terms that help them increase ROI simply because they have a firm grasp of the market. Things like liquidity preference (how much money they get out before the founders in a sale), veto rights and other preferred stock privileges can affect the long term economics of a deal substantially. Entrepreneurs generally rely on their attorney and contacts to help them understand the current trends in terms. Now, though, TheFunded will help them by supplying even more information. Entrepreneurs will love this. VCs, not so much.
Seth Godin on Grammar
Last week I received an instant message from a PR professional interested in position we are advertising on Craigslist. She suggested that I needed someone to edit my blog ~ the implication was that it is full of misspellings, run-on sentences and split infinitives. Of course it is and I apologize to Ms. Kinsley for the state of my writing. Of course Seth Godin has a different opinion:
Don’t let the words get in the way. If you’re writing online, forget everything you were tortured by in high school English class. You’re not trying to win any awards or get an A. You’re just trying to be real, to make a point, to write something worth reading. So just say it.
Turns out Brad Feld is taking heat for his own grammar issues. Check it out here.
Lawyers seek to muzzle bloggers by use of ©
January 26, 2008
The US District Court in Idaho has decided that lawyers can copyright their demand letters. The decision means that bloggers wont be able to post cease and desist letters on their blogs if the lawyer remembered to include a valid copyright notice. Look forward to seeing more ‘©’ on your legal correspondence.
According to Dozier, “The Court, in its decision, found that a copyright had been adequately established in a lawyer’s cease and desist letter. The unauthorized publication of the letter, therefore, can expose the publisher to liability. Statutory damages under the US Copyright Act can be as much as $150,000 per occurrence plus attorneys’ fees that can average $750,000 through trial. The publisher of the letter raised First Amendment and “fair use” arguments without success.”
Hm… I need to get out my Blacks Law Dictionary so I can recall what constitutes fair use. Update: Joe Gratz spent some time reading the actual decision and determined that the court DIDN’T agree that it was permissible to copyright a boilerplate legal document. In fact, the court suggested that they wouldn’t get into the merits of the copyright, instead focusing on whether or not the lawyers could force a website to reveal the identity of an anonymous poster. Check out the full post here.
New Design Explained
The new design of the Texas Startup Blog has been live for 15 days. The reviews have been mixed.
The Purpose - I began the Texas Startup Blog in 2005 to provide a resource for entrepreneurs. The result is more than 1,900 articles comprised of more than 1,000,000 words.
The Problem - I often include posts about my family, political beliefs and non-entrepreneurial ideas that interest me. New visitors to the blog are just as likely to find a post about raising venture capital as they are to find out about my son’s views on global warming. Visitors who expected startup content and found something else rarely returned. I wanted a way to better ‘merchandise’ my startup content for new visitors while continuing to post other material.
The Solution - We implemented the current theme so that new visitors would be able to find startup related content immediately. Of course prior readers still get the chronological posts via RSS or on the Blog page. Lots of my old readers evidently simply visited the front page and as a result the new look is frustrating. Once I point them to the ‘blog’ category they are fine, but it is hard to talk to 25,000 people.
The Result - In the last 15 days I have had more than double the normal readership, previous we had estimated we had 25,000 regular readers, our new estimate is now 50,000 regular readers. We will see if this trends holds up…
Google, Ideas & Advice. . .
January 25, 2008
Several times a day I get an IM from someone I have never met asking for advice. Most of the time the person sending the instant message has an idea for a business and they want advice. Ironically, more than half of the time the person soliciting information is uncomfortable sharing their idea with me. In those cases I am not terribly interested in helping them. On the other hand many people are willing to share their idea with me, but are concerned about sharing it with folks like Google or investors. My advice is always the same: OPEN UP, SHARE YOUR IDEAS! (more…)
