Last week brought a discussion with an entrepreneur about whether a particular person would be a good board member for his company.  He thought not, but I tried to correct his perception.  I have served on many private and some public company boards, including a couple of banks, and have seen many different styles in action.  Here are some of my thoughts as to characteristics you want in your board members:

1.   Cheerleading – It is great to have a director who is always willing to help promote your company to customers, partners, potential employees, and investors.   Someone who is not afraid to open the Rolodex (dated term, I know) and flog it on your behalf can be a great asset.   I’ve often thought about giving my directors sales quotas; the best boards become part of your outreach team and should be managed as such.

2.  Critical thinking – On the other hand, you don’t want your board to drink your Kool-Aid with such enthusiasm that they are incapable of critical thinking about what you report to them.  I don’t mean criticism per se, but I do mean the ability to ask incisive questions based on their experiences and to help you see where you may be going astray in your plans.  It’s easy for you as the entrepreneur to get lost in the day-to-day pressures and to lose sight of the bigger picture.   Having some more detached input, particularly when it’s creative and positive, can be a real benefit. 

3.  Domain knowledge or more general wisdom – Either of these can be beneficial.  If you are in a highly technical business, say fabless chip design, having someone who can grasp the technical nuances and, perhaps more important, who knows the players in the industry, can be a huge resource for you.  However, in some locales those types of individuals may be hard to find, and you can still benefit from generalists.  The human resource dramas and basic financial challenges of early stage companies aren’t particularly dependent on the specifics of the business.

4.  Sensitivity - It’s great to have someone who’s been in your shoes as an operating entrepreneur and who understands how you tick.   I’ve seen some grinders on boards, particularly young MBA analyst types coming along as part of the package when you take in dollars from a very large VC firm with layers of associates.  You don’t want your board meeting to devolve into calculator sessions where every number you report is second guessed or requires some clarification.  Hopefully those analysts are accompanied by more senior partners who understand what’s appropriate for a board meeting and what’s best handled offline.  

5.   Lack of conflicts  - There’s an inherent conflict when a venture investor holds a board seat and the company is ready to raise its next round of financing.  On the one hand, that investor wants the best deal possible for his own fund; on the other it’s better in the long run for the valuation to keep increasing.   You will do well to attract investors who are professionals at their game and can keep these conflicts in check.  I’ve even seen board members who get more concerned about protecting their investor buddies from the country club than doing what’s best for the company as whole.  This is especially dangerous when you have a mix of individual seed investors followed by a more powerful and deep-pocketed VC round.  Board members server at the pleasure of the shareholders and are obliged to look out for them all, but when the company absolutely has to have money to proceed, tough decisions have to be made, and conflicts have to be managed.

6.   Skin in the game – You should seek board members whose interests are aligned with the company’s by virtue of having some significant equity upside or by being an outright cash investor.  Board members who serve only for fees or resume building rarely give you the share of mind that you really require.

7.  Stamina – It’s important for a board member to have the stamina to stay the course during the ups and downs of your company’s development and to hold on to the institutional memory as you have changes in your management team.   It’s even better when that stamina is accompanied by dry powder for successive financing rounds.  Having a board member who has folded somewhere along the way means you have someone who is only there trying to protect an earlier investment and who is particularly subject to the aforementioned conflicts.

6.  Collegiality – Having board members who get along with each other is critical.   I’ve formed some close bonds with fellow directors in many situations over the years.  We’ve had to have many discussions outside the boardroom environment and even sometimes had to make management changes or take on operating roles beyond the normal call in order to get companies out of the ditch.  

7.  Work ethic – You go to a lot of trouble to prepare for a board meeting.  You’re forced to get the facts and numbers up to date and to create useful reports for people who are outside the normal day-to-day flow.  These efforts may or may not be of much value in your own management activities, but you have to do the work in order to get your directors up to speed for each monthly or perhaps quarterly gathering so you’ll get meaningful advice from them.  It’s darn nice when the directors actually do their homework before the meeting and come prepared to accomplish something rather than sit through recitations of charts already provided to them.

8.  Good match – If you had the luxury of choosing investors up front and having a say as to who joined your board, then that’s the time you should have conducted the interview and reference checks to be sure you’re getting directors who align with your style and are likely to be most helpful to your company.  If you didn’t have much negotiating leverage on this point, then you may have to make the extra effort to establish rapport with particular individuals.

I could add to this list, and you are welcome to do so.   I could also recite many interesting stories from my boards over the years.  I recall one investment that went sour almost solely because the VC representative clashed with the CEO; the ultimately solution was the VC firm taking a loss on is position so management could do what it wanted it do.  There were two sides to the story, but I always thought that loss could have been avoided.   Then there was the time when Bain Capital invested in one of our Cordova portfolio companies.   I was not assigned to that board, fortunately.  I don’t know if the Bain work ethic originated with Mitt Romney, as this was long after his tenure there, but the Bain board members insisted on flying in late the night before a meeting and then convening at 6:00 AM so as not to lose any time in traffic.  Talk about stamina. 

I’ll save the rest of the stories for my book.  Time now to get ready for some board work.

<image from Wikipedia>

That was the title of last week’s Texchange event on the timely topic of Product Development.   A panel moderated by Tom Hale, Chief Product Officer of HomeAway and including Mike Svatek of Bazaarvoice, Ash Maurya of Spark59, and Sam Heywood of uShip drew a capacity crowd in the AT&T Center ballroom and was assisted by a dozen discussion leaders at the dinner tables.

This is an issue that almost all the startups and early stage companies in my view are grappling with.  It’s one thing if you have a going business with multiple product lines and the luxury to expand or kill any particular one as you choose; it’s quite another issue if your livelihood totally depends on bringing that first product to market.

One of the key statements in the opening discussion was that one person on a development team needs to be the “spirit” of the product.  When I think of that I recall Enzo Ferrari and his earliest post-WWII racecars (photo above).   He built a powerful high-revving 12-cylinder engine and wrapped a simple body around it with the sole purpose of maximum speed.  He had a very clear statement of his product intent:  “I don’t care if the door gaps are straight.  When the driver steps in the car, I want him to sh*t in his pants.”   Crude but elegant, and the high style that we associate today with Ferrari would come along much later on the basis of all the race wins that original philosophy delivered.

Il Commendatore was an example of tyranny in product design, and the panel seemed to agree that both democracy and tyranny have their places in a multi-person product team.  At some point the one person ultimately responsible may have to call the shots.   And, that may include even overruling the inputs of prospective customers.   There was largely a B2B audience at this event, but particularly with consumer products people may not know or be able to express their real feelings about a new concept presented to them.   I’ve always found focus groups in particular to be easy to manipulate to a desired answer.  And, with groundbreaking products of the type that have made Apple so successful, we clearly saw that one person’s instincts brought into existence shiny objects that far exceeded normal imagination.

Our table discussed the runaway product design problem.  When does that “spirit” go beyond the basic business requirements and result in runaway features and missed deadlines?  This was viewed as a very common problem in startups, and it’s one that affects funding as well.  Investors will almost never follow behind $Millions invested in a product that could have been monetized along the way but disdained customers in order to stay on a track toward the ultimate feature set.  I tried to help a couple of years ago with one such project where 43 different versions were created as demos for prospective verticals, but none were actually sold.   Technology is moving so quickly now that long development cycles may well result in the competition stealing the show or a product that is already “moldy” even when first launched.   There comes a time to button up whatever works and let customers have at it, and many entrepreneurs have a difficult time letting go.

Once a product is launched and is part of the fabric of a company’s offerings, the ability to kill it may be limited.  Someone brought up the practical issue that what seems to be a poorly performing product may the very one that a particular sales team is using to make its quota for the year.  Or there may be especially loyal customers that rely on that product and as a result buy others from your company.  Once a product is introduced into the price list, the interdependencies multiply rapidly.

Tom Hale closed the session by demonstrating the toy drone pictured below.   He used it to make the point that successful products can come from the most unexpected places.  In this case a French company that makes chips for very specialized purposes had one employee who realized that he could design a very stable 4-rotor drone using one of those chips as part of its control system.  If you’ve every played with a typical toy helicopter, you know how hard they are to fly, and this machine is easy to maneuver, knows to hover at about 4 feet if your inputs would throw it awry, and is just fun.   The inventor essentially developed the product, proved on his own that he could sell it online, and then it became part of the company’s offerings.  

So, it may not be a Rocket to the Moon, but even a clever drone can be an unexpected moneymaker if you let innovation rise up from your ranks.

<photo of Ferrari from Nerd Insurance>

 <photo of drone from Amazon>

On January 10 my daughter Audrey and I attended the Austin Forum, a regular monthly lecture by distinguished researchers from the University of Texas.  (Dad is always good for some live entertainment when the boyfriend is out of town.)  This forum series provides insights beyond the normal realm of TechDrawl content on entrepreneurial topics, and I hope you find this occasional brain food worth reading.  One of my loyal subscribers asked me recently how I could write on subjects about which I have no knowledge, and I assured him (let’s call him “Charlie”) that I am not alone in that practice.

The topic of the evening was “The Predictive Brain:  How Past Memories Influence Future Decisions”  -- presented by Dr. Alison Preston (pictured above), an assistant professor in the Department of Psychology and Section of Neurobiology and a member of the UT Center for Learning and Memory.  This drew a crowd well beyond the capacity of the venue at the AT&T Center, and as the Foursquare Mayor I found this to be rather heart warming.   (It may be “good to be the king,” but it sure is easy to become the mayor.  User initiated check-ins will soon be artifacts of a quickly forgotten era in the Consumer Internet.)

Now back to the topic, which does have an important lesson for all of us at the end…

Dr. Preston defined memory to include facts, acquired skills, habits or fears, and events you experience – all things supported by different parts of the brain.  Experiential memory is “mental time travel” and is housed in the Hippocampus, where her research team hangs out.  She showed a video trace of a single neuron in that region of the brain responding to the subject’s observing particular video clips, in the test case a Simpsons episode, and then again responding just to the recollection of that same stimulus.  I was at that point wondering if a glass of fine Single Malt kills a few brain cells, does it erase very specific experiences?

She showed interviews of research done with subjects who had lost their Hippocampus to a virus.  They exhibit anterograde amnesia -- no memory of events after the disease -- but are otherwise smart, full of prior memories, and engaging.  Since live subjects aren’t too keen on having cranial probes inserted or brain parts extracted, these rare subjects who have very specific injuries or illnesses are obviously prized research specimens.  She said that Alzheimer's looks the same in early stages but then progresses through the brain.  As one who has had two direct ancestors succumb to that disease, I’m hoping Dr. Preston’s work sheds some light on possible treatments.  Otherwise I’m going to buy a very fast motorcycle just prior to the age where that seems to overtake my strain of Dyers.

The Hippocampus glues together all the things that happen during an event and reactivates all the brain pathways associated with that event.   We can then use that memory to predict, and to imagine.  Shared content triggers recall of everything related in the past, and this remembering influences the way we learn.  She referred to this as “Inferential learning” – anticipating linkages among events and applying them to what we store as memory.  Her team employs Functional Magnetic Resonance Imaging (fMRI) to study this, and the supercomputing capabilities at TACC have made possible rapid analysis of collected images from fMRI studies.  The goal is to correlate what we’re thinking about while we’re actually experiencing something new.  

Now for the punch line…

Dr. Preston emphasized that sleep plays an important role in stabilizing memories. Experiences are replayed during sleep, which makes memory stronger.  Test subjects show fewer errors on things queued during naptime and thus allowed to bolster the relevant neurons.  Sleep facilitates the gist of an idea, insights, and inferences.  Our memories anticipate, go beyond actual experiences, are ever changing, and actually need enough sleep to accomplish their tasks.  So, the next time you decide to “sleep on” a decision, know that you have a scientific basis for doing so.  And know also that all-nighters prior to an exam have very little effect.

The implications of Dr. Preston’s studies go beyond basic understanding and apply to educational practice, and a whole new field of legal practice known as Neurolaw.  Your honor, my Hippocampus is to blame, not me…

<image of Dr. Preston from Austin Forum site>

<image of Hippocampus from Wikipedia>

You’ve no doubt seen multi-year financial projections prepared by accountants.  You get a plethora of spreadsheets showing income statements, cash flows, balance sheets, capex, assumptions, amortizations, tax estimates and all manner of interlinking numbers from sheet to shining sheet.  These thorough presentations have their place and are worthy products from anyone training in the accounting profession. 

However, at the startup or early stages of a company, this mountain of data often tends to obscure the numbers on which you need to base your decisions.  I spent time this past weekend wrestling with a workbook with 17 spreadsheets, many of them rolling out over 60 months and including summaries at the end, curiously enough ending up with the column “BS” – and I’m not making that up.  I was preparing for a potential investor an analysis with respect to trimming distribution methods and overhead, and I quickly found the expected issues with broken REF’s when I tried to make even minor changes.  Performing surgery on a model of that scale is almost more difficult than building it in the first place. 

I’m sure the original author of the model was following a template he or she uses often and probably could have manipulated it more easily than I could, but that person was not on the scene.   Just as coders have a natural instinct to throw out everything written before them and rebuild software from scratch, I believe spreaders of sheets have the same tendency.   We all develop our personal styles that are most comfortable and most easily managed through repeated iterations.

The core issue of an overly complex model for a startup is that it is just compounding from day one assumptions that have not been tested.   I can understand why many investors no longer look so closely at the numbers, particularly anything beyond the first year.  I heard a VC long ago say that with the invention of spreadsheet tools everyone could produce a pretty model with very little thought as to its core elements, and he thereafter paid relatively little attention to them.

I ended up boiling all this down to a new two-sheet workbook that addressed the investor’s core questions about runway he would be buying with his dollars.   The financial expert at that firm had been given the complex model but probably like me found it hard to tackle.  Seeing everything condensed made visible the actual cash needs under the newly trimmed format.  But, as a byproduct, it also revealed some flaws in the pricing of a strategic relationship that needed to be addressed as well.

We went from a mountain of GAAP data to a pretty simple picture of a real live situation.  We had something on which to make decisions that could lead to a better outcome.  And, some beneficial changes in the operation of the company will be a result.

Some of my core recommendations for creating a decision model are these:

1.  Keep the important assumptions highly visible and make them easy to change.   You should be able to see on one summary page the direct result of bumping prices or changing any assumptions about volumes.   You essentially need one dashboard that lets you manipulate the key variables and measure the consequences.

2.  Let your accountant worry about the GAAP presentations.  Your only interests are whether your plan has sound arithmetic and how much cash is needed when to enable you to execute that plan.

3.  Stress test that plan.  Try the extreme ranges of your input variables and see what happens.   You’ll discover how much cash cushion you may need if products get delayed or the revenue ramp doesn’t quite have the positive second derivative you estimated.

4.  Keep the presentation simple.   Staffing details, for example, can be in an ancillary sheet.  Investors will assume you can manage expenses to match the needs of the business, and their main focus with respect to staffing will be a reality check on head count versus revenues.  If you are showing 5 people generating $50M in revenues, you probably will have some explaining to do.

5.  Once you have gotten comfortable with your model, and you have raised your financing, try to lose it quickly.   It will change next month anyway, and you’ll be working on a new model after your first few tests on the battlefield.

For those of you youngsters who don’t recognize the image at the top, that’s the implement that put men on the moon and was the basic tool behind every financial model for startups in my early career.

<photo of teaching slide rule on author’s mantel>

Hall Martin’s Texas Entrepreneur Networks offers an interesting alternative for Texas based companies looking for capital.  He runs what he calls Funding Forums where he assembles groups of investors at various locations around the state and stages for them presentations by 10 companies at each stop.  I attended the Austin event on January 12, 2012 at the Norris Conference Center (their generic photo above).

As an aside, this particular conference center is in itself what looks to be an interesting business model – repurposing shopping center space with poor frontage exposure into a destination for various shows and events.   I’ve been to several shows at this particular location, and there’s even an adjacent ice rink if you want to negotiate your deal on skates.

The January 12 Funding Forum was the first stop on a 4-city tour including Dallas, San Antonio, and San Marcos.  There were six investors or representatives of investor groups and family offices on the front row who introduced themselves, plus some number of others who were scattered in the audience.   Presenters pay $1000 each to appear at the 4 shows on this tour.  (No roadie jackets included, however.)

This is more of a matchmaking activity than a typical angel group investment “process.”  Hall has a good following of investors from low to high tech, and he attracts a similar diversity of presenters.   Each is given a 15-minute slot, 10 to present and 5 for Q&A.   All of the presentations showed evidence of coaching and included the fundamentals that any good pitch requires.  There were the few inevitable technical glitches, and, as is always the case, some presenters will never realize that very small fonts are unreadable beyond the very first row.

This particular batch included 10 companies raising in the aggregate $7,350,000 and with total 2012 projected revenues of approximately $13M.  A couple were under $50K in revenue, and one was more like $6M, so don’t divide anything by 10 and come to any conclusions.   The companies included 3 in the production and/or distribution of healthy foods (no biscuits & gravy mentioned), another dealing with assessing your personal health via a website, two social media plays, one car buying service, a multi-player online game company, a financial information provider for public company investors, and an SMB cross-platform marketing firm.

The success rate of the Funding Forums is pretty good in terms of actual transactions, particularly given the aforementioned diversity of deals and investors.   In this batch, I’d say maybe 2 were nonstarters, 2 didn’t really explain themselves well, 2 had possibilities but were early, 1 was technically interesting, 1 was a pure franchise play, and 2 seemed to be pretty far down the track toward proving unique models and establishing revenues.  But, those are just my opinions.  Most of the more than 1000 deals I reviewed in 2011 were pure technology plays, and I was not in my element here.  One thing is certain -- several of these companies will complete their current funding rounds as presented.

Texas Entrepreneurs Networks offers a range of resources and good connections for those seeking to start and grow businesses in this area, and its Funding Forum is a model that adds value to the startup ecosystem here.  Check the schedule for the next one coming to your area.

<photo from Norris website>

Today’s TechDrawl report is filed by Jesse Dyer, CEO of TourGroove:

Congratulations to all involved in the first iteration of the Flashpoint program at Georgia Tech.  A very carefully curated group of startups was well coached and brought to the stage on Tuesday January 10 in one of the most flawless venues and formats I’ve seen.

Opportunity is knocking for Atlanta’s tech angels.  From personally making the rounds in Atlanta, Austin & New York, I can confidently say that the presenters at Flashpoint Demo Day brought everything one could ask in a tech startup...now will investors out there respond in kind?

I'm really impressed with the quality of start-ups in Atlanta.  Yes they are all SaaS, and yes many of them are some offshoot of Internet Security Systems, but so what!  Atlanta does Internet security, and it does it very well.  These are smart folks.  Again this is not a Y-Combinator scene.  These are GA Tech PhDs, professors, grads and one really sharp undergrad who all have prior technology start-up experience and are solving problems that they've faced in past entrepreneurial endeavors.   There’s no sex & violence, but these are hard B2B problems that someone needs to solve.  Why not here in Atlanta?   

Flashpoint Demo Day at GTRI’s auditorium had an overflow crowd excited to be a part of the buzz for this first outing.   It had a much looser feel then Venture Atlanta even though 1/3 of the presenters were repeats from that event.   However, it seemed all the VA grads had made progress since I last saw them, and the new faces that found their footing at Flashpoint fit in well with the regulars.

Here's the problem, by my count these startups are passing the hat for over $9M.  Where's that going to come from?  Godfather Sig already rounded up a cool $Million to get Flashpoint off the ground, and I bet Noro-Moseley will be there when a Series A is in order, but who is going to fill the gap in between?   I'm just curious how many angels are out there for Atlanta deals?  And not just in Atlanta.  I talked with another entrepreneur friend of mine who is actually a Flashpoint mentor, and he was lamenting a meeting he'd had earlier in the day when a local investor balked at him for seeking seed investment before he had finalized all development and stabilized his revenue stream.  It seems that outside San Francisco and the Valley true arms-length risk-taking angels are a scarce breed.  Austin and New York are no different.  It's telling that in 2012 when U.S. Treasuries can pay a negative rate of return that angel investors seem to expect entrepreneurs to eliminate all the risks but also to deliver a 1999 return.    

From my years in banking I saw that the country's greatest risk takers generally are real estate gamblers (sorry but it's true); I feel that since so much of the real estate wealth has evaporated in Atlanta, many of the real risk takers who would write the bigger angel checks have disappeared.   The primary angel market I see outside of Silicon Valley is for token $5-25K checks after 72-hour start-up weekends.  That's just not going to cut it here in Atlanta, and this community deserves better.  Maybe $5K will fund your start-up weekend - super lean - soft beta - 20 & 22 year old cofounders - mobile app that curates the social feed around your 80%-off dog grooming coupons...but addressing a $37 billion dollar phone fraud problem is going to take some substantial investment.  PinDrop has already found its lead dollars in Silicon Valley, but wouldn’t it have been nice for that opportunity for wealth creation to have remained at home?

If Atlanta doesn’t have $9M handy, then the Flashpoint group will hopefully find success on its stops in New York next week and California the week after that.  I hope their stories aren't lost in translation outside of the ATL.  While Internet security is all the rage here, its sex appeal is quickly neutered (unfairly) when compared to Foursquare and Facebook.  That's why it's now more important than ever that the Atlanta angel community rises up and starts writing checks again.  You don't get mobile...fine.   Can't get comfortable with Social....OK, you're not the first.   BUT, no excuses if the community of Atlanta angels can't really get behind these home grown SaaS Internet security winners.  From CodeGuard to PinDrop to Social Fortress, if these teams are still schilling at Venture Atlanta 2012 then shame on us.  I'm kicking one of you angels out of your seat next year so I'm not stuck sitting on the floor at Flashpoint Demo Day 2013.

(Editor’s Note:  I hope you Atlanta readers will take Jesse’s comments as a call to action and not as any form of criticism.   He’s been through similar forums in Austin and NY and now has real world basis for his perspective on this.  Too many potential angel investors in Atlanta have preferred to hold their money for their own deals, including me when I was in that stage of my life.  Meanwhile, we’ve seen hundreds of $Billions of wealth creation in the Bay Area over the last few years where there is an abundant supply of the aforementioned arms-length money.   Dave McClure of 500 Startups has alone invested in 252 startups in only 2 years of operations and did his first deal of 2012 on January 3.  That kind of velocity, even if you view it as “spray and pray”, is an example of how differently angel investing is defined in that one section of the US.)

So, Atlanta investors, “start them checkbooks” and make some $Billions at home.

<photo by Jesse Dyer>

Last night’s BCS Championship game had a clear winner, and it had a clear lesson.   The LSU team seemed not to have their collective heads in the game, and it started with the quarterback Jordan Jefferson, photo above.  He was like a deer in the headlights as he faced the BAMA defense, and that was apparent even to a television viewer.  Since his backup had a proven history of throwing interceptions against the Tide, Coach Miles apparently didn’t think he had a choice.

There is no coach to call the plays in a startup.  You have to step forward as the CEO and make real-time decisions that involve complex interactions among employees, customers, and vendors.   Yes, there may be a board, particularly if the company has taken on some investment, but I’ve often heard it said that the only purpose of a board is to fire the CEO.   I don’t subscribe to that view; board members can be very effective as business developers or fundraisers if you equip them and encourage them for those roles.  And, their advice can be very helpful.  But, they’re never going to be the ones immersed in the day-to-day and suffering the body blows, so there’s only so much they can do to share your load.

When things are going very well for a startup – happy customers, deals getting done, payrolls getting met – the entire team is energized.   A good CEO is always the head cheerleader and head rainmaker, and you need to ride the waves of those good times to strengthen the ranks.  Some companies successfully use various types of extracurricular team-building exercises, but I’ve personally found that nothing beats the adrenalin rush of knowing that the company is accomplishing something in its chosen market.

On the other hand, as with LSU last night, when things aren’t going at all well – delays, financial pressures, missed targets – as CEO you have to instill some fortitude up and down the line and maintain confidence.  You have to keep everyone on the same page, with none of those shovel pass interceptions while your intended receiver is blocking in another location.   And, likely you will have to deal with a lot of dissention within your own leadership ranks.   I’ve always recommended that when things are going well, just take credit for good management.  When things aren’t going so well, then it’s time to look for excuses.   But, excuses won’t solve the problems and improve the situation.

One or two individual efforts can provide a turning point.  Even if you as CEO are at your wits’ end, you may have someone in the frontlines of your team with a creative idea that can be a turning point.  Somebody needs to make just one extraordinary play -- mixing league metaphors here, but think of Demaryius Thomas’ individual feat of turning Tebow’s first 18-yd pass in OT into a long touchdown Sunday in Denver. 

As with all entrepreneurial endeavors, you face the good and bad times dealing with lots of ambiguity and lots of uncertainties.   Jefferson never knew exactly what defense would be called against him, whether the BAMA players would execute, or whether his own players would perform according to the designed play.  Fatigue became a factor, and you could see the confusion and frustration as LSU could never even find and hold the 50.   Give the opposition due credit, but the Tigers just weren’t able to perform at their capability and weren’t able to adjust to adverse circumstances.  This appeared far more mental than physical, and that traces back to leadership.

McCarron, on the other hand…that’s the CEO you want to be.  

 <Photo from Arlington Star-Telegram>

As I tallied up 2011, I realized that I had reviewed, evaluated, judged, advised, or opined on well over 1000 start-up or early stage deals, and I expect that trend to continue in 2012.  This is something I enjoy doing, for many reasons.  It’s interesting to see the worldwide patterns that come and go in creative startup minds, and it’s always a particular joy to meet aspirational young entrepreneurs in hot pursuit of their dreams.

My deal flow is by no means a representative sample of the startup universe.  It is skewed more toward digital media, with less hard science and almost no life sciences.  But, I can make some interesting observations from this pool.

Déjà vu – I looked at one set of executive summaries where I calculated 20% were just about exactly the same concept.  All those were in the general category of “using my mobile device to organize my friends and/or family activities.”   That’s not to mention the already healthy number of companies playing in that same space.  Are these ideas being created in vacuums with no thought to existing tools?  Is the problem that significant that it requires so many solutions?   This is a prime example of where operating in a strong start-up ecosystem can be a huge benefit.   No matter how much you read and research online, just being in a human community where you can describe your deal to a knowledgeable listener can keep you from re-doing the obvious, can connect you with something similar where you can add value, or can spin you off in a totally different direction.   These ecosystems in places like the Valley tend to protect their offspring by providing a dimension of personal feedback that might not be found in, say, Ludowici, Georgia.   (Some decades ago its leading industry was its infamous speed trap.  Where else but TechDrawl could you learn such fascinating tidbits of Southern history?)

The Kicker – Bob Metcalfe here says repeatedly that the world’s problems are not going to be solved by another website.   Yet just this week we see companies like Klout getting a $30M infusion from top rank VC’s.   Does that mean my Klout score will eventually determine whether I can get a job or buy a home?  Will it be on an RFID chip in my elbow that also has my medical records?   (I’d cite my Klout score here, but when I try to check it all I get is “internal server error.”  Hopefully some of that $30M is going toward technology.)  Certainly for some careers indices like this are relevant, and yes there is still plenty of money to be made in new websites and new mobile apps.   But, when you look at a mountain of deals as I have over the last year, the ones that stand out are the ones that appear to have some protectable science underneath and are not relying strictly on being coolest, fastest, or "firstest."  That science may be embodied in an algorithm, a chip, or a device, but it changes the nature of the game and provides what I would call a “kicker” to interested investors.

Traction – There’s that word again.  Entrepreneurs complain that if they already have traction and have taken the risk out of a deal, then investors aren’t actually taking much risk.   But, you can see from the investors’ perspective how with so many similar deals, the cutest ones that come to the front of the cage ready for adoption are the ones that have shown an ability to create real customers and real volume.   (Austin is a rather slow market for local TV news, so there are lots of animal shelter stories.  I thought I should throw in something analogous here.) Investor risk is indeed greatly reduced if you let the marketplace do the preliminary sorting, particularly when there are so many replica deals.   If there’s no kicker that truly differentiates, then traction is the next best test.  And, you can see why investors find it easier to play in B2B deals where a few big customers or channels can be sold up front to prove the market.  

Proxies – That’s a term that has surfaced several times this past year.  If you have a new concept, what similar concept is an adequate “proxy” for your proposed revenue model?   How do you set the price?  Who else is paying what you plan to charge, and what are the competitive pressures?  Even as far back as my Peachtree Software days, just creating a price list was a challenge.  That topic alone is almost worthy of a business school course, but it’s trial and error for most entrepreneurs.   If your concept has multiple revenue streams, or perhaps mixtures of capital costs and recurring fees, you quickly find many permutations.   You can conduct surveys and get some useful input, but genuine proxies can be your best guides.  I’ve found that it’s very hard in particular to ask consumers what they will pay for a new and novel product or service.  You might pay a lot more than I for something that catches your fancy, or vice versa, but the question is what on average is reasonable.  And you often must learn that the hard way as your launch yourself into the market.

I would say more on this topic, but it’s time now to go look at another deal...

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