In several companies I’m involved with now we’re wrestling with the notion of locating the businesses where the action is.  Positioning yourself along with a collection of like-minded entrepreneurs, even direct competitors, is a good way to hone your strategy, gain access to talent and capital, and be in the know when new innovations are rolling out.  Austin is a great example of that in mobile.  Lots of good things can happen by just making yourself part of the scene.   I’ve bet my own business on making the household move and trying to be engaged in as much here as possible.

Another project may involve distribution of goods through big-box retailers, and that one probably has to go where we can assemble the best management and marketing talent with relevant experience and relevant address books.  (Rolodex now sounds too dated!)  The founding entrepreneur is flexible; rather than bring the management team to him, he may be best served by going where they live.   That could be Atlanta or probably some other city of size east of the Mississippi.

Yet another one needs to disperse its key executives according to their roles.  In that particular case, development is being done here in Austin, but the primary customers will be making decisions in places like NYC and Chicago.  These team members already know each other well and don’t have to be in one facility to bond.  They can leverage technology to be out in the trenches where the revenue is to be found.

Unfortunately the current housing market imposes an enormous amount of friction in these decisions.  If you are looking to bring in a key person who is in family formation stage with a house, kids, school concerns, etc., chances are pretty high that his or her house is either “underwater” or likely to be sold only after many, many months on the market.  The drumbeat of bad news in the residential sector just continues to wear on the economy in general and reduces career flexibility.  Only the largest companies with very highly paid recruits can absorb the costs of corporate re-lo in this climate.

One idea I have is to create an Airbnb-like service for permanent home swaps.  If there were a service to match homes in, say, Dallas and Atlanta according to apparent market value (whatever that is), equivalent schools and amenities, and other factors, there are probably enough families wanting to go in either direction to create some trading opportunities.  This would not, however, be a simple Internet transaction.  Mortgage holders would have to get involved, and the families would actually have to exchange titles in order to get the mortgage interest tax deduction for an owner-occupied home.   If one or both houses are underwater, the lenders would have to agree to some resolution of that.  Bottom line, this would be legally complicated, but if it were possible it might create jobs by making people once again portable to where their skills are most valuable.

If you want to work on this idea, it’s yours.  The real action on this one is probably near Bank of America in Charlotte, a rather nice city in my opinion.

There is a plethora of programs and conferences around the country incorporating the word “launch."  I happen to be engaged in or advising several start-ups that are wrestling with that issue at this moment and am devoting this post to that specific topic from the entrepreneur’s viewpoint.  Here are five thoughts:

1. This is the stage that tests the entrepreneur’s ability to tolerate ambiguity.  There is no clearly defined roadmap, and often a technology as conceived can be applied in many different ways.   Each of those ways may suggest different marketing paths, funding sources, and types of team members required.  It’s most difficult when all the directions look promising; it’s darn hard to let any of them go.  And, you can probably find all the advice you want for or against any particular selection.
2. The vision of the entrepreneur is put to the test.  Most don’t have the luxury of doing what Apple just did in Final Cut Pro X by inventing a new product it believes the world needs and giving short shrift to compatibility issues with earlier versions of its dominant FCP software.  Even Conan has picked up on this.  At launch many decisions have to be made based on a feel for the target market and a creative strategy than can only be tested in action.  When we developed Peachtree Software, it was pretty obvious what accounting looked like; we could launch as long as the debits and credits balanced and didn’t have to pay any attention to today’s trendy terms like use cases, UI and UX.
3. There is the currently popular issue of launching the MVP (minimally viable product) versus shooting for something bigger.  The MVP is a way to stake an early claim in a particular market segment and begin engaging actual customers, and it can certainly reduce the development cost risk.  On the other hand, a concept of broad scope may just never catch on if exposed piecemeal to its audience.  Everyone favors the lean startup, but not all ideas can be “leaned” to success.  Plus, the competition at that level is not one or two companies, it may be thousands cranking out overnight apps or other software or purely digital concepts.
4. The entrepreneur has to be adept at “discovery” – talking to developers, investors, partners, prospective revenue sources, and users to get some feel for what will fly in his or her chosen market.  I have been participating in a lot of these discovery meetings, and we always come away with something of value that helps us understand what is possible as opposed to what is imagined.  Knowing how to ask the right questions is critical.
5. Finally, a point was driven home yesterday in a church meeting I attended with about 20 smart and accomplished Austinites, none of whom except me had ever actually used Twitter, Facebook, or any other social media.  And, this is in a hip town with more than 200 mobile startups of some consequence.  Most of these folks had smart phones, but not all, and they have the basic tools of modern communication.  But, it’s important to realize that launching a really cool new product that ought to have the world knocking down your door has to overcome a whole lot of inertia.  The point is, before initiating the countdown and lighting the fuse, make sure you’ve talked not just with your tech peers but also with people that represent “real America” and aren’t breathlessly waiting for the next great innovation.  

<Apollo photo from Boeing site>

Joshua Baer, Director of the Capital Factory in Austin, invited me to join in an evening session with this summer’s crop of startups.  They practiced pitching their company concepts to a group of mentors, who provided appropriate critiques and guidance and even tolerated some insights from myself in the peanut gallery.  One of the companies had a very similar model to one of our prized failures at Cordova Ventures in the early 00’s, but I think now the idea will work whereas then it was just way too soon.  Advances in tools combined with dramatic cost reductions have made a lot of bad ideas from a decade ago now plausibly good ideas.  (Someone should start a resurrection fund; our graveyard has several that we’d like to “dig up.”) (Groan.)

Next on the agenda was Michael Trafton, CEO of Blue Fish Development Group, who gave a thorough presentation on the importance of defining your core values as a company and making you sure you hire (and fire) accordingly.  I don’t have his list, but, oddly enough, just Googling that topic turns up at the top of the list Google’s core principles, as good a template as any. 

Anyone who was around Atlanta’s tech scene in the 90’s will likely recall Mindspring’s core values as constantly preached by CEO Charles Brewer.  I remember them even being laminated on a wallet-friendly card, and they were always front and center in any discussion with Charles.  Clearly they worked; I still see plenty of Mindspring email addresses many years now after the company was merged into EarthLink.

Trafton went so far as to say the only way an employee of his could get fired would be to violate one of his core principles.  He has created strong loyalty in his team, and he’s competing for talent in a market where there are plenty of great jobs to be had.

There was much discussion on the hiring process, using examples like Southwest Airlines.  Someone mentioned Chic-fil-A; I don’t know their hiring strategy, but it’s pretty obvious they find people who deliver much higher service quality than most other fast food chains, and they are drawing from the same labor pool as all.  The Cathy family has stuck to its most noted principle of never opening on Sunday, and I’m sure that tradition will continue.

Clearly it’s critical to match hires correctly with the jobs to be done.  Trafton’s company is in the F1000 IT services business, and he needs customer-minded employees and not ones who only want to work on the latest cool idea.  (One of the mentors turned to me and noted it’s hard to get any duller than accounting software, but, hey, it was a good living at the time and great for our investors.)  There are many approaches to this matching process – from tests to team interviews to multiple sequential interviews to reviews of social graphs like contributions to Stack Overflow.  And, companies with some history soon develop a pretty specific profile of what type of person is likely to succeed in their particular cultures. 

One point that prompted considerable conversation and that stuck out, and one that I heard also at an earlier event here, was the admonition to avoid hiring crazy people.  Most of the mentors seemed to have had some direct experience to that point.  I’ve made plenty of hiring mistakes in my career; I’ve had my share of eccentrics that come along with technology and creative endeavors, and I’ve seen people do plenty of crazy things, and yes I can also recall a couple of senior execs in the 80’s and 90’s that did literally go crazy on me.  I don’t know exactly how a young company translates that advice into action, however, other than steering clear of Vancouver hockey fans.

Now if you asked me about crazy customers, there’s a long list I can drag out.  You’ve had them too.

If there had been time I’d like to have extended this session to the topic of personal leadership in a startup company.  Core values complemented by a strong leadership style can work magic.  Look at the individual influence of people like Steve Jobs and Larry Ellison, for example.  It’s hard to imagine any statement of principles standing alone without the extraordinary force of their personalities and styles.

One company I admire for leadership is not in the tech business, barely present in Austin, but ubiquitous in the Southeast – Waffle House.  Every one of their senior team constantly works in the field, staying close to employees and customers, and in particular they all work as cooks, servers, or cashiers on every major holiday.  Waffle Houses never close, and they have developed an extraordinarily successful style of management that provides well for them.  I recall attending a GA Tech Foundation meeting at Sea Island where Waffle House CEO Joe Rogers flew in his G4 to the airport on St. Simons Island, worked a shift in their restaurant nearby, and showed up for the GT meeting in his uniform with nametag.   Joe and his team seem to value nothing more than staying close to the frontlines of their business.  They event bought out a franchisee in one state who put in some POS automation in lieu of the iconic paper tickets at Waffle Houses; any perceived efficiency was counter to one of the key elements of the “user experience” at that chain.

Unemployment is distressingly high for some geographies and some skills, but one can sense that many companies in the tech industry will succeed or fail based on their abilities to find the right people amidst a what is now a tightening supply of talent.  And, at the very least, they’ve got to “avoid the crazies.”

<image from CNBC site>

The goal of a startup is not just to raise money.  I don’t know who said that first, but I’ve heard that quite often lately.

Perhaps the greatest quote of the management icon Peter Drucker is this:

“Because the purpose of business is to create a customer, the business enterprise has two--and only two--basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

Case in point – read about the success of Apple’s store strategy in today’s WSJ.  For the opposite, look at how the major US auto companies, particularly GM, had their beans counted to the point of losing comprehension of the basic notion of building marketable cars.  (I’m still not sure GM gets it.  Hertz gave me a Chevy Cruze this past weekend, and I found it to be bland, wheezy, and with entrance and seating seemingly designed for much shorter than average people.)

In the technology world we are in a design-driven era.  Apple certainly understands that and seems to be on a non-stop string of successes based on its design skills.  The lowering costs of technology development and distribution are allowing more products to be brought to market, and those that are differentiated in terms of user experience will be the ones that will create customers and prevail.

All that said, however, a startup has the unique requirement of being able to innovate and market while keeping itself financially viable.  If you and your team have the personal resources or the innate talents to completely bootstrap your company, or if your idea is one that can be done relatively “capital light” through a Y Combinator type program, you can strictly adhere to Dr. Drucker’s thesis.  On the other hand, the majority of startups don’t have that luxury.  There is the constant pressure to bring money in the door to meet pesky payrolls, rents, and other expenses.

My point is that startup management has to have on its primary agenda the forward financing of the company.  Using all the money on hand to develop a great innovation will come to naught if there are no funds to carry it to market and surround it with the infrastructure that becomes a real business.   Advisers and finance specialists can certainly play an instrumental role in this respect, but there is no escaping the necessity for senior management to be intimately involved in the process.  And, yes, it is a process.  It takes a lot of time, a steady building of relationships, and a repeated articulation of the vision as only senior management can do.

I’m not talking about just raising capital by selling equity.  That is one way to raise money, and the one most commonly attempted.  Other alternatives include selling services to generate excess income that can be applied to product development, pre-selling the product, and seeking government grants.  All of these require a thoughtful strategy and must be managed ultimately from the top of the company.

For a business to exist and to adhere to Dr. Drucker’s purpose, it has to have capital, and that capital doesn’t appear by accident.  

The photo above was taken June 12 in the lush North Georgia mountains where I had a chance to spend time with some of my GA Tech colleagues and to reacquaint myself with golf after a few months' break.  Georgia and Texas seem to be sharing the same heat wave, and it reaches well into these mountains.  

Two important new programs have come together to help technology entrepreneurs in the state of Georgia.  They were announced in May, but this was my first chance to talk with some of the key people involved.  Flashpoint, patterned after Y Combinator, is now accepting applications for its first class this fall.  Entering companies will get a stipend in the $15K range, which will cost them up to 6% of their equity.  Unlike Y Combinator, there is no $150K check waiting at the end, but nonetheless I think this is an important first step toward creating the "assembly line" that will prove attractive to all types of investors.  The goal is perhaps 20 companies in the first batch, and yielding a good crop of graduates that are all of the same mold structurally will allow investors and entrepreneurs alike to focus on the core issues of the startups - use case, customer acquisition, and revenue theory.  

A parallel development perhaps more unique and quite significant in its own right is the launch of GT:IPS.   Referred to as "GTIPS", this program is the result of collaborative efforts among Georgia Tech's licensing and technology transfer offices and the state's entrepreneurial development entities like the ATDC.  (In the interest of my readers who are not steeped in GT acronyms, I won't attempt to name all the specific entities.). The licensing office executed a very clever strategy of getting four of the most prominent tech deal law firms in Atlanta to work together on a relatively short licensing contract that is fair to entrepreneurs, their investors, and to the university.  One will have a hard time arguing with this new standardized boilerplate for commercializing technology originating from research at GA Tech.  Already recognized nationally as being among the best at dealing with licensing issues, GT has taken this to a new level with this highly streamlined process, which is backed by copious "how-to" resources and training.  There has never been a better time to invent something at the school and get the help you need to bring it to commercial fruition.

As an aside, it was noted that this is not something a university with a medical school could attempt.  That's a very different world in terms of regulations and the sheer magnitude of money required to unleash new health products and devices.

Funding is the big caveat in this situation, not just the availability of investment capital to get the best Flashpoint graduates to the next level but also state funding to underwrite the human capital to follow through with all the opportunities that evolve.  The generous support of volunteer mentors is of necessity a key part of the plan.

Kudos to all who exerted their leadership to get these new resources in place.  That's no easy job in a public research university operating in a state with lingering economic problems and the resulting budget pressures.  Generally speaking, nothing new is ever easy in academia, and this is all the bigger an achievement in that context.

Dr. Dan Reed, Microsoft’s Corporate Vice President, Technology Policy and Strategy (TS&P) and the eXtreme Computing Group (XCG) raised some interesting challenges in his address to the June 7 monthly meeting of the Austin Forum on Science, Technology & Society.  His talk was titled:  “Future shock: the Day after Tomorrow.”

So, instead of worrying about the payables today or some minor technical problem, here are some bigger things to get your attention.  There will be detailed coverage and photos on the Austin Forum site, so I’ve just selected 13 comments that are worthy of reflection.

1.  Due to the rate of technology change, your college degree will get you your 1^st or 2^nd job, but not your 8^th or 10^th.  You will have to continue your education to stay relevant.

2.  From one who remembered ironing a wet deck of punch cards after a thunderstorm so he could feed it into the computer, (as I too remember from GA Tech days), he said over his career a Gigabyte had gone from “nation class” to “kindergarten class.”

3.  He also remembered that not very long ago a “friend” was someone you actually knew.

4.  His fundamentally believes in knowing how to ask the right questions, which matter more than the answers.  In computing the questions don't change but the answers do -- because orders of magnitude change.

5.  When asked how many computers we own, most of us might reply 4 or 5.  Actually we all own thousands of computers if you count those in our cars, appliances, and medical devices.  From that he concludes that successful technologies ultimately become invisible.

6. In what he called “The Internet of Things” he mentioned that there will be 50B connected devices by 2020 -- more devices than people.  There could even be a connected “squirm” sensor in your chair so a speaker would know if he’s boring his audience.

7.  We are reaching the limits of Moore's law, and the rate of computing advances to which we have become accustomed is not happening anymore.  With transistors now only about 5 atoms thick, we are running into quantum mechanics issues.  He referred to “Dark Silicon” – already more transistors on a chip than we can turn on without literally melting the chip. 

8.  We are drowning in data.  There were 1.2 x 10^21 new bytes of data created in 2010. 

9.  The cost of monthly web storage has dropped from $1250 pre Gigabyte to jus $.15 since the year 2000.  All that “free” storage is like free puppy, expenses come later in terms of security issues, actually using the data, etc.  The limiting factors of data centers have now become energy and water consumption.

10.  Dr. Reed mentioned that each day astronomers collect more data than in all days prior in history, and we can now analyze real data instead of creating simulations to try to comprehend large problems.

11.  He thinks computing can create for us the equivalent of a good personal assistant, one that leverages memory, anticipates needs, holistically completes tasks, understands your emotions, and recognizes patterns.  (In light of certain current events with misbehaving politicians, this brings to mind all kinds of bad jokes, which I will avoid in this case.)

12.  He also talked about verifiable privacy and security.  His example was showing your drivers license to prove your age in a liquor store.  You’ve provided much more data than needed, including your photo, and there needs to some way of limiting that to what he called “claims based identity” that has a short and defined life span for its intended purpose only.

13.  Spectrum shortage made his list as well.  Most spectrum is unused most of the time, due to fixed allocations that are determined internationally by treaty.  We need to have intelligent and dynamic allocation of spectrum to accommodate the growth of mobile computing.  This is a prime example of technology changes outstripping social policies.

Congratulations to the Austin Forum for a very interesting, packed house monthly event with such a renowned speaker.

<photo of Dr. Reed from Austin Forum web site>

Here are some thoughts based on the author’s opinions, anecdotal data, numerous conversations, and considerable reading:

1.  A prominent tech executive in the mobile sector told me over lunch one day last week that as fast as things have been moving, he actually senses even more acceleration in the trend toward mobile.  He’s on the front lines, and he should know.  I see nothing but confirming evidence of that.  If you have no mobile strategy, even if you are selling tomatoes on the side of the road, you have no strategy.

2. The Groupon IPO filing worries me.  I have been a proponent of the “no bubble” theory based on the fundamentals of many of the prominent tech companies being mentioned as IPO candidates.  I don’t see fundamentals in Groupon.  It looks like 1999 again.  There are just two many questions about the sustainability of the business model, the ability for anyone to manage such hyper growth, the looming threats from much more established companies, the real value to merchants in terms of acquiring repeat customers, and, most of all, the actual numbers.  Sure the growth this there, but I thought their float on the money-up-front plan would mitigate the losses.  If the broader markets continue to swoon and this deal doesn’t perform well, it could be a big setback to others’ plans.

3.  There appear to be two economies in our country.  There’s one that has recovered, or perhaps was never even in a recession, consisting of the Internet superstar companies and their employees, Apple, the 25-40ish salaried crowd who are established in professions or at large employers, Beltway employees, defense contractors, and some regions like Austin that have maintained population growth and dodged the worst of overbuilding and subprime lending.  On the other hand, there are big hits being taken in public education even here in Austin, a sign of the general fiscal weakness of state and local governments across the country.  Housing values still seem to be declining generally, and it may take years for new construction to rebound.  Automobile sales, always a great indicator, are sinking again as gas prices and uncertainties rise.  And, persistently high unemployment is the big drag, and a big issue for the more recent graduates.  It’s no wonder that luxury spending is on the rise while basics are showing more weakness.  Tech entrepreneurs can’t assume a rosy backdrop for the next 24 months or so.

4.  I think we’ll see some mighty pivots this year.  Allow me to pick on Foursquare.  That company has smart leadership and stout financial backing, so I have to believe they will find a way to monetize their enormous user base.  But, at the same time I think there’s some urgency to doing so.  I spent a fair amount of time on Foursquare as an early adopter and became mayor of several places important to me.  Now, having relocated to another city, I get occasional emails that I have been displaced as mayor of one place or another.  I never once got anything of tangible value from frequenting any establishment.  On the rare occasions I have made some comment about being a mayor to anyone other than a tech colleague, all I have heard was: “Duh?”  I’m happy to see the whereabouts of those of you still using Foursquare, but you’ll rarely see me checking in.  It will also be interesting to see where Quora heads from here; it was initially useful to me, and entertaining, but it’s now gotten rather repetitive, stuffy, and overladen with verbosity.  Namesake is an LA-based Q&A site that I find far more interesting and more suited to brevity and occasional humor. 

5.  There are too many technologies being thrown at us too fast.  Look at all the tablets announced in Taipei last week, the dueling mobile platforms, the dueling version updates of just the Android platform, not to mention more than 500,000 apps from which to choose.  I have begun to believe that if you have more than 5 high-tech gadgets in your possession, one is always malfunctioning.  You have to budget time every day for trouble shooting something on which you have become dependent.  Where is all this headed?  I think Apple proves that product design, both the physical presentation and the UX, is the most important component of the winning formula.  I Tweeted recently that my cable remote has 63 buttons, many of them <3/16” in diameter, and many leading to sub-functions.  If half of them were dummies, I’d probably never find out.  Sadly, it’s much easier to engineer something really complicated than to design something powerful yet simple to operate.

And so the year is flying by.  We can all look forward to the “24 Days of Christmas” we’ll need to keep up with all the new stuff between now and year end.

>photo of Maroon Five Album "It Won't Be Soon Before Long">

Yesterday I had discussions with three separate startups about valuation questions. 

One asked how to respond in an investor presentation when the inevitable question comes up:  What are your valuation expectations?  It’s possible to get 5 different answers from the next 5 advisors you consult on this point.  How would you respond?

I went through some math based on an investor expecting a 10X return, assuming an exit value of 8X EBIT based on the company’s 5-year projections, and deriving what percentage would yield that result.  That answer was about half what the entrepreneurs really had in mind, and I must acknowledge that very little weight can be given to projections literally more than a few days out into the future.  But, this calculus does serve the purpose of showing the possibilities.

Another way is to put some beef behind the proposed valuation.  I’ve heard yardsticks like each engineer on the founding team adds $1M in value, particularly so in the Bay Area where companies are sometimes bought and shut down just to acquire the engineering talent for another purpose.  So, things like head count, actual customers, and any other elements of “traction” can help.

In any event, I would always advise against ducking the question.  I’ve often heard in venture séances an answer like:  “We’ll be reasonable and will respond to terms sheets.”  Inevitably as soon as the presenter leaves, someone around the table has already had a conversation with the company and spills the beans on exactly what is expected.   Avoiding the question just never works.

In this particular case we seemed to settle on an approach with a ballpark number that was about 2X what I calculated but was not out of the realm of reason.  The main goal of a séance presentation is to get one-on-one meetings with interested investors in the room.  If you answer with a number that shows ambition but is not delusional, you won’t prevent those next meetings.  In other words, there’s almost no right answer to the question, but there’s a wrong answer that will derail your process.  There’s a fine line between the two.

In another session we got into the subject of traction.  Clearly the valuation steps up incrementally when a product is complete and technology risk is mitigated, and then again when there are some actual customers that prove that at least somebody will pay for and use the product.  The latter begins to move the company from angel funding to A round consideration.

At the very earliest seed stage, I suggested the idea of “conversational” traction.  Two of the aforementioned companies are attacking markets from the outside.  The ideas seem plausible and promising, but I think it’s important to get some meetings with decision makers already in the target industry just to get some genuine feedback on how the game is played.  You don’t want a potential investor to ask whom you’ve met that likes the idea only to find out that you haven’t yet started that person-to-person investigation.  Your research can only tell you so much; you have to get some introductions and go meet the movers and shakers to understand how things really get done in your chosen sector.  Connections are easier to come by than you may realize.  You want that feedback so you can mold your plan accordingly before a potential investor starts asking around and shoots a gaping whole in your idea.

Keep in mind that valuations vary considerably by geography.  Deals that match the Valley interests will be worth much more there than in my hometown of Gainesville, GA.  But, if your business has to do with chicken processing, Gainesville may be the better bet.  I recently had a discussion with an attorney who referred to the valuation on a deal as “laughable.”  I agreed until I realized he was thinking laughably high and I was thinking laughably low.  We were looking at the same facts from very different geographic perspectives.

Comments always welcome.