The head of a prominent mobile development company today made to me a comment that many corporate clients have made underfunded and ill-planned forays into mobile apps and are now coming back to the table to get things done right.  I think that is a meaningful observation.  It's time for some mulligans.

Even the consumer oriented apps for iOS or Android, now probably numbering 1M+, include many startup ideas that may have been a bit too lean and haven’t achieved any success.   I’ve seen a number of cases in sectors relevant to my own businesses where pioneering efforts had only superficial wins or faded very quickly.

The point now is for all of us to learn from those pioneering efforts and try to step up the game to the next level.   Pardon a bit of reminiscing, but I recall the early microcomputer era from 1975-1981 when the Altair spawned a temporarily flourishing industry of manufacturers mostly in the San Fernando Valley.   Every day brought incremental progress in functions, power, and reliability, but things got real when IBM came out with the PC in August 1981.   IBM basically rationalized the industry from that point forward, and I suppose Apple is the only surviving hardware brand established during that period of history.  (A larger number of software brands are still around, however.)

My question now is whether there will there be some rationalization of the mobile apps industry?  I don’t expect a dominant player to change the whole landscape, but it is possible that we will see a new range of more substantial apps, abetted by a convergence of mobile and money, in 2012.  We have more tools to work with, more and more smart phones in the hands of the masses, and the ability to deliver real performance.  This will require more capital, and it will depend heavily on first-class product design skills.   The technical underpinnings are in place, and it’s the creative UX and UI types who will advance us to the next level.

As I have written before, a good mix of basic marketing and distribution efforts across online and offline channels will be part of the new order of things.  “Viral” may again become associated primarily with colds and flu, although a well-designed app always has the potential to be associated with that term.

And, the power of major brands will be more and more evident.   The ideas may come from the startup world, but it may be the household brands that propel them to glory.  In a sense IBM was the first such brand to legitimize microcomputers, and there are many brands now teeing it up again and coming forward with more serious bets on their own mobile strategies.

All this bodes well for the mobile development community.  We can learn from the many pioneers who have tried ideas that worked, or didn’t work, and we have the customers to enable us to keep playing the game and improving with each cycle.   It’s a great time to be sell up and build up, and to just ignore that first shot when you turn in your score.

This past week brought a number of occasions to pitch or be pitched or to read others’ critiques of various concepts.   One particular meeting was very cordial, a warm introduction leading to a very detailed discussion, but at the end as I reviewed the session with my compatriot he said we never got to the “aha” moment in the conversation.   Yes there were plenty of really good suggestions, some very pointed criticisms, and some valuable insights, but it was obvious there would be no next step in that case.  Some might describe this meeting more colorfully as “they threw up all over the idea.”

Fortunately in that case we were working from the entrepreneur’s mockups, and it was one of a series of meetings with similar types of companies (not investor candidates).  We took to heart the suggestions, not all of which were consistent with other advice.  Prior to the next day’s similar outing with a different audience we were able to make a major iteration and did actually get the resounding “AHA” that we were seeking.   It was much better to have gotten knocked down before having committed any development dollars than to have been further down the track with little room to maneuver.   And, I give the team on this venture due credit for responding creatively to criticism   The rest of the week in that case just continued on an upward trajectory.

Similarly I was at the 1SS Friday “speed dating” session where students where forming into compatible teams, and mentors like myself were trying to find teams where we have the most relevant experience to offer.  This was a pretty crowded, noisy, fast moving event in a classroom.  I’m not sure I got to all the tables, but there were some aha moments for me.  One student is a biomed major working with a professor on a novel advancement in the creation and distribution of isotopes.  Having just read an article in the WSJ about GE’s newly disclosed laser excitation facility for that very purpose, I actually got the idea immediately.  Reading one article doesn’t qualify me to help that team, but on first hearing it certainly came across as an outstanding idea in a newsworthy area.  Maybe the iPad12 will be nuclear powered if this venture succeeds.

On the other hand, another team I met is intending to produce a game.  Not being a gamer myself, I just didn’t see the potential.  For all I know this may be the $1B+ idea in the room, but it’s one that’s just not easy to describe in a sentence or two, particularly to someone like me who has no good frame of reference.

I don’t yet know for sure which teams will end up on my list.  I look forward to the second speed dating session Monday followed by the weekly classes to follow.  And, likely I’ll learn more than I teach.

I realize that not all the great ideas can or should be explained in a way that results in the immediate aha.  Some are worthy but are complicated and may require some description of the target industry or the component technologies to give a generalist enough basic perspective to grasp the idea.   But, I think the takeaway from the past few days in my Austin travels is that somewhere in the process of introducing the concept, the initial pitch needs to build to a climactic moment where the listener can’t help but say that prized “AHA”!

<image from Silence of the Lambs>

I find myself in many settings these days where I’m asked to advise startup companies with respect to everything from pitching to fund raising to operations to strategies, all of which obviously interrelate.  And in many cases I’m part of a team where all members are reviewing, commenting, and suggesting.  I’m also on the receiving end of a lot of advice at some startups in which I’m personally engaged.

From the entrepreneur’s perspective, this would all be clearly helpful if the advice were consistent, which it rarely is.   Jason Cohen, a mentor at Capital Factory has written eloquently in his blog about “survivor bias” – drawing the wrong conclusions from successes as opposed to learning vital information from failures.   He also has provided an interesting video (54 minutes) on “six ways to work out whether advice is helpful to you” – which I commend to your viewing.

I’m going to list here a few of my own thoughts on this topic from my recent experiences:

Everyone who has been through the startup wars has biases based on past successes and failures.   One who has been involved in a similar business or in the space can easily jump to conclusions like “tried that, didn’t work” or “this definitely is the way to go.”   However, many businesses lessons from just a few years ago no longer apply in this era of fast-to-market lean startups with access to low-cost tools and services.  Failed ideas from the overfunded late 90’s are being resurrected in a climate where the business models that didn’t work then can work very well now.  So, the vintage of any advice, like the vintage of a fine wine, makes a difference.

As the stock brokers say, past performance is no indication of future success.  Some things that did work well in previous companies may no longer apply.  We have a major shift in technology away from PC to mobile, and we are living through a time when the general economic backdrop is perhaps permanently downgraded from what we knew just 3 years ago.  All of our revenue models depend at some point on consumers paying for the result of our work; even if we are deeply buried in the B2B space, at the end of the chain some C’s have to be supporting the B’s with their dollars.  Very few entrepreneurs get it right with every venture, and all advice has to be conditioned on the backdrop of the technology industry, the global economy, and even the unemployment rate closer to home.

Giving good advice is a painstaking process.  I admire those who take the time to go through every frame of a pitch and make very specific suggestions.  I know several people here who seem to chime in 24/7 when requests are made and who are doing much more than a flyover.  They have the knack to keep the big picture in view while hammering on the details.   Broadbrush platitudes can be found on bookshelves, it’s the fine-graded personalized examination that is most helpful.

Ask 5 people and you’ll get 5 different opinions.  Often these are conflicting, because everyone is looking through a different lens based on his or her background.  Maybe all the ideas are good, and you just have to choose the ones that you can execute and are consistent with your skills and resources.  Maybe you have reason to think some are bad, in which case you’ll have to follow your own instincts and do what you believe in.  None of your advisers will have hurt feelings as a result; all are trying to help, and all have been on the receiving end of plenty of conflicting or confusing suggestions.  At the end of the day, it’s your business at stake, and you are the one with the final vote.

Whatever inconsistency you may find in your advisers, it’s best to tap their wisdom at every opportunity.  Don’t be bashful about asking for help and using this network to test your ideas before you commit them to action.  You may hear things you don’t want to hear, but better to learn early from friendlies than get shot down in the market when it really counts.  The worst advice is no advice.  We all need some grounding with help from those who are interested in our success.

1 Semester Startup at the University of Texas is breaking new ground in teaching the art and science of entrepreneurship.  I am very much looking forward to assisting as a mentor this semester.  The students, nearly all undergrads, are actually on missions to create real companies; it’s a bona fide lab course and not just theory.  I think it’s especially cool that mentors are asked not to invest in the companies – at least until after the semester!

All this brings to mind fond memories of my one semester of teaching a graduate level MBA entrepreneurship course at the Goizueta School at Emory University in Atlanta.  I had previously and have since given many talks to various classes at Emory, GA State, and GA Tech, but actually having grade power put a whole new perspective on the process.  I was told that I was lucky to have graduate students.  The professor who recruited me said that undergrads were so grade sensitive in their planning for future graduate programs and jobs that when he gave out anything below an A he generally had to talk to Mama, Daddy, and a few uncles about how a life-long star-student in a prestigious (and expensive) university could possibly fall short of an A.

I do not count this as one of the successes in my life.  I probably learned more than the students did, and I think I connected with some, but here’s how it went.  I was given a syllabus under which the students were to form teams at the beginning and come up with business plans for presentation and defense in the classroom setting.  A few weeks were allotted for that, followed by some actual instruction.  I was told the order could not be reversed because the student workloads got too heavy from mid-terms and beyond.

So, the prescribed structure called for students to come up with really bad ideas on a subject where they had no training, and then spend the rest of the semester undoing the damage.  There were no mentors, per se, although I did bring in some worthy guest speakers.  

The class was an elective, and I questioned the sincerity of interest of most of the students.  I had people from F500 companies, several nations, and multiple backgrounds that showed no traces of entrepreneurial leanings and were probably looking just for a load-lightening course.  One international student who had limited command of English always sat on the front row and went to sleep immediately.   I did say most, not all, and there were some in the class who belonged there for the right reasons and who did participate enthusiastically.

Early on I discovered that all these students could write business prose very well.   Rather than read the same BS over and over again, I switched the goals to getting the concepts right in simple PPT decks and spending their hours on thinking rather than spewing out the words of more elaborate business plans.

So, with nothing really at stake, and with at least one team copying a plan from a previous semester (to my knowledge), we went through the process.  That was some number of years ago, and I don’t recall a single one of the plans that were put forward.   Not all were high-tech for sure.   I graded the students against each other as best I could in compliance with the distribution prescribed by the department.  I didn’t have to talk to any parents, but I know a few of the students could not discern any correlation between their actual grades and the syllabus. 

That course was only offered in the fall semester, and I chose not to repeat it again the next year.  The effort that would have been required to revamp it for my style far exceeded the compensation and the “psychic income.”  Then too the university was trying to minimize the use of adjunct professors like me because of negative consequence on national rankings.  Even the person who recruited me, also an adjunct, moved on to a prominent position at UVA.

The Goizueta Business School at Emory is one of the best in the nation, and I would certainly commend any person who choses to go there.  My criticisms are limited to my being miscast as a professor for one course at one point in time.

But, all this goes strongly to the point that 1SS is a much more practical model, designed and implemented by the professors who are leading it, with plenty of tech community support in Austin, and populated with students who are genuinely eager to be in the class.  I’m sure the goal is not to run the undergrads out of school to start up ventures before getting their degrees (might hear from Mama on that), but I wouldn’t be surprised if that happens occasionally.  Certainly some ideas will get further incubated while students remain in school and will then be hatched upon graduation in lieu of job seeking.

And, I do remember vividly the Chancellor’s introduction of Michael Dell as the principal speaker at my son’s UT graduation:  “He’s done rather well, but just think how far he might have gotten if he had completed his degree like all of you have.”

<photo: Ben Stein in Ferris Bueller's Day Off>

Patent portfolio issues have become daily headlines in recent weeks.  With the Federal government running short of cash, the next headline may be “MICROSOFT BUYS USPTO, PROMISES TO BE FAIR.”  Right now it would take a pretty complicated chart to track all the patent-related payments flowing among Google, Microsoft, Apple, Samsung, and other titans.  For all I know, they may net out to about zero.

So where does the law really come into play in startups and early stage companies?  If you’ve raised money, you are no doubt familiar with the basic securities rules and corporate organizational matters.  Those are pretty straightforward, although there can be a difference between “git ‘er done” attorneys and strict constructionists.   I worked with one entrepreneur whose lawyer told him he could not offer shares to anyone he had spoken with about his deal prior to handing them a full disclosure document.  He had, of course, spoken to everyone on his prospect list in general terms to test the waters, so that brought him to a dead stop – until he changed law firms and completed the deal. 

Then there is often the question of whether your creation should be patented or formally trademarked.  Clearly, based on current events, there can be teeth in strong patents around concepts embodied in electronics and devices, and certainly in pharmaceutical formulations.  Anyone working in those areas may find the cost and time to be well justified.   And, of course, startups often form around patents being licensed out of university research.  As to software, at least at the application level, my personal opinion has always been that the patent process far exceeds the lifecycle of the software product itself and never really affords any protection.

Trademarks are based on first use.  If you liberally use the “tm” superscript you have some common law protection if in fact your name or design is original.  You can apply for a formal trademark with the PTO.  I did that once at Intellimedia for the brand “IntelliPlay” we put on our sports instruction CD-ROM’s.  We obtained that trademark, and I had it framed for my office wall.  However, we chose to port our products to the 3DO game platform of the early 90’s, and we ended up in their catalog right next to products from “InterPlay” – a southern California game developer.  It only takes one or two incidents of customer confusion to challenge a trademark, and we got sued immediately in California about the time of the OJ trial.  Our business decision was to abandon the trademark and just use "Intellimedia Sports"; the trial costs were beyond our reach and might well have resulted in an unfavorable verdict anyway.   I just discarded that framed trademark when I moved to Austin; it looked good on the wall, even though the frame was the only thing of value.

I have heard litigation described as “the sport of kings” – and that is in fact the case.  If you choose that as an offensive business strategy, or if you are forced to defend yourself on some matter, be prepared for the cost, time, energy and emotional toll.  I once had a strategic investor who began poaching my employees. I knew well the top executives and was rather surprised they would take actions to diminish the value of their investment.  But, I suppose we weren’t so strategic at that time and they just wanted our talent pool.  When I complained directly to the President, he said:  “You get you some lawyers and we’ll get ours and sort this out.”  So much for that; I was a pawn against kings in that case and could hardly take him up on his suggestion.  It’s a lot nicer when your investor just buys your company to get the talent, as is common with companies like Google and was the case for me when Rupert Murdoch’s News Corp. bought Comsell in the 80’s.  

I could go on with the stories, including the time my VP of Development at Peachtree was handcuffed and taken from our offices to the Dekalb County Jail for being in possession of computer tapes from a disgruntled subcontractor.  That’s a rather extreme case when a trade dispute is contorted into a criminal matter.  Nothing came of that ultimately, but it’s a reminder that you only have to convince one cop of supposed law breaking to get someone arrested.

Most of the legal issues that come into play in startups seem to revolve around IP protection.  Making sure that work done for your company is actually owned by you and can’t walk out the door with a departing employee is an important step that most young companies are coached to take.   That’s pretty fair.  But, what do you do if you think an employee has pilfered your IP?  As with patents, trademarks, and so many commercial agreements, you have to make a business decision to spend money on the legal process.  And, you need to calculate the possible return.  It does no good to sue an individual who has no capacity to make amends or pay damages.   You might or might not be able to get a TRO (Temporary Restraining Order) followed by some sort of injunction, but you’ll pay all your own legal fees for that.

The bottom line is that in the hotly competitive business world the law is one weapon at your disposal, and throughout your career you’ll probably have occasions to deal with being on the offensive or defensive end of that weaponry.  In those situations, as Mel Brooks said:  “It’s good to be the King.”

I recently wrote on the topic of Forecasting.  The subject of this post is to differentiate between building an accounting oriented forecast with all the requisite statements properly footed versus creating a model that is readily usable by you and your investors to test basic cost and revenue assumptions, gauge capital needs, and guide your instinctive planning for the business.  I obviously favor the latter.

I like to build these models with one sheet that has all the input cells highlighted and shows a summary of the big picture results.  It’s easy then to manipulate the key variables and see instantly the effects on the plan.  I’m not interested in year-by-year balance sheet changes, depreciation schedules, etc.   I just want to know how much cash is required to get from here to sustainability.  I want to test out various theories regarding major items like customer acquisition cost to see what those do to my EBITDA and cash numbers over time.  And, I want to be able to show with clarity what return an investor can expect based on the desired valuation going in.

But, first let’s take a look at the really big picture:

On August 2, Dr. J. Tinsley Oden, Director, Institute for Computational Engineering and Sciences at UT Austin, gave an interesting presentation at the Austin Forum on “The Emerging Age of Predictive Computational Science.”  Dr. Oden is pictured above from the Forum site.

Dr. Oden talked about some “grand challenges” of prediction, e.g. nuclear weapon effectiveness when actual explosions are banned by treaty, the affects of new medical regimens, climate and weather changes, consequences of natural and manmade hazards, and even nanomanufacturing outputs.  In general the methods used to make such predictions have not been accurate enough and have cost plenty.

He walked us through a history of scientific methods from Plato through Aristotle, Bacon, Hume, Popper, Bayes, and Laplace.  I took good notes and will be happy to answer your questions about any of these, but I will spare you more detail in this post.  Or you can order Dr. Oden’s new book on mathematical modeling in mechanics if you’ve got an extra $101 and can wait until October.

I thought his punch lines, however, applied to the subject at hand:

• Are we trying to solve the right equations?
• Are we able to solve them correctly?
• Do we realize that all inputs are imperfect and have issues of validation and verification?
• Even hard science is subjective due to uncertainties in parameters, models, and even experimental data.
• Therefore life’s most important questions are subject to probabilities.

So, what does this mean for one who is trying to forecast a startup?  Certainly it implies that assumptions need to be clearly stated and even perhaps stress tested across a range of values.  For example, what if a salesperson can only sell 3 deals per day instead of 4?  Does it make sense to assign some probabilities to either end of a range of assumptions and see what those suggest as to the range of outcomes?

Are we paying too much attention to the easy parts like expenses and not to the difficult parts like revenue and its components of selling costs, pricing, and volume estimates?  Do we really have enough information to solve any of our equations without just compounding one guess on top of another?

Do we as entrepreneurs and investors have the ability to operate in the world of startup uncertainties?  In an ancient time (not that long after Popper), I ran a chain of hardware stores in Atlanta.   (And yes, I did go from “hardware” to “software” in the most literal sense of both, but that’s another story.)  I could forecast one year’s revenue by month for each of eight stores within a 1% margin of error.  There wasn’t much one could do to make a dramatic change in a decades old company with pretty established neighborhood markets.  In high tech I’ve never come close, but I believe I’ve missed on the good side more often than the bad side, which is about the best that can be expected.  

So, flip that coin, after making sure it’s perfectly symmetrical, and get moving on your model.  Just save those “supporting schedules” for your accountant when there are some real numbers to report.

This has been a week of pitches for one of the businesses I’m involved in, and I’ll be seeing five more in a Capital Factory practice session this afternoon.  Whether you’re seeking to recruit a key person, to motivate an employee, to make a sale, or to land an investment, as an entrepreneur you’re always pitching.  That has to become your most finely honed skill.   The great successes I’ve seen have been the ones where the out-front person could make the pitch under any circumstances and cause good things to happen.

There are plenty of venues in Atlanta and Austin for coaching on this art.  I always liked the informal format of Startup Gauntlet at the ATDC, where the winner gets a certificate that says something like “your pitch sucked less.”  It’s a good chance to practice in front of seasoned reviewers who aren’t bashful about giving advice.

Practice does make a difference.  I’ve already seen the Capital Factory companies twice, and there was huge progress between those two sessions.  I expect even more today.  Good entrepreneurs are coachable and can improve with guidance.  They may get 5 completely different ideas from 5 different advisors, but they can synthesize something from each to improve their next outing.

Practicing first with “friendlies” is a good step.  Trying out your pitch on those already on your team as advisors or investors is a great way to get honest feedback and to help you develop a good style – forceful and succinct in making your points but relaxed and genuine at the same time. 

You have to match your presentation tools and approach to each audience.  You need to be ready for an individual, five people around a conference table, or a full-blown audience in a stand-up “séance” with whatever dogs and ponies help you get your message across.

And, you need to get to know that audience.  Is the decision maker in the room, or are you being screened?  Does someone there have the right frame of reference to evaluate your proposition easily, or is more background required?  How much real time do you have – not what’s on the agenda but the elapsed time before your listener starts checking emails?  (Looking at the watch seems to be passé now.)  What is the hierarchy in the room, particularly if you are presenting to a sizeable group working for an established corporation?

It’s good to do a round of presentations to real players you seek to persuade.  Perhaps you warm up with ones you think are more long shots, so you have a chance to be tested under “live fire” before you attack the targets you absolutely must win.  Even cold calls, if abetted by warm introductions, can be a good testing ground like this.  You’re better talking to anyone who might act on your request than sitting around just waiting for something to happen.  Force yourself into action and into staying in that action.

Some things that can happen are these:

You learn that your idea or the way you pitch it isn’t yet ready for prime time.   It’s better to learn that early from friendlies and give yourself a chance to refine your concept before you’ve blown any “must-have” opportunities.

You will get an introduction that matters.  Even if you pitch into a clearly losing cause, you never know what personal connection might come to the listener’s mind that leads you to a very positive next step.

You get that next meeting.  Often the major goal of any initial presentation is just to get to the next meeting where you can tell a more fulsome story to the real decision maker.   You’ve accomplished your mission on that alone.

You realize you need better ponies.  Very few people are truly visual when presented a new idea.  You may have to ratchet up your presentation with a movie, a magic show (saw one of those at a conference in San Francisco), or something else dramatic to be sure your audience “get’s it.”   This is particularly true in this era when you are competing with so many other new technology deals, many of which may go as quickly as they came but are still enough to overwhelm and confuse your listeners.

You realize you are pitching all the time.  Every time you run into someone who asks about or cares about what you are doing, you are pitching.  In my sports CD-ROM days I landed a deal with Tom Kite just after he won the US Open because someone in my church in Atlanta asked me about the company I had at that time, also happened to know Tom, and gave me a good reference.  I went from “who is that guy?” to “we want to do that deal” on that one reference.  (It didn’t hurt that the referring friend was also the Secretary of the Augusta National Golf Club.)

I won't repeat in this post all the standard rules about PPT’s, plans, models, etc.  I’m focused here just on the interpersonal skills.  Whatever happens, you next pitch will not be your last; as long as you are a tech entrepreneur you will be pitching, sometimes from strength and sometimes through adversity.

<Image from Paper Hounds>

Conversations with a number of entrepreneurs in Austin and Atlanta this week got me focused on the concept of “MVP” – Minimally Viable Product.  In this era of lean startups, and particularly those that are mobile apps, this approach is often recommended.   “Just get something out the door fast and see if the dogs will eat the dog food.”  Then risk your capital, or your investors’ capital, when the dogs give you some proof along with the woof. (Sorry couldn’t help that.)

At the same time, I am familiar with several companies that have raised anywhere from $.5M to more than $10M and are looking for capital now to start generating meaningful revenue.   All of these are Consumer Internet related, although some have a B2B distribution aspect.  Why have they not followed the MVP model?  Here are some possible reasons:

They started too soon.  They also went down a few wrong paths, and are just now matching strategy to the market.  It has been possible to go through a lot of money in the last few years through trial and error while technologies and markets evolved at light speed.  I personally advised on one deal a couple of years ago that had a large legacy investment.  We came up with a product for the iPad, prior to its release, that built on the original idea but used none of the code.  In retrospect I think our timing was perfect and we had a product that would have been a winner.   But, the investor group was caught up in the real estate downturn and couldn’t carry the restructured company to the start line.  And, not surprisingly, new investors were very leery of following so much capital, no matter how sweet we made the deal.  The psychology of that backdrop proved impossible to overcome.

The team had ready access to capital.  That is a corollary to the preceding paragraph.  I don’t have a list of the first 10,000 investors who said: “too much money has killed many a good idea” – but they were all correct.  We saw this in spades in the 90’s, but there have been many cases since where projects got overfunded.  If the money is there, it will all get budgeted for something well beyond an MVP.

The idea is too broad.  There’s nothing wrong with an idea that has lots of moving parts and needs to be more fully developed to demonstrate its value to users, investors, and whomever is paying the freight.  Any one portion of the idea may lend itself to an MVP, but that tactic would also result in a minimally useful product.  It might achieve some early traction, but it would neither prove nor disprove the bigger idea, and it in fact might die a quick death.  (Tech writing style guides require the use of the term “traction” as often as possible.) I’ve seen cases of early traction and investor euphoria only to have the usage fall off as fast as it rose.  Sustainable traction, with a positive second derivative on its growth curve, is what is really desired.  Underbuilding to an MVP spec may make that goal unachievable.

The product handles money and/or customer data.  In today’s climate, one should take no chances on a product that can have tremendous operational risk if it botches transactions, leaks customer data, or is subject to fraud, hacking, or any other type of customer misbehavior.  You’re no doubt familiar with the recent well-publicized Airbnb case and maybe with the breach at high profile Zaarly.  If I’m going to use a product, I want it to be Maximally Secure.

So, what is my conclusion?  I think every startup idea has an “Optimally Viable Product” and should be built for that.   That may be an ultra-lean weekend coding binge, or it may be a few $Million at risk before all the market risk is tested.  Would you rather have a portfolio of 50 $100K deals or 5 $1M deals?  Apart from the obvious question of wrangling 50 individual deals, which portfolio has the most risk versus upside?  Those $100K deals are more susceptible to being knocked off quickly, but you’ve essentially bet on all the horses in the field and will have some winners and no bottomless pit losers.  The $1M deals go much farther out on the limb, but they may be much harder to catch when the race begins and should have the potential to generate some big gains.  It’s your personal call if you are the investor – part of what makes angel and early-stage venture so challenging.  

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Tuesday August 2 was decision day for the ATI’s SEAL program – Student Entrepreneur Acceleration and Launch.  The ATI invited 5 student teams originating from the University of Texas at Austin to participate in a summer program to evaluate their big ideas and reach a go or no-go decision by August 2.  Their series of presentations was one of the more interesting startup events I’ve attended, and here’s a summary.

The SEAL teams under the leadership of Kyle Cox were provided coaching and mentoring resources, a co-working environment in the ATI, interns, and a timeline with clear deliverables.  They were all on a mission to determine if their ideas could be developed into real businesses.

The afternoon began with presentations from 3 predecessors from past ATI programs.  You can check their sites to learn more, but what’s cool about each:

Famigo has iterated from an app concept to a much broader model of search and discovery of apps using family-friendly criteria. Great line (paraphrased):  “Being a student is your secret weapon.  It’s like being a puppy -- everyone gives you plenty of affection.  Ask for all the free help you need.”

Ordoro is tackling the supply chain issues of the vast population of smaller online merchants, giving them a better solution to a point of obvious pain.  Here we have 3 MBA’s, none technical, who have managed to get their technology built and are in the market with enough live customers now to begin focusing on growth issues. 

Hoot.me is run by 3 rising Juniors who are using Facebook to tackle group study tasks and has found a revenue model in links to tutors.  Best line:  “HootyCall”

The five SEAL members then gave their reports:

Virtegrity is developing code to detect and counter malware in root OS servers, a growing issue with cloud computing.  They run atop the Hypervisor for KVM devices on Linux systems.  I had actually done some work last year on a KVM project and learned how to spell that. Very deep technical. Decision:  GO

ARC is recovering Nitrogen from waste water for use in fertilizer production.  They solve an important environmental problem.  I thought it was interesting that the 3 founders got to know each other on a water polo team and are now focused on waste ponds.  Decision:  GO

Pheir Healthcare is seeking to address medication mistakes made in nursing homes.  Fewer than 10% of those homes can afford current automated solutions, and Pheir is exploring a mobile app.  They presented five hypotheses they tested over the summer, and the idea failed on 4, including price, established competition, and perception of the pain by nursing home administrators.  Great line (paraphrased):  “Sat on this idea 2 years, better to have done this work and killed it faster.”  One of the most candid presentations I have seen in a situation where everyone wants to find a winning strategy.  Wanted to invest in this team, but – Decision:  NO GO

Shape Tracker is a team of ME students using technology developed at UT for 3D surface scans of humans.  Thought is it reduce high turnover in gym enrollments by showing body improvements with an easy, non-invasive method.  They found that industry too heavily franchised and centrally controlled and that a pilot program would be a necessary next step.  (Wondered if they could pilot with Kim Kardashian?)  Unfortunately the technology is not quite ready for that.  Decision:  Defer

VecturaLux is addressing the problem that existing Internet fiber is reaching capacity limits, and the company is using considerable math and some IP to create active optical cables.  (Similar notion to Atlanta originated Quellan, now part of Intersil.)  This group analyzed the prospects of providing the technology to major OEMs versus creating its own product line and chose the latter.  Decision:  GO

It’s exceedingly rare that startup programs produce “stopdown” decisions, but sometimes those are best.  The time lost on a bad idea can never be recovered, and making a painful decision early, calmly, and analytically is better than wasting time and passion on the wrong concept.  And, it’s also rare that we see founding teams give such insightful assessments of this process.

<image from Scientic American>

My previous post was on the art of forecasting, which generated a number of comments on the blog and via other channels.  After continuing to read more about Groupon’s accounting theories, I thought a quick follow-up on “backcasting” might be appropriate.

Let’s say you’ve made it through the startup phase and have achieved some major momentum.  There’s perhaps that next high-value institutional round, and then with luck an IPO as well.  The bigger you get, the more investors are interested in real numbers and the less they care about your use case (formerly known as your “story”).  In fact, as I have written before, businesses often become worth less when valued on actual financial results than on their promise, so I guess the trick is to sell on the vision but buy on the numbers.

The computer industry has always made the honor roll of creative accounting.  One of the early landmarks was a Texas-based company called DataPoint that counted as revenue any system moved from one end of its warehouse to another, even if no customer was on the hook to pay for it.  As I recall, that company had a respectable product line and became public on real performance, but, after a while the quarterly earnings pressure forced management into the “desperate man” conundrum.  Busted.

Software companies in particular mastered the art of “revenue recognition” at times most fortuitous for reporting purposes.  If you made a $500K sale on December 31 for a 5-year license, why not show all that revenue in the current year and kick the can down the road for next year’s sales quotas to be made elsewhere?  How about those 20% annual maintenance contracts?  Might as well book them upfront too and not be too concerned about matching the fulfillment expenses three years out with the revenue of today.  And then there are development contracts that are “in progress.”  No auditor is going to be able to assess how far along you’ve gotten with millions of lines of code toward a finished product, so you can just about pick any percentage completion number you want and show the revenue accordingly.

Enron and WorldCom were very late to the party when it came to creativity with the books, and those of us in with software backgrounds should stand by our rightful inheritance of inventing that art.

Enter the 90’s, and perhaps the most interesting case (no intended reference to Steve “Case”) of all was AOL not expensing all those “coasters” we got in the mail daily.  Under some theory the cost of those was capitalized.  Time Warner and Ted Turner paid the price for that later on.  So did the United Nations.

Now we have Groupon making famous the acronym CSOI – Consolidated Statement Operating Income.  That seems to mean that expenses associated with that income are irrelevant and should not be used to evaluate the investment.  Forgive me, but I can’t believe their tax return would be calculated in that manner. 

So, take heart, if you survive the worst of the startup phase and get to the universe of real numbers, you don’t have to adhere to any standards of accuracy!  If you don’t quite make the goals for the quarter, just invent some new metric and flout it to your investors.  Maybe it’s RIWHEC, Revenue If We Had Enough Capital.  I hear that a lot.  How about CFASWCMTN, Can’t Find A Salesperson Who Can Make the Numbers.  I hear that too.  Or even PS, Payroll Smayroll, who cares if we pay people when we are really in the business of producing pretty financial statements?

I have owned about 90 cars in my driving lifetime, from a 1928 Buick (no I did not buy that new) to a 1988 Ferrari Mondial to a variety of Porsches, Corvettes, Alfas, and even pickup trucks.   I also owned a Collector Car Price Guide called the Gold Book (sold to Cox Enterprises) with about 58,000 entries.  I bought that business from its retiring owner, automated it, and kept making up the numbers like he had.  However, I was pretty darn accurate when measured against actual auction sales.  So, I’m going to my friendly banker and add $2M to my Net Worth for AAT, Accumulated Automotive Trivia.  If he asks me the value of a Talbot-Lago SS or a Delahaye 165 with bodywork by Figoni et Falaschi, I can answer those questions.  That qualifies as an asset, right!

<Talbot-Lago photo from Peterson Museum in Los Angeles – I recommend you go>