On Thursday, September 22, Dr. Frank Moss, until recently head of the renowned MIT Media Lab and formerly the Chairman and CEO of Austin-based Tivoli during its glory days, gave a presentation to Texas student entrepreneurs, the 1 Semester Startup class, Tivoli alumni, and other guests.   This was an informal interview conducted by a student leader in which Dr. Moss wore one of his prized Tivoli T-shirts.   (Those are the shirts one wants to have, as opposed to the T-shirts that for many investors were the entire return from various tech deals over the last couple of decades.)

I’ve picked out a few of the many pearls of wisdom that arose during this conversation:

The concept for Tivoli originated with four UNIX researchers from IBM Austin, and Dr. Moss himself had spent more than 5 years with Big Blue prior to coming in to be CEO of the venture in 1991. Counter to the current tendencies to favor startups by college dropouts, he feels that ideas brought from a big company experience can play a role in a successful new enterprise.

Tivoli started out making sales with little more than a description of a product that could be built.  There was no such thing as traction, but there was a team that could get orders from real customers.  Quote:  “Texans are good at telling stories.”  In a recent post I commented that it’s good to have an enemy to fuel your passion for your startup, and Tivoli had just that in Computer Associates.  CA at the time was big, nasty, and easy to dislike.  The Tivoli guys wholeheartedly believed they had a better way to manage distributed computing and had the passion to attack the evil nemesis and make somebody’s life better.

Quote:  “If you have a great idea, the business plan will come.”  He also gave due credit to luck, never to be underestimated in any startup.  And, he talked about the importance of setting some goals, lest you have no way to measure your progress. 

With respect to hiring key people, he used the term “zero compromise.” He said he was more interested in people who could experiment, fail, and recover, than those not yet tested by failures.   There is so much ambiguity in any startup, these qualities are particularly important.

There was some discussion of risk.  If investors go too far in requiring traction, then they’re not really assuming adequate risk and are perhaps not funding viable innovations.  As successful companies get bigger and more ponderous, they too begin to stifle innovation by becoming too risk averse, and thus they give startups a chance to form in their space. 

In answer to a question about how one knows if your idea is too early for the market, Dr. Moss talked about the ability to adapt and experiment.   He gave some very practical advice about selling into enterprises:  If they don’t have a budget category for what you want to sell, find a budget they do have and define your product so that it fits.  It’s wishful thinking that companies will create new categories on the fly when all their money is generally budgeted in advance.  This is particularly true with respect to brand spending on various forms of new media that are evolving faster than budgeteers can plan.

Every startup needs a CEO who can “take the hill” -- a genuine leader who embodies the basic principles and beliefs of the company and can galvanize the team into action.  Dr. Moss epitomized that role at Tivoli, which led to 44 subsequent startups.  He commented that his greatest satisfaction from that period of his career comes from personal emails he still gets from Tivoli alumni thanking him for “unleashing their potential” and launching them on great careers.  He echoed many of the themes those of us from Atlanta have heard from John Imlay in particular over the decades.  He didn’t use Imlay’s exact motto “People Are the Key” but he clearly practiced it.  It’s darn nice for a tech community to have “anchor” tenants like Tivoli and MSA that can spawn so many capable people and follow-up ventures.

Dr. Moss thinks mobile technology is in its adolescence, very awkward and transitional.  He looks for great advances to come from less developed parts of the world, e.g. Africa where the mobile infrastructure is beginning to set the pace, not only in terms of bandwidth but transactions.

Is privacy is a relic of the past?  Yes, and it is being redefined.  There are many benefits from open information systems in areas like health so that problems can be solved with access to all needed data.  Dr. Moss thinks that a bigger issue than privacy is the loss of thought time in a distracted world laden with so many connected devices.

His passion now tends toward health care.  He noted that 50% of the people in the world are mentally or physically disabled; and there are many opportunities to impact humanity by addressing these disabilities.

He thinks the next 30 years of technology will bring the biggest revolution in health care.  The US is good at treating chronic disease, but 47th in measures of overall health among developed countries.  In the US 18-20% of GDP is consumed by health care, compared to 9% in the top countries in Europe and only 2% in developing nations.   Just getting our costs to the 9% range can alone save our economy, and that, in his opinion, will come from a bottom-up patient activated system

All in all, this was a very thought provoking evening.

<Image from MIT Media Lab site>

The Economist of September 10-16 has a special report on the Future of Jobs called “The Great Mismatch.”  I commend it to your reading.

I have had many discussions recently about jobs issues.   As I have written before, I see two economies even here in Austin where the tech sector is gasping for new hires while nearly every day brings news of some friend or friend’s child laid off in a non-tech field.   National announcements like Bank of America’s planned disposal of 30,000 workers don’t help the general mood either.

The Economist quotes the McKinsey Global Institute as defining three main types of work:  transformational (physical activity like construction, which has been in long-term decline in rich countries), transactional (like call centers, now subject to displacement by technology and labor arbitrage across borders), and interactional (like consultants and designers who rely on knowledge, expertise, and collaboration with others).   Clearly you are better to position yourself and your children in the latter category if your focus is earning a decent living over your career.

Let me digress here to a recent post by Jason Calacanis, a thoughtful analysis of whether the majority of millennials even have a work-ethic comparable to their elders or will be content with 20% unemployment over their lifetimes.  He questions whether many of them are really worth employing or whether they will have the motivation to achieve in the interactional world.  I recommend this as well.

Back now to the Economist report: Lynda Gratton of the London Business School has written a recent book on the topic at hand, and she brings up the notion that each of us needs to invest in our “social capital” – and she’s not referring to our Klout scores.   She says we need a “posse” of people with similar expertise to whom we can turn when needed, a “big-ideas” crowd to keep us mentally fresh, and a “regenerative community” of family and friends who can keep us emotionally healthy.  

I wholeheartedly ascribe to Ms. Gratton’s theories.   Every entrepreneur tends to build a posse over time that saddles up repeatedly for each successive venture.  That posse includes technically skilled people, investors, advisors, service providers, key leadership team members, and others.  It’s much easier to focus on the business at hand when you are already comfortable with the people surrounding you.   Even individuals with no entrepreneurial aspirations need their own posses to carry them forward through their careers and bring them into interesting and challenging opportunities.  Your posse may change over time, but just having a go-to team can be a huge benefit.

The big-ideas crowd is also important.  Being part of the ATDC in Atlanta and now the ATI in Austin keeps me challenged with the new ideas that appear each day.  I make it a point to go to more academic discussions like the Austin Forum each month, an event provided by the University’s Advanced Computing Center and always focusing on some mind-bending big-picture topic.  And, there’s nothing more interesting in this respect than working with student teams as a mentor in 1 Semester Startup.  They’re building businesses in everything from fashion to isotopes to big data to highly efficient automobiles.

And I’m building a strong regenerative community here in Austin as well.  This is a very welcoming city in all respects.   I miss the men’s locker-room scene with my golf buddies at the Capital City Club in Atlanta, but I have a similar hangout here with characters like “3-Margarita Roy” (story for another time), and a strong network of friends both inside and completely outside of the tech crowd. 

I always enjoy the frequent visits from Atlantans.   Come on out.  The fires seem to be under control, and we seem to be below our 100+ temps now.

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When an entrepreneur is on the fundraising trail, there’s usually nothing more tempting than finding someone or some entity that will remove that burden.  I’ve been on both sides of that table and thought I’d share a bit of wisdom from my perspective.

I once had a deal teed up with the venerable Robinson-Humphrey company, part of SunTrust since 2001 after having passed through many ownership changes in the preceding decade.  In its day it was the premier investment bank and brokerage in the South.  My deal preceded the dotcom era but was an interesting technology play.  We prepared the offering memorandum, did a road show at various R-H offices around the Southeast, and ended up with exactly the group of investors I had already signed up – and not one more.   I think our show was fine, and the R-H guys put in the effort, but in the end individual angel investing is very hard to accomplish with even one degree of separation.  People who didn’t already know me and who probably had no way to assess the technology just couldn’t be swayed by a broker intermediary.  Then too, the compensation structure of the firm rewarded brokers for trades more so than for tying up their clients’ money in long-term speculative and illiquid deals.  That was a valuable lesson learned, particularly after paying the brokerage fee on my own group.

I have found investment bankers to be very good at accomplishing deals based on real numbers.   They have plenty of databases of private equity groups, VC’s, and strategic investors that are looking for specific types of deals that meet specific financial criteria.  In those cases it’s a matter of due diligence, working the numbers, putting on a show, and matchmaking.   It’s less personal, and the relationships that IB’s have with these various buyers and investors open the doors and enable the deals to get done.  All this effort is not inexpensive, and if your deal doesn’t potentially generate a $1M fee, you’re probably below the range of even the boutique registered IB’s. 

The perversity of this is that it is easier to do a bigger deal than a small one.  I told someone last week that even Goldman Sachs probably couldn’t do a $500K raise based on a story; the same rules I faced with R-H still apply.  

A related blog post by Dan Shapiro entitled “Don’t Ask for Introductions to Investors” came to my attention.  He basically emphasizes the importance of doing your homework, using LinkedIn and whatever other resources you can find to match your deal with the most likely investors.   If you’re doing a startup, the fewer referrers between you and your target, the better.   Yes a warm introduction is still necessary.   You won’t find Ron Conway looking at anything over the transom, but if you can’t find an introduction from the thousands of deals he’s done, you obviously have done none of the requisite homework.

So, if you are in a geography (e.g. not the Valley, NYC, or Austin) where investors are less identifiable, and if you have a business that is more A round ready with enough traction to prove the financial model, and if your company thesis can easily be grasped by someone who is not up on the latest technology, then you may well be able to leverage the skills of an IB firm.  You’ll still be front and center in all the key investor meetings, so you’re not going to able to pay full-time attention to your business and just wait for a check, but you very well may improve your odds of success. 

<image from Man in the Middle DVD cover>

This post is on a term I hear often among investors here in Austin and in California.  They are generally viewing startups as having “binary outcomes” – either a total loss or a big win.

The notion is important.  It implies that entrepreneurs are thinking big and are willing to fail fast if bigness is determined not to be achievable.   And it implies that their investors are playing for more than enough 1’s to offset the 0’s. 

Later stage investors have the luxury of evaluating real numbers to project returns that make their portfolios successful.  They are less accustomed to losses, and they generally come to the table too late for the 100X wins on the most fortunate startups.  Running such funds can be very profitable, but it’s understandable why it’s hard to include startups in the mix and why some of the largest VC’s have set up special purpose sub-funds to play the binary game.   The mindsets are just very different.

The true startup investors prosper by bringing much more than money to the table.   They have a bench with “scaling entrepreneurs” who are appropriate for each phase of growth; they know which companies are marriage candidates when a standalone idea starts to look more like a feature or a product than a freestanding business; they have the right relationships with channel partners, brands, and other “make the company” opportunities; they comprehend the care and feeding of the brightest entrepreneurs; and they often rally around one lead investor, especially at the angel level, who is best able to guide and monitor the subject venture.   This level of investing is more hands-on, and close geographic proximity is desirable.

The worst outcomes for investors of any class are the zombies – the companies that get just big enough to hang on and keep the persevering entrepreneur’s dream alive but can’t reach escape velocity.  They’re like patients in an extended care facility; they need continual care and feeding but aren’t expected to die and have nothing to look forward to.  There are no real winners in this case.  The entrepreneur may earn a decent wage, but he or she is just marking valuable time that can’t be recaptured, and the investors are just stuck in something for which there are no likely buyers.

So, as an entrepreneur, how do you aim for the 1 in the binary game?

• Figure out a solution to a really big problem.
• Start with a big enough market where a large company can find room to grow.
• Do something so creative that you invent a new market.
• Raise so much money that you can buy a market.
• Recruit a leadership team that won’t settle for anything less.
• Get the right investors on board early.
• And, never underestimate the power of a bit of luck.

Keep in mind that’s it takes no more effort to shoot for a 1 than just a half or less, and you have only so many chances in life.  Use them to maximum advantage.

<image from Wikipedia>

Congratulations to Josh Baer and his colleagues at Capital Factory for mounting a very successful Demo Day on September 7.  A capacity crowd of about 300 in the ATT Center Amphitheater on the University of Texas campus seemed to be about evenly divided between entrepreneurs and investors.  The latter included individuals from around Texas, the West Coast, and Atlanta.  There was enough money in the room to fund all the 22 deals on display, and that’s a very positive mix.  One investor commented to me that this was the best such presentation day he had attended, and I know he’s been to plenty.  The five capital factory graduates were highly polished in their morning 8-minute pitches, and the afternoon gang of 1-slide, 3-minute presenters made for a more interesting format than I anticipated.   They got their points across.

The event was fully transcribed by Launch, so I will focus on the theme that I found particularly dominant during the day.   That theme is having a genuine interest, often called passion, for the core of the business idea.  Just being enthusiastic about doing a startup, or making money, is not the same as solving a problem that is more personal.  I know Capital Factory coached its graduates to open their pitches with personal tales that spawned their ideas, and that resonated with the audience.

One can’t help but be reminded of this great quote from The Godfather:

 "Tom, don't let anybody kid you. It's all personal, every bit of business. Every piece of shit every man has to eat every day of his life is personal. They call it business. OK. But it's personal as hell. You know where I learned that from? The Don. My old man. The Godfather. If a bolt of lightning hit a friend of his the old man would take it personal. He took my going into the Marines personal. That's what makes him great. The Great Don. He takes everything personal Like God. He knows every feather that falls from the tail of a sparrow or however the hell it goes? Right? And you know something? Accidents don't happen to people who take accidents as a personal insult." — Mario Puzo

On that theme, Brian Sharples of HomeAway used terms like having intense curiosity, a higher purpose, and never settling when things can be made better.  He said there’s no better career than starting companies, and he shared the wisdom of some failure on his way to successive wins.  He talked about humility, and he exhibited it on stage.   HomeAway arose from a problem he wanted to solve for his own family travels, and he assembled the team and the capital around that idea to essentially own a market.  He had the smarts and the clout to think a few moves ahead of competitors and potential competitors and truly dominate an area he really cares about.

Bob Metcalfe in his opening remarks took a bit of a different tack but did speak to the very personal skills required to start business – keeping yourself healthy and energetic, being good at speaking and writing, knowing how to sell, and having the ability to plan.  I don’t think he’s a proponent of regular all-nighters fueled by Ramen Noodles that reduce your communications skills to 140 character increments.  

One thing I would add is that it’s really good to have a competitor that you view as your archenemy.   We had one such company during the early Peachtree Software days, BPI actually based here in Austin.  They went public early, but that brand has long since disappeared.   I take personal pride in the fact that we kicked them hard and that Peachtree is still around creating jobs, careers, and happy customers.  

It’s become harder to identify your nemesis in a world where fast, lean startups are appearing by the minute from all parts of the globe.   But, if you can focus on a few competitors that you really want to lick, and you take that mission very, very personally, you will be the better for it.

<photo from The Godfather>

One thing I enjoy about helping with 1SS is that I get to experience the teachings of Professors Joshua Baer and Bob Metcalfe.  If I’m searching for some pearls of wisdom for a TechDrawl post I don’t have to look very far. 

Last Thursday Baer gave the class his list of ten reasons for starting a company today.  His talk was aimed at students and had a CS perspective, and I’m paraphrasing and annotating his thinking into a list for the broader TechDrawl readership.

If I started a company today, I would:

1. Pick a problem I have experienced and care deeply about.  Agreed, particularly if you are doing something that will hold your attention for the long run.  Caring deeply about something only to the extent of flipping it is not the same.

2. Find a co-founder, it's lonely, and it’s nice to share the load, not to mention the fact that if you can't find a cofounder, you must have some other problems.  Agreed, unless you personally happen to be good at nearly everything.

3. Don’t keep too many secrets; talk to lots of people; good things can happen; risk of idea theft is not all that great.  I really favor this approach.  One way to vet an idea is to discuss it in detail with domain experts before you start spending real money and creating real code.  That’s a form of “pre-cursor traction” that can be helpful to investors.

4. Outsource as much as possible – all the things where you don't add unique value; focus mindshare on things that matter.  Agreed on this too.  I’m more of a tech business builder, deal doer, and rainmaker, and I have to outsource technology and other skills to trusted partners.

5. Raise as little money as possible.  I concur that it is no fun raising money, but I’m not unwilling to tackle some bigger projects that require more capital.  That can be a competitive barrier and open some bigger opportunities.  

6. Get customers to pay in advance, even if they have to be sold on a vision instead of reality.  I have had great luck doing that in most of my ventures.  The best salespeople can sell vision.  Anybody can sell something that actually already works; where’s the challenge in that?

7. Build mobile first; makes you focus; captures the rising tide.  Goes without saying, particularly in Austin.

8. Buy no servers.  What are servers?

9. Build in Ruby on Rails; rapid, attracts good people, balance of elegance and practicality.  That’s CS talk; I defer to superior wisdom.

10. Take advantage of resources like 1SS and Y-Combinator where you can learn so much from others.  There’s no understating the value of working in collaboration with other startup entrepreneurs.  A corollary to this is that you have to be willing to locate yourself where this is possible.  There are no incubators, to my knowledge, in Hahira, GA, even though it’s a lovely town.  Go where the action is if you’re really serious about a startup.  If you have arrived at a station in life – kids, mortgage, community involvement, etc. – where you are not portable, this may not be the time for you to pursue your startup dream.

<image obviously from David Letterman show>