High Tech Ventures: August 2001 A Silicon Valley Perspective

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High Tech Ventures August 2001 A Silicon Valley
Perspective

• Gordon BellMicrosoft Corporation
• Nanyang Ventureshttp//www.nanyang.com.au/
• August 2001

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Summary

• Weve witnessed the greatest, all time, wealth
  creation and destruction period. Ponzi?
  Conspiracy?
• .com era allowed any idea to get extraordinary
  funding, valuations, and payoff. Little
  technology!
• Silicon Valley has capital. But, VCs busy with
  old projects.
• Real technology exists and is increasing!But, I
  dont see a chance to spin a yarn like www!
• What counts AGAIN, are fundamentalsTeam,
  product, marketing and execution!
• Lots can go wrong!

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Internet Bubble Lessons

• Laws of economics still apply
• Risk/reward at a new level
• Technology enablement available to all
• Infrastructure is means, not end
• Internet connectivity doesnt mean integration
• Big changes take gt5 years. In the long run, it
  will all be true!
• Cash is still king!
• Company failings is still growing. Peak by year
  end.

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Now this is not the end It is not even the
beginning of the end But it is, perhaps, the end
of the beginning

• Winston Churchill, 1942

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BIO INTELLIGENCE AGE
AGRICULTURAL
INDUSTRIAL
INFORMATION
CONSUMER ACCEPTANCE
TECHNOLOGY DEVELOPMENT
BIOINTELLIGENCE
2000 BC
0
2000 AD
1900
1800
1500
TIME (year)
R. Satava 29 July 99
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Outline

• Situation in Silicon Valley / Bay Area 2001
  August
• Unlike our PR, streets arent paved with gold
• You have to dig for it versus pick it up
• Now it is much harder than 2 years ago
• Good business for pick and shovel makers!
• Bell-Mason Model for a startup and the diagnosis
  of them the fundamentals havent changed
• Look at the environment that supports it and
  compare it with the area in Boston.
• Lessons for .au?
• Red flags and flaws what to look our for

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Slowdown in the valley What's ahead

• Mercury News 5 August 2001
• Economic recovery may lag The Internet bubble
  burst, as painful as it's been, follows a
  historical pattern. Although a slow recovery is
  predicted, experts say technology is still the
  key to future growth.
• BY DAVID A. SYLVESTER
• Silicon Valley, get ready for life in the slow
  lane.
• After five years of turbocharged growth, the
  tech-dominated economy here is still plunging
  toward a bottom.

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WSJ 7/27 technological gloom

• Mary Meeker famous for the rise of the Internet
  , estimated that 727 billion has been lost by
  the 360 Internet companies 12/99-07/01. Ms.
  Meeker adapted an aphorism from the Great
  Depression The "biggest risk we face, is not
  being willing to continue to take risks."
• many venture capitalists are so busy shutting
  down their existing companies, or trying to
  arrange bailouts, that they have little time or
  appetite for new deals.
• Stewart Alsop, a general partner at NEA, made
  10 or 12 investments this year, compared to 50 in
  the same period of 2000. Instead of griping about
  excessive valuations demanded by start-ups, he is
  now steeped in the onerous contract terms that
  firms impose during "down rounds.

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Shutdowns MA 2000-present
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VC Finding(t)
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Some statistics and sayings

• Technology industry 7.6B invested 2001Q2, vs
  24.8B 2000Q2.
• 555 Internet start-ups have closed since the
  beginning of 2000, gt75 in the past eight months
• In the first half of 2001, 330 .coms shut down
• Consumer companies accounted for 26 of
  shutdowns, vs 43 last year,
• Business-to-business accounted for 33 of
  shutdowns, vs 22 last year.
• Electronic commerce start-ups comprised 40 of
  closings, vs 54 in 2000
• ASP shutdowns rose to 10 from 8.
• In June, 53 .coms ceased business, vs. May record
  of 60
• the biggest Ponzi scheme in the postwar era,''
  says K. Rosen, UC-Berkeley. And we were in
  the center of it, right in Silicon Valley.''

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California, Here I Gob2c b2b- back to
Cleveland Boston
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"New technologies always SOUND HOTthe problem is
knowing whats NOT." -gbell

• .coms NOT.
• Moores Law drives startups. 10X transistors/die
  /5 yrs.
• Microprocessor-based Java, games, DSP,
  multiprocessors
• Communications DSL, switch traffic 4x/year
• MEMs, leading to Nanotech
• Communications 4x/year traffic growth. They are
  all in debt!
• Wireless NOT. Carrier platform limited.
  Crowded.
• Games. Industry is gt movie
• Drug discovery given the genomic map. Bio-x.
• Opportunities
• convergence of computer with phone with TV
• Energy conservation
• "The technological possibilities are endless
  ...all we have to do is sort through them."

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The Bell-Mason Diagnostic

• A system for ... Measuring risk Predicting
  course Tracking progress Improving the odds
  of success ... of high tech, high growth,
  early stage ventures

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The Bell-Mason Diagnostic Founding Premise

• You dont have to understand the technology to
  ask the right business questions.
• The Bell-Mason Diagnostic provides the critical
  technology, product, marketing, and people
  expertise.

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The Bell-Mason Diagnostic

• Space Twelve standard dimensions characterize a
  venture (a chapter of High-Tech Ventures).
• Time Four, well-defined stages of company
  development with 7 sub-stages of product and
  market development.
• Quantification Clear, yes/no questions (i.e.
  rules) encapsulate knowledge for evaluating a
  company.
• Visualization A relational graph shows company
  position.

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12 Dimensions of Analysis
MARKET
PRODUCT
Business Plan
ManufacturingService/Delivery
Marketing
Product
Sales
Technology/
CEO
Engineering
Team
Control
Board of Directors
Financeable
FINANCE/ CONTROL
Cash
PEOPLE
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Four Stages of Growth
Stage 1
Stage 4
Stage 2
Stage 3
Market Development Stage
Product Development Stage


Seed Stage
Concept Stage

1 day to 12 months
3 to 12 months
12 to 48 months
24 to 48 months
Concept Seed Product Market
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Context for Digital Strategy Ventures
Ventures
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Bell-Mason Diagnostic Staged Evolution of
Questions from roughly 1,000 for all stages!

• Concept Does the company have evidence of
  product possibilities, given the technology, that
  customers are likely to buy?
• Seed Does a simple product specification exist
  with features and functions that can be presented
  to potential users?
• Product DevelopmentAre an appropriate number of
  beta systems (3 for large systems, gt20 for mass
  marketed software) operating in real user
  environments with users satisfied and testifying
  that the product exhibits unique capabilities
  and/or significant performance and/or
  performance/price benefits?

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Evolution of the Ideal State at Each Stage
Entrepreneurials
Stage IV.
Market Development
Business Plan
Stage III.
Manufacturing
Marketing
Product Development
Product
Stage II.
Development
Seed
Sales
Stage I.
Concept
Technology/
CEO
Engineering
Team
Control
Fundability
Board of Directors
Cash
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Bottom line

• The startup process can be codified and measured
  according to a model
• Deviating from best practices is a risk to
  company and investors
• Theres rarely a shortcut for starting a
  successful venture

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Context for New Ventures

• How do you support them?
• Look at Silicon Valley versus Bostons Rte 128
• Needs of area to support venture

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Sonicbox Garage
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Sonicbox Establishing Internet Radio
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Si Valley vs Route 128(Hi Tech Employment 000s)
Saxenian 1994
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Rte 128 and Si Valley

• VCs behave as bankers VCs behave as
  investor/partner
• Finance focused Content, contacts assistance
• Established industries Growth from new companies
• Military contract companies Large, and many
  startups
• Vertical integration (DEC) Horiz. Integration
  compon. Key ideas IC, Micro, disk!
• MIT few rich profs. Stanford, UC/Berkeley
  (Close to Washington DC) (Close to industries)
• Protection of IP Free flow of people ideas
• Silicon failed (large cos) Silicon from the
  beginning
• Hi-tech is just another biz Hi-tech is the only
  biz
• Gen. Purpose infrast. Hi-tech focus
• Risk is to be avoided Risk is admired rewarded
• Work to live Live to work
• pay for lifestyle

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Exogenous Effectors for Each Dimension
Reasonable expectations, patience,
Tech workforce, sub-contractors, components
Market, infrastructure for "complete" product,
partners, strategic alliances, PR, etc.
Competitive Products, co-components
Customers, sales personnel, channels to
international mkt.
Eng, sci., tech, tech svcs, unis, other
companies, consultants
Trained pool of gen. mgrs successful "role models"
Trained personnel to hire, area-specific
consultants
Acctng, legal, financial/financing infra-
structure
Capital market supply
BOD with Industry, market, product, engineering,
financial experience
Cash financing experience, "patience"
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An ideal Venture Capitalist

• Has a reasonable sized fund, but not too large
• Has access to friends who have plenty of funds
  including bankers and MA folks
• Has done it before as an operational
  professional
• Knows your industry.
• Customers and suppliers
• Consultants, potential employees
• Knows infrastructure acctng, legal, recruit, PR
• Great company salesperson recruiter
• Youre happy to be with them in a law suit.
  -Doerr
• Past success knows difference between luck
  skill
• Smarter than you are and willing to teach you

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Personal Failures when I didnt luck out

• Failure to use the BMD! NO due diligenceuse 2
  sec. Gut!
• Buying a dream or idea, NOT teamplan.
• A lone rangers algorithm, isnt a product
  or company
• Features, UIs just arent products, let
  alone company!
• No viable biz plan just an idea that one could
  exist.
• Gut gt logic just like the idea or team.
• CEO problems or Sociopath on the team?
• Team turns on each other. Wontcant hire CEO
  or x.
• Friends helping in some capacity!
• Flatteryneed we need you on the BOD!
• Do it for money w/o due diligence.
• Poor money manager post IPO

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Chameleon PC/XP CE phone
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I. Concept Stage Activities

• "Inspiration and Speculation"
• Average Duration 0 - 6 months
• Principal Activities and Achievements
• Formulation of idea for technology/product
  innovation.
• Initial field investigation to "test" application
  vision.
• Acknowledgement by 3 reputable outside sources of
  a product and business.
• First business plan (6-10 pages).
• First funding to go to Seed and make a proper
  plan.

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I. Concept Stage Flaws and Flags

• No clear articulation of vision or competition
• Faulty or non-existent business plan
• The vision constitutes research or hope
• Not a company, but a feature, algorithm, one
  product event
• Over-reliance on new components or new
  suppliersor new infrastructure
• Lack of credible sources who support the
  technology/product premise
• No acknowledgement of competition
• NO team or the wrong team... (e.g. too many new
  tricks for old dogs?)
• No risk assessment
• Over financing without going to Seed (planning)
  Stage

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II. Seed Stage Activities

• "Exploration and Resolution"
• Average Duration 3 - 12 months
• Exploration key technologies to prove feasibility
• Product Specification and Products Requirements
• First product devel. schedule made with team
• Exploration and refinement of key market
  assumptions and positions, models, applications,
  and channels
• Preliminary Customer/Application Profiles built
• Full, formal business plan
• Funding for Product Development

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II. Seed Stage Flags and Flaws

• Insufficient technology feasibility (product may
  be research) or it may not be unique or
  differentiated or it may be one shot
• No clear product specification (and no
  predictability on scheduling and real resources
  required)
• No "design for manufacturability or
  delivery/support?
• Engineering and Marketing both have a great
  product vision -- but they're contradictory
• No Product Requirements Document or Lack of
  Market Vision
• Untested market assumptions and models
• No written Customer/Application Profiles and
  loose definition of market segments

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II. Seed Stage Flags and Flaws-2

• Insufficient model of the lead-time to sale by
  segment and channel
• Miss-perceptions re competition and advantage
• Flawed team lack of credentials and no clear
  solution to attract the right talent and fill
  voids
• "Penny-wise, pound-foolish"-- delaying
  expenditures for critical resources
• Business plan is a fund-raising document, not a
  dynamic control document -- i.e. the top line is
  unrealistic sales forecast is just a 'hockey
  stick'
• The Board is just founders and VCs
• Company misses Seed milestones

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III. Product Development "Construction"

• Average Duration 12 to 48 months (avg. 24)
• Principal Activities and Achievements
• Engineering team is hired and product is built,
  according to specification. Development goes
  through four phases
• a)hire the team, specify the product in detail
  and plan the project and all support processes
• b)test the specification and simulate its
  operation, building operational prototypes
• c) integrate and alpha test under operational
  conditions
• d) beta test in the field at customer sites.

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III. Product Development-2 "Construction"

• Engineering and Marketing iteratively refine
  FFB's and product positioning according to
  Customer/Applications Profiles and requirements.
• By end Beta, delivery organization and process,
  including manufacturing is completely formed.
• Marketing works iteratively, closely with
  Engineering throughout this stage.
• Marketing's programs are in place at end Alpha
  and beginning to be implemented in Beta. (Note
  Beta is the last opportunity to test under a
  shield of privacy and confidentiality.)
• Additional funds are often raised to finance
  market entry and calibration, based on Beta
  progress.
• III ends with product introduction.

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III. Product Development Red Flags and Fatal
Flaws

• Technology-to-product translation simply didn't
  work as planned (too low, too high, too elegant)
• Company needs new tools to develop the product --
  couldn't invent or obtain given current plan.
• Company reliant on other vendors for product
  performance.
• No product architect.
• Schedules/milestones are constantly missed funds
  used faster than forecast.
• Product isn't Beta Tested.
• Systems integration problems.
• Manufacturing can't produce product for target
  cost.

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III. Product Development Red Flags and Fatal
Flaws-2

• Business Plan isn't updated, and reflects
  unrealistic break-even point.
• Key customers aren't identified per segment.
• Pricing and availability are still in flux.
• Strategic partner candidates not interested.
• Product is introduced before it exists.
• Sales is on too early marketing is on too late.
• Marketing is vision-less and has no written plan.
  
• Marketing has no Market Segment Development
  Schedule.
• Sales and/or channel strategy is mismatched to
  product.
• Team is at war, and there's no consensus.

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IVa. Calibrate the MarketCommercialization"

• Average Duration 3 to 9 months (avg. 6 months)
• Principal Activities and Achievements
• Every line of business plan is now operable and
  tuned for determining profitability.
• Every department's operations and plans are
  tested.
• Engineering responds to field problems and joins
  in team sales.
• Modifications to product, enhancements, next
  releases, new products are handled by Phase
  Review product planning process.

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IVa. Calibrate the Market-2Commercialization"

• Manufacturing is fully staffed and delivering
  product on schedule at the correct cost, quality
  and volume commitments.
• Marketing and Sales drive the company.
• Marketing validates/recalibrates its Market
  Segment Development Schedule, positioning, unique
  selling propositions per segment, sales gestation
  times.
• Sales hones its prospecting and pre-qualification
  filters, and tunes its forecasts.
• Making sales is the top priority of the company
  (meeting 3 and 6 month forecasts).
• Financing for IVb Market Expansion is often
  undertaken.

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IVa. Calibrate the MarketRed Flags and Fatal
Flaws

• Engineering ships a buggy product and spends all
  its time fixing the product in the field.
• Weekly meetings to cover product status and
  categorize/prioritize change requests don't
  happen (changes are ad hoc and priorities are not
  established).
• Departments aren't following their own plans as
  central control and measurement documents.
• The Phase Review (or some other similar process)
  isn't instituted as a means to organize
  cross-company communication and decision making
  re the product and follow-on's.
• Engineering is understaffed to handle field
  maintenance and new development.

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IVa. Calibrate the MarketRed Flags and Fatal
Flaws-2

• Engineering ships a buggy product and spends all
  its time fixing the product in the field.
• Weekly meetings to cover product status and
  categorize/prioritize change requests don't
  happen (changes are ad hoc and priorities are not
  established).
• Departments aren't following their own plans as
  central control and measurement documents.
• The Phase Review (or some other similar process)
  isn't instituted as a means to organize
  cross-company communication and decision making
  re the product and follow-on's.
• Engineering is understaffed to handle field
  maintenance and new development.

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IVa. Calibrate the MarketRed Flags and Fatal
Flaws-3

• The product is introduced far before it can be
  shipped ("vapor").
• Manufacturing can't product the product at
  appropriate unit cost, according to committed
  schedules, and the quality levels aren't met
  (DOAS, bad installation procedures, lack of
  service, no spares, etc.)
• Marketing's assumptions, positioning and unique
  selling propositions are off (beyond
  fine-tuning).
• Marketing's specifications/programs for customer
  service and support are insufficient to maintain
  "satisfaction" level (e.g., can't respond to
  problems within 24 hours, inadequate
  documentation, insufficient level of initial and
  ongoing training, many complaints).
• Marketing doesn't have a completed Market Segment
  Development Schedule and a completed market plan
  to drive Its own operation and strategically
  direct Sales.

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IVa. Calibrate the MarketRed Flags and Fatal
Flaws-4

• Marketing and/or Sales' forecasts of lead time to
  sale per segment are off.
• Marketing has a completed Market Segment
  Developmenth Group 1 early adopters, but can't
  transition to Group 2 segments to expand the
  market position and sales volumed Engineering
  stalemate on action required by changes to FFB's
  political infighting and finger-pointing starts
  eating up time and energy.
• Marketing and Sales have presold functionality
  that now can't be attained in real product
  operation in the field (in specific applications,
  or "across the board").

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IVa. Calibrate the MarketRed Flags and Fatal
Flaws-5

• Marketing is short on strategy and long on
  tactics.
• Marketing Is understaffed, or inappropriately
  staffed.
• Marketing doesn't strategically drive Sales with
  segment targets, key reference customers,
  training and support necessary to make sales
  (e.g., Sales is on its own).
• Sales doesn't agree with Marketing's Market
  Segment Development Schedule, market plan, or
  with specific identification and prioritization
  of sales targets.
• Sales is completely opportunity and
  personality-driven that makes forecasting
  unpredictable, at best.
• Sales has hired the wrong type of sales people
  for the product/company.

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IVa. Calibrate the MarketRed Flags and Fatal
Flaws-6

• The company's third-party distribution
  agreements, now operable, are in conflict (e.g.,
  the company has an agreement with a retail chain
  and begins mail order sales in the same areas.)
• Marketing has underestimated the level and cost
  of support for third-parties (e.g., VARs end up
  requiring more training and assistance company
  must team-sell to close VAR sales volume doesn't
  Justify support costs VAR getting deeper
  discount, but is operating like, a non-value
  added distributor.
• Marketing hasn't created enough interest in the
  product in the end-user markets (through
  marketing communications and key sales) to
  motivate aggressiveness from OEMs and other third
  parties.

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IVa. Calibrate the MarketRed Flags and Fatal
Flaws-7

• The product's current feature set is insufficient
  to support third-party requirements.
• Sales forecasts for the first 3 and 6 months
  werent met.
• Sales forecasts for the first 3 and 6 months were
  met, but do not support the business plan's model
  of operation for the next 12-18 months (IVb),
  pushing out break-even.
• Funds were raised based on a plan that is no
  longer feasible.
• The company is unable to raise more funds, or can
  do so only by diluting current stock value,
  because of disappointing performanceIVa.

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IVa. Calibrate the MarketRed Flags and Fatal
Flaws-8

• The CEO isn't current on the issues across the
  departments and through exec staff MBOs.
• The CEO makes far-reaching decisions too quickly
  or too slowly.
• The CEO isn't making weekly or bi-weekly customer
  visits and key sales calls.
• The CEO is an Ineffective spokesperson for the
  company and product.
• The CEO is totally immersed in Sales and
  neglecting ongoing strategic business planning
  for the company.

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IVa. Calibrate the MarketRed Flags and Fatal
Flaws-9

• The Board of Directors is involved in day-to-day
  operations and decision making (i.e., the CEO
  isn't in control).
• Cash flow is unpredictable (e.g., accounts out
  greater than 60 days).
• The company's expenses are higher than forecast.
• The company isnt managing to the bottom line,
  but is hoping for a miracle.

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End Bit
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Engineering Marketing Stages Synchronization
Engineering
Aug. 95
Marketing
June 96
Jan 96
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New Venture Models
Stages of New Venture Growth
Seed
Product Dvpt.
Market Dvpt.
Estabd. Business
Concept
Independent Start-Up
Corporate Ventures
Venture Capital Funding
Joint Venture
Strategic Alliance
Self - funded
Acquisition
Spinout
Internal
Business Unit Marketing Engineering
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Entrepreneurial vs. Intrapreneurial Ventures
Intra
Entre

• Venture goals
• Funders measures of success
• Competition
• Resources
• Structure
• Staffing

Independent Profits, ROE, IPO/Aquisition External
Scarce Simple, stand alone CEO small team
Set by parent Revenues, strategic business
position, market share Internal
external Plentiful Complex, ties to
corporation Larger teams, matrix organizations
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Entrepreneurial vs. Intrapreneurial
Entre
Intra
Category

• Tech./Eng. no process, few people many
  processes, questionable goal
• Product more related to a market likely to be
  "Field of Dreams"
• Mfg. often out-sourced forced to be internal
• Plan crisp,but often unreal variable (0 to very
  detailed)
• Marketing weak, hard to do ......... unrealistic,
  hard deal-making
• venture s drives a plan no early market
  planning incompetence is size organization
  independent
• Sales built as needed co-mingles with corp,
• CEO/GM founder or vc choice often missing, hard
  to find
• Team focused on venture diffused throughout
  organiz.
• Board important mgmt. comp. missing
• s too few, easy to hire/fire blank check... few
  people ²s
• Financeable a concern, easy to stop blank check,
  hard to stop
• Control lax over-control, long time const.

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Summary Observations Imperatives for Success

• Corporate body guiding new ventures must
  understand new venture development model
• Corporation must inventory and leverage core
  competencies (otherwise, true roulette)
• Start-ups dont naturally live in established,
  large corporations must be structure that
  provides early insulation and (much) later
  assimilation
• Entrepreneurs dont exist naturally in
  established, large corporations personnel must
  be continually trained and self-selected and
  imported
• New ventures must acquire understanding of
  missionary marketing/sales techniques and build
  new positions/job descriptions that reflect it