How to make things happen

I’ve been observing an interesting way of getting things done in the last few months but I haven’t been able to formalize it until we had our second Kauffman Fellows Program module a couple of weeks ago.

I’m talking about something we do almost on a daily basis: group decision making. Many times we present our ideas or proposals to a group and expect everyone to draw the same conclusions and agree on the spot. To get there it takes more work.

One-on-one interactions are critical to get things done. It sounds obvious but many times we skip them as they are time consuming.

Spending time with the key decision makers that are going to be at the table where the final decision is going to be made is probably the most important thing to do. In those one-on-one interactions you usually have the opportunity to learn what the key concerns each individual has, so that you can address them one by one and get to the general meeting with an implicit agreement.

Where do I think these one-on-one meetings should be used more? Basically in most cases! If you are entrepreneur trying to get your Board to agree to something, take the time to meet with them individually before the Board Meeting. If you want your co-workers to support your idea, once again, take the time to share with and listen to individuals. It is definitely worth it!

The Repeated Game Nature of Venture Capital

I was talking to a friend who decided to become an entrepreneur and he told me he has been working on this great idea for quite some time now, investing heavily out of his pocket. When I asked him where he was getting inputs to come up with a solution that the market would adopt he paused and almost secretively told me he hasn’t told anyone about his idea because he was too afraid they would steal it from him. After that, I paused…

Venture Capital is probably one of those industries in which reputation is built over long periods of time, and destroyed with just one wrong move. Individuals and firms in the VC community work hard to build long term relationships as they understand the non-zero sum nature of the game. Success, both for VCs and entrepreneurs, comes after relatively long periods of nourishing key constituents.

If you think about the Prisoner’s Dilemma, the only way to get to the optimum solution is by collaborating, and the only way for individuals to collaborate is by playing the game multiple times.

The repeated game nature of Venture Capital is the main reason why most VCs don’t sign NDAs. If you are an entrepreneur you should be aware that VCs have a lot more to lose if they ever break the “rules of engagement”. Today, with social media tools the word-of-mouth is even more powerful to enforce these social rules.

Moreover, not discussing a business ideas with potential customers is another key mistake, as you might end up climbing a mountain, making a huge effort, only to realize that you’ve climbed the wrong mountain. I’ve recently heard Promod Haque, Managing Partner at NVP and one of the top dealmakers on the annual Forbes Midas List for the past eight years, say that innovation happens in collaboration and close proximity to early adopters. After thinking about this concept I realized it makes a lot of sense, as interactions with those early adopters and multiple iterations are key to crafting the solution the market is willing to consume.

Ideas keep on being a dime a dozen, so my recommendation for entrepreneurs is not to keep those ideas for themselves and share them with people they trust in order to forge a better business solution. Make sure your innovations are not just great technologies but also significant bridges for gaps either in the consumer or enterprise markets.

Geolocation Conference in San Francisco: The Futures & Trends of Location-Based Services (LBS)

I attended the Geoloco conference in San Francisco on July 22nd 2010 and it was great to see how early we are in this new wave. There was even a big debate about geolocation being a feautre or a business... Anyway, I'll share my key takeaways.

Summary

The underlying trend discussed in the conference was the evolution of search into social and now into local. Altavista was one of the first movers in the search chapter, Myspace in the social and now Foursquare in local, meaning we still are going to see lots of changes in local. Given the early stage of this opportunity not even consumers are seeing a lot of value (except with navigation). The challenge, both for business and consumers, is to find applications that exist only because of local, generating real value. Data and privacy are the key components for new startups to leverage. The privacy issue affects consumers and the data element is the key for businesses (think of the first navigation devices where data was stored in the GPS box vs. the new Google map-style models where data flows back and forth constantly between the device and the server). Another interesting aspect to think about is how the location stack will look in 2-4 years: what is going to be a commodity and what will be monetized. Currently companies are blocking access to their data, generating silo solutions (an app for restaurants, foursquare, tripit, etc.). The question is how and when are we going to get over those contractual rules and build solutions that are more comprehensive.

Key trends to watch

1. Likely: Geodata will be free with mapping data from OpenStreetMap and other crowd-driven sources eclipsing commercial vendors
2. Very likely: Location-awareness will be an integral part of practically every mobile app where location is relevant and can add value - while users will have control (e.g. the ability to turn location disclosure on or off), location awareness will no longer be an exception or an "option" for developers of mobile app
3. Likely: More than half of all mobile advertising will be location-based
4. Very likely: Virtually any user-generated content (e.g. Tweets, Facebook updates, photos uploaded to Flickr, Yelp, etc.) can be automatically geotagged, allowing users to append location effortlessly. With automatic geotagging, users will routinely add "location" to their social data, resulting in an exponential increase in the volume of location-specific information"
5. Likely: Proximity will become a critical filter for mobile users, routinely and widely used to discover, view and act on news, alerts, nearby deals and other content relevant not just to their interests but also "near" (as defined by the user) their location
6. Likely: Mobile devices capable of scanning QR codes and barcodes will revolutionize the way in which individuals obtain information, shop and generally experience places. As businesses rapidly embrace and deploy the technology, scanning and retrieving information and offers via barcodes and QR codes will be as easy and commonplace as reading a brochure or package
7. Very likely: LBS will be integrated with social networks, enabling users to share their real-time location with the appropriate people. For example, family members (spouse, kids, parents) will be able to view my location at any time; co-workers will know my location during work hours; friends in my inner networks (the people I connect with the most) will be alerted if I travel to their city; etc.
8. Likely: Location will enable and foster better communication, stronger ties and interactions among individuals and their communities - e.g., neighborhoods (citizens, news sources, government, etc.), local merchants, cities, hyperlocal news, etc. The equivalent of a "local"worlds wide web will emerge
9. Likely: While location is an integral features of mobile apps, consumers will be reluctant to pay for any location-based services - they expect location to be a "free" value-added feature. However, where location is relevant, consumers will strongly prefer apps and content that are location-aware over those that are unaware
10. Likely: Nearly one in two consumers will remain skeptical, even reluctant to disclose their location, due in part to highly publicized incidents resulting from location-sharing apps (including a series of robberies, homicides, kidnappings)

Interesting data

• 20% of Google Searches are geo based (Mark Silva, Real Branding)
• Where.com
o 3M users
o launched hyperlocal ad network earlier this year and they are up to 1B impressions
o working directly with publishers to extend reach from 3M to 50M as advertisers care about reach
• Yelp
o 2.5M uniques on their mobile app (vs. 35M uniques on Yelp.com)
o 1/3 of total searches (including mobile and fixed) are coming from iPhone, but Android is growing faster
o 1M clicks per month, 500k calls ==> they are still not monetizing
• Jiwire
o seeing 6 figure deals every month for brands interested in a very targeted audience based on location data
• 14% of mobile users in the US accessed maps on their devices in April (34M people according to Comscore)
• Foursquare has 800k active users (2.1M registered) and 100k-200k active in any given day ==> 1M check-ins per day

Fundraising? Intrigued about valuations? Understand how VCs do their math!

If you are in the process of raising funds from VCs you need to understand how they will look at your company’s valuation. VCs are not evil (at least reputable ones…) and don’t want to take a large piece of your company just because. They have commitments and thresholds, and their LPs are watching…

I’m going to talk now about valuations for early stage technology companies, where the application of a DCF model will render useless. When VCs look at these companies they generally use three lenses and combine the results in different ways according to their gut feeling and the market conditions.

1. Starting with the exit valuation and working backwards: the easiest way to get to a valuation is to start with the expected exit value. Let’s say the expected exit value is $80mm (which can be calculated using a weighted average of different scenarios). Now let’s assume that the cash-on-cash hurdle is 5x, then the post money valuation should be around $16mm (post money = expected exit value / cash-on-cash hurdle). Finally, if the investment is $5mm, then the pre-money valuation should be around $11mm (pre money = post money – investment). This method has many shortcomings, as it doesn’t take into account the time to exit which will definitely affect your IRR.
2. Target ownership: if the initial target ownership is 25% and the amount invested $5mm, then the post money valuation should be around $20mm, making the  pre money valuation around $15mm.
3. Comparables: this final method takes into consideration the temperature of the market, public and M&A transactions deals, and precedent transactions within the VC’s portfolio. These transactions will include a diverse basket measuring TTM revenues, EBITDA, subscribers and other metrics depending on your company’s industry. It is not easy to find private comparables as this information isn’t generally disclosed, but looking at public comps and M&A activity can give you a sense of where the market is. VC’s might even have pre defined ranges for their own Series A, Series B and Series C.

Even though these methods should be used as general frameworks, adjustments need to me made for different scenarios. For example, the cash-on-cash hurdle will be higher for seed and series A rounds than for series C and growth equity rounds. Target ownerships will also vary across stages and across funds.

Valuations have always been and will continue to be a topic for discussion as even though there is some math behind it, there are also many softer components. VC’s personal style and gut feeling will always play a critical role.

Why SaaS companies fail?

I am a passionate believer in SaaS, cloud, virtualization and any other delivery method that can help foster adoption of new applications in a much more cost-efficient ways. However, since my company first launched a SaaS e-learning solution many years ago (to give you a clue we called it ASP back then), I’ve seen many SaaS companies fail. I’ll try to summarize the reasons why they failed and if you are like me and tend to see the glass half full, you can use this guide to make sure your SaaS startup succeeds.

1. Using buzz words: I’ve seen startups claiming to be cloud solutions and after reviewing their business models they were not leveraging the cloud at all. Not every business model lends itself to be “as a service”. The most successful ones are those that can exist only because of the cloud.
2. Product vs. Service: many founders focus too much time thinking about the product and how to add new features without realizing customers are generally buying a service. Every touch point you have with your client is more important than a feature they probably don’t even need.
3. Metrics: SaaS companies should be metric driven organizations. I can understand if projections are not met, but I won’t understand if you can’t figure out what metric should be adjusted or targeted. Recurring revenues, churn, customer acquisition costs and customer lifetime value should be clearly understood, measured and targeted.
4. Analytics: with installed applications vendors had little first hand information about usage. Now, with a SaaS deployment, you can get detailed information you should use to improve your solution. You can see where people are spending most of their time, what features are being used, where the data-transfer bottlenecks occur and more. You need to monitor this activity and use it to align your solution with what the market needs.
5. Architecture: it sounds obvious, but I still see many startups implementing single-tenant solutions, eliminating one of the coolest features of SaaS: continuous updates. If you are maintaining multiple platforms then you won’t be able to make them converge ever. The more customized features you develop for individual customers the more you drift away from true SaaS.
6. Go-to-market: not everyone should be your customer, at least when getting started. I can tell from my own experience it is very different selling to large Fortune 100 customers from selling to SMBs. There’s even a big difference between small businesses and medium businesses. You need to be explicit and clearly plan your go-to-market strategy to make it as efficient as possible. Remember this is a numbers game, and volume is key.
7. Cash: large amounts of cash are required to build the dominant SaaS player in any industry. It took $126m for NetSuite to go public, $61m for Salesforce, $45m for SuccessFactors and $32m for Mint to get acquired by Intuit for $170m. If you understand the metrics of your business you will be able to estimate how much cash you are going to need. I would take that amount and double it… Remember it’s really bad to run out of cash!
8. Wrong partners: I’ve seen good business models and talented teams being dragged down by early partnering. Without a clear understanding of SaaS partners such as channel partners or VCs will try to manage a traditional product cycle, which is very different from what SaaS companies should be delivering. Make sure you partner with the right people or plan to spend a lot of time, energy and money educating them.

We are just starting to see the new era of SaaS business models. With a more educated enterprise consumer, large players such as Amazon and Microsoft making huge bets on the Cloud, and new devices such as the iPad the new ecosystem will evolve and new winners will emerge. Exciting times ahead!