Latest Entries

Sprint EVDO Revision A Card (also, plea for help!)

I am a satisified Sprint EVDO customer, but today I learned that Sprint will be releasing the faster EVDO Revision A card later this year.  Here is the news:

Designed for operation with compatible laptops as well as the soon-to-be-available Linksys Wireless G-Router for Mobile Broadband, the Merlin S720 will allow customers to connect to the Sprint Power Vision Network and remotely access audio, video and data applications at DSL-like speeds. The card operates on the current Sprint Power Vision Network and will support faster average download and upload speeds (450 -850 kbps and 300 - 400 kbps, respectively) of Sprint’s upgraded network when it becomes available. Sprint plans to begin its roll out of EV-DO Revision A during the fourth quarter of 2006 with coverage expected to reach more than 40 million people by year end. Ultimately, Sprint plans to reach more than 200 million people in the United States with mobile broadband data services in 220 major metropolitan areas by the end of 2006.

One note to Sprint (if you are listening): I need a driver for my Mac!  I am using a Verizon driver to make my current card work, but I am scared the new Revision A card won’t have a Verizon driver as they are lagging behind you on the new release.  PLEASE RELEASE A MAC Driver!!!!  PLEASE!!!

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Kiko’s Web 2.0 Failure Nets $258,100 Cash!

For those of you living under a rock, Kiko was put up for sale on eBay. Kiko was touted by many as a failure, but for those in the know it was built for $50,000 in convertible debt (guess how much the banker got? $3800 - i.e. eBay was the intermediary) creating around $200,000 in wealth for the founders/investors. Not bad for a failure (if I could get $200,000 for my failures…). Here is a play-by-play:

Ogijun made the first bid on August 23rd for $50,101.00. Later that day Powerjoe1998 made the second bid of $54,042.00 soon to be outbid by Ogijun with a bid of $54,151.00. Dvdy98 then bid $55,643.00. Wswire got in the game on August 25th and bid $55,843.00. Eladsr57 thought it was worth more and bid $60,000.00 that same day. Al_uminum figured it would be worth $61,500.00. Jactao88 (unverified) then bid $63,000.00. Next Robbkni got in the game and bid $64,800.00. Ogijun raised the bar to $69,371.00. Powerjoe1998 then took the bidding into six digit territory with a bid of $113,118.00. Ogijin, Powerjoe1998, Eladsr57, Macrhino and Wswire all made bids over $114,000.00 throughout the day on the 26th.

It came down to a head to head bidding war between Powerjoe1998 and Wswire. Wswire bid $258,000.00, but was outbid by $100 by Powerjoe1998. I wonder if Wswire is kicking himself for losing the auction by $100? Who is Powerjoe1998? Turns out he has bought three other items on eBay. The first two back in February 2002 and the most recent in April 2005.  I am not sure what he bought, but I sure hope he likes his new purchase.  Now will he use PayPal to complete the purchase?

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Web 2.0 Failures: Less Painful

Dallas IT SupportFred Wilson and Paul Kedrosky are blogging about Web 2.0® failures.  Paul is talking about the lack of failures to date and Fred is suggest we wait, they’ll come.  Fred explains that it takes time to fail, perhaps 12 to 18 months just to run out of cash.  John Battelle notes that Web 2.0® companies can operate for long periods without much cash, most with rates less than $1MM per year.

What would constitute a failure?  For companies in the creation phase, i.e. pre-VC, failure is almost impossible.  Entrepreneurs trade their time for experience - for technology geeks a failed idea is always better than time spent playing WoW or hanging out in Second Life.  My advice?  Don’t worry about the failures, instead embrace the people who make the effort - hire them if you can.

The impact to VCs is not very different than for entreprenuers.  Most of the Web 2.0® investments have been very small (under $5MM) and the resulting losses will be relatively painless.  Fred points out a few exceptions including Jobster ($20MM) and Zillow ($50MM), but I think that is the point.  I keep hearing there is a bubble, but to what extent?  I have not seen ten VCs sinkings tens of millions of dollars in copies of Zillow and Jobster.  There is room for a Zillow or a Jobster, there isn’t room for ten of each right now.  Until we start seeing copy-cat investment I don’t think we will see a painful set of Web 2.0® failures.  Fred leaves us with this note:

I think if we all keep our heads screwed on straight and keep the funding amounts to reasonable levels, keep the burn rates down until we have demonstrated viable business models, and focus on building sustainable businesses instead of companies than can be flipped, we’ll all be fine.

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Global Warming = More Glaciers!

According to researchers global warming is causing glaciers to grow. Researchers studied the western Himalaya

Researchers at Newcastle University looked at temperature trends in the western Himalaya over the past century.  They found warmer winters and cooler summers, combined with more snow and rainfall, could be causing some mountain glaciers to increase in size.  The findings are significant, because temperature and rain and snow trends in the area impact on water availability for more than 50 million Pakistanis.

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Utility Computing Delivery Model

According to TechCrunch, Amazon is jumping into the utility computing space. We have been working on our own clustering/grid offering and the question of “how to price” computing capacity has been a hot topic. We have been focusing on the 50% the price of the other guys model, but that will only work for a limited time. The Amazon news starts to define the market. Their pricing is as follows:

  • 10 cents per instance hour
  • 20 cents per GB of bandwidth used
  • 15 cents per GB of storage

Amazon calls their new service the Elastic Compute Cloud (EC2). Here is how they define it:

Elastic: Amazon EC2 enables you to increase or decrease capacity within minutes, not hours or days. You can commission one, hundreds or even thousands of server instances simultaneously. Of course, because this is all controlled with web service APIs, your application can automatically scale itself up and down depending on its needs.”

The terms and conditions of the service have some interesting limits including: a) no more than 1 call per second per IP address, b) may not send files bigger than 40K and c) you cannot hold Amazon accountable for service delivery (i.e. you release them from any liability for service that you pay for).

Sun has a competing “pay as you go” computing offering starting at $1 per hour. They charge $1 per central processing unit hour and charge $1 per gigabyte per month. IBM offers similar pay-per-use computing at 50 cents per hour.

http://hilbert.math.uni-mannheim.de/~seiler/cray.jpg

Cool Cray supercomputer on display (note: this has nothing to do with the post, just thought it looked cool). The equivalent computing power doesn’t look half as good as it used to!

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BarCamp Venue Change

Note that the location of BarCamp Texas has changed.  The new location is: Elysium, check the Barcamp wiki for more information.

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BarCamp Texas

Whurley’s BarCamp Texas is being held between 8.26.06 & 8.27.06 Thistle Cafe ,300 W. 6th Street, Austin, Texas. I won’t be there (I will be in Legoland istead), but Alex Leverington will be there (hopefully) showing off the new version of SimpleTicket.

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Attracting private investors

In this post we will continue the discussion about private investors.  Last post’s primary takeaway was that there are significant differences among private investors and it is incumbent upon the first-time entrepreneur to understand that, first, and then use it to his advantage to conduct a successful fund raising effort on reasonable terms.

This time I will share with you a way to divide potential investors into different categories and how to use those categories in the fund raising process.

PERCEIVED RISK
Revisiting some of the issues from last week, different classes of outsiders will look at the risk of your enterprise differently.

  • A bank will want to see profitable operations, positive cash flow, and sufficient assets to provide collateral for any loan it is going to provide.  As such, banks may fund your growth, but they won’t fund your start up. According to this method of evaluating risk, your start up is “too risky.”
  • Alternatively, venture capitalists may not be put off by your company’s financial performance to date.  In fact, they would probably be surprised if you satisfied any of the bank’s criteria. They will want to evaluate the financial return potential of your enterprise and the inherent risk associated with your ability to realize that potential.  They will do this evaluation in the context of their experience, their existing portfolio, other deals they are looking at and the investment criteria of the fund. The net of all this will be to come to a decision about the risk-adjusted return expectations of your venture.

These two examples represent the two poles of the financial sources scale.  They share the characteristics that they are reasonably predictable with regard to their requirements for your ability to access their capital. The same could be said for other identifiable sources, economic development funds, technology grants, etc.  They have stated criteria and an honest evaluation of your firm will help you determine whether you have any chance of qualifying for their funding.  Too often, first-time entrepreneurs don’t do their homework and/or don’t have the sophistication to properly assess their qualifications.  This can lead to disappointment, and sometimes anger, that could have been avoided.

Entrepreneurs have to gain the sophistication to understand what sources are viable for them and which aren’t.  The competition for those funds is often quite intense, and the people responsible for making the funding decisions have extreme time pressures placed upon them.  You are not doing yourself any favors by aggressively pursuing a source of capital for which you don’t qualify.  Similarly, creating ill will by venting your frustration when you are inevitably turned down is not smart.  Don’t shoot the messenger, particularly when the source of the problem is your mistaken belief that these programs are set up for “you” and you are “entitled” to them. You are not entitled to any of these funds.  Get over it. Compete for funds for which you are qualified, and compete well and from an informed base.

Private investors are not so predictable. That’s why you have to manage the process.

Sources of Risk
The first step in attracting private investment is to recognize how others will react to the risk of your enterprise. While risk can have an almost infinite number of dimensions, there are two core sources of risk: the business and the people.

Business Risk
The types of questions that a typical private investor might ask include:

Is there a market opportunity worth pursuing? Is the business at hand a reasonable way to exploit the opportunity? Who are the competitors and how are they addressing the identified opportunity? Can a start up or early stage business realistically establish itself in such circumstances?  Who are the customers? How are they accessed? How do they make purchase decisions? Can the venture successfully close sales?

What is the role of technology in this venture?  Does the company have proprietary intellectual property?  Is the technology invented, or in a lab? Have customers used it and endorsed its value? Can it be effectively protected?

I could go on and on, basically providing a full list of due diligence requirements that an institutional investor will use to evaluate such a deal, but you get the point.  Evaluating business risk can be quite daunting for the typical private investor.

People Risk
Similarly, the types of questions that a typical private investor might ask about the people include:

Is the venture’s team the one that will successfully exploit this opportunity and provide a desired financial return to the investors? Do they have relevant industry experience?  Have they done it before? Can they grow to meet the venture’s future needs? Will they accept advice and guidance?  Will they attract quality people to the team and let them do their thing? Do they understand the value of a dollar in an entrepreneurial concern?

Are they good people?  Do I want them to win? Do I want to work with them? Do I like them? How do I know if they have integrity? How can I go beyond superficial impressions and really get to know them as a person?

Evaluating risk
Just as risk has many dimensions, evaluating that risk can go in many, many directions.  In the private investor arena, the potential investor is unlikely to have the resources, time, or motivation to go a “professional” due diligence process. The private investor is rarely making investments in companies such as yours as his primary occupation.  If it’s “too hard” to evaluate your business, they will pass and move on to the next deal. Remember last week’s advice:

  • If you approach a potential investor prematurely or inappropriately, you will lose that investor unnecessarily and for the wrong reasons.

This discussion is why I gave that advice.

What are you to do then? How do you influence the perception of risk? For lack a better way to express it, you need to evaluate how well potential investors know the business and know you. If a particular individual knows something about your business, he will either “get it” of not. If he “gets it,” then his perception of risk will be significantly reduced relative to someone who doesn’t know the business.  Similarly, someone who knows you and thinks well of you will perceive lower risk than someone who doesn’t.


Advice to Entrepreneurs

  • Many sources of capital have defined criteria and processes for attempting to access that capital.  It is the entrepreneur’s job to learn what’s what, and to honestly evaluate whether his company qualifies for consideration.
  • Private investors are less predictable than institutional investors.  The entrepreneur needs to understand and categorize potential private investors according to their perceptions of risk.
  • Do they know anything about the business?
  • Do they know you?
  • Surround yourself with professionals, mentors, and advisors who can help you level the playing field.
  • Next time we’ll take a look at how you can use these insights in your fund raising efforts.

    NOTE: I would like to acknowledge Tom Canfield of Equity Catalysts (www.equitycatalysts.com) for his contribution to these articles.  Much of what I’m sharing with you was developed by Tom and me when we worked together at The Enterprise Corporation of Pittsburgh, a predecessor organization that was merged with others to form Innovation Works in 1999.
    —-

    By Frank Demmler adjunct professor of entrepreneurship at Carnegie Mellon

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    Partner Sought to Leverage our Computing Assets

    The Spur brands (Big in Japan, Architel and SimpleTicket) previously utlized our own small data center (perhaps 20 cabinets on raised floor with all the standard bells and whistles). This month we were fortunate enough to acquire a significantly more robust facility built by McLeod Telecommunications. This new multi-million dollar facility will easily accomodate the several hundred servers we need for the Big in Japan tools as well as the new SimpleTicket SaaS offering.

    Finding ourselves with room, power and cooling for 4,200 servers (and that is leaving ourselves with plenty of room for growth) we started looking for a problem to solve. Today we have access to almost 2,000 fairly robust DELL servers and plan to install them in the facility because we don’t have a better place to put them. Our thought is to construct them into clusters or a grid (i.e. a virtual architecture able to distribute process execution across a parallel infrastructure) or some other virtual architecture (perhaps a combination of technologies). We are playing with Sun’s Distributed Resource Management Application API.

    We are now looking for someone to help productize, manage and sell this opportunity. If this sounds interesting to you give me (Alexander Muse) a call at 214.550.2003.

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    Prospects for Google = Gloomy?

    If you believe the executives at Google the future for Google is not so hot.  Over the past 18 months some of the richest people in the world, who also happen to work at Google, have decided that the stock is overvalued.  Not a single insider has bought a single share of Google stock in the past 18 months.  Instead those same insiders have sold $7.4 billion in google stock.

    If you have taken $2 billion off of the table (for diversification purposes of course) I think it is time to take a stand.  If you are willing to tell shareholders your stock is worth at least what it is selling for I would stop selling.  If you are willing to tell shareholders your stock is going to be workth more than it is selling for I would start buying.

    The Google guys have taken  $7.4 billion off the table.  When should they start doubling down?

    • Larry Page: $2 billion
    • Sergey Brin: $1.9 billion
    • Omid Kordestani: $1.1 billion
    • Eric Schmidt: $650 million
    • Ram Shriram: $650 million (Director, Investor)
    • David Drummond: $200 million
    • George Reyes: $200 million
    • Jonathan Rosenberg: $200 million

    [via]

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    Attracting Private Investors

    Much of the investment discussion has been focused on institutional investors and their attitudes toward investment in entrepreneurial concerns.  On the one hand, this provides some context for you as to how the “professionals” address such investments.

    But on the other, the vast majority of companies are funded by private investors.  In a “normal” year, venture capital will invest in 2,000-3,000 companies in the United States.  Of those, about half will be receiving their first round of institutional investment.  This is in contrast with the total of about 14 million businesses in the United States of which well over 13 million have less than 100 employees.  Every year, close to one million new businesses are launched. It has been estimated that private investors provide ten times the capital for small businesses as compared to that invested by institutional venture capital.

    The bottom line for most of the entrepreneurial readers is that your funding is much more likely to come from private sources than from institutional venture capital.  For the next few weeks, I will focus on the private investor.

    Not all the same
    Private investors are not all the same.  Quite often a first-time entrepreneur gets focused on raising money from an “investor.” This “investor” becomes the sole focus of the entrepreneur as he seeks the “answer” to how to access and successfully solicit funding from that “investor.”  If only it were that simple.

    The private investor is as varied as your neighbors, as your classmates in the various schools you attended, as the drivers in all the cars fighting the traffic with you each day.  Private investors are individuals first and foremost, with the same human differences that each of us has.

    As such, some may have an interest in your company and some won’t.  Some you’ll want to be interested in your business and others you’ll want to avoid.  Some will have investment expectations that you consider to be reasonable, and some won’t.  Your challenge will be to identify the intersection of potential investors in your company out of the universe of all investors with the deal structures that that are acceptable to you out of the universe of potential deal structures.

    The Role of PERCEIVED Risk
    The first thing you need to understand as you consider approaching potential investors is that their perception of the risk involved with your business (and their potential to receive a return) is the initial hurdle you must overcome.  Their perception of risk is likely to be much different than yours.  You need to be sensitive to that and responsive to that.

    A corollary to this is that this screen if pretty much binary.  By that I mean the potential private investor will have an initial reaction to you, your company, and the investment opportunity. If that initial reaction is one of, “it’s too risky,” you can scratch that person off your potential investor list.

    Only if you pass this screen will you have an opportunity to try to convince the individual to invest and to influence the terms under which such an investment would occur.

    As you proceed down the path of seeking private investment, the potential investor will be making a series of decisions. The outcome of each decision will be “no,” or “maybe.” Your goal is to get, “maybe,” each time until you finally get the coveted, “YES!”

    Advice to Entrepreneurs

    • In all probability, your funding is going to come from private investors, not institutional venture capital.
    • There is no single “private investor.” Each is an individual with his or her own views and sensitivities.  Attracting an investment from such sources is not a “one size fits all” proposition.
    • The potential investor’s perception of risk will greatly influence whether he has an interest in investing in your company under any circumstances.
    • If you approach a potential investor prematurely or inappropriately, you will lose that investor unnecessarily and for the wrong reasons.
    • Surround yourself with professionals, mentors, and advisors who can help you level the playing field.

    Next time we’ll look at how these issues affect private investors and how you can use this knowledge to improve your chances of successfully raising the desired capital.

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    By Frank Demmler adjunct professor of entrepreneurship at Carnegie Mellon

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    Bankruptcy Blog Pointer

    Brad Feld points out that Cooley Godward has a new blog called The Business Bankruptcy Blog.  Chapter 11 is never fun as I can attest, but a good resource for information is always helpful.

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    Startup Valuation

    This post covers entrepreneurial fund raising. Let’s review some of what we’ve discussed in recent weeks.

    Review of Valuation

    Angels of Brooklands cemeteryIn past articles, I explained that valuation was a number agreed to by the parties involved in a transaction. While quantitative tools are used to estimate, or justify, a range of values, the actual value used in the deal is determined much more subjectively than a first-time entrepreneur would like to believe.

    As a starting point, I noted that valuation could be represented by the following equation:

    Pre-financing value + investment = post-financing value.

    Further, I cautioned that valuation was just one of many elements of an investment, and that it needed to be put in the context of the total deal. In particular, I said that the terms of preferred stock were material.

    Review of preferred stock

    Preferred stock is called preferred for a reason. It provides the investor with certain preferences, some of which directly affect the value of his investment under different circumstances.

    Features of Preferred Stock

    Preferred stock is materially different than common stock in many important respects. Some of the terms and characteristics of preferred stock can have significant consequences.

    Liquidation
    In the world of private equity, the definition of liquidation encompasses most transactions, other than an initial public offering (IPO), through which the investor seeks to “liquidate” his investment.

    Liquidation Preference
    One of the key features of preferred stock is that higher in the pecking order of who gets paid what and when in the event of a liquidation. Preferred stock shareholders receive distributions from liquidation before common stock shareholders.

    Liquidation Amount
    This is the amount of money the investor in preferred stock has a right to receive before the common stock shareholders receive anything. The dollar amount is defined in the term sheet. It often starts with the investment amount plus accrued, but unpaid dividends. Then some sort of multiplier is usually applied to that amount.

    Participation
    Originally, preferred stock was an ‘either-or’ proposition for the investor in the event of liquidation. The investor would calculate the liquidation amount, calculate the value of the common stock if converted, and pick the one that yielded the higher amount. This is called non-participating preferred stock.

    The key feature of participating preferred is that the investor gets the liquidation amount first, AND then participates in the distributions on an as-converted basis.

    Anti-dilution protection
    If the company sells shares at some future date at a share price less than what the investor paid, the investor wants anti-dilution protection, either full-ratchet or weighted-average.

    Control
    To a large degree, control and percentage of ownership become separate issues in deals including preferred stock.

    How preferred stock terms can affect valuation – a scenario

    Let’s take a look at how all of this can play out.

    The Original Investment
    Let’s say an investor invests $1 million in your company at a pre-financing value of $1 million [50-50 ownership]. Let’s also say that the investment purchases Participating Convertible Preferred Stock with a 10% dividend rate and a liquidation amount multiple of two.

    The Sale of The Company
    Two years after he investment, the company has stalled for some reason, and it has never really gotten significant commercial traction and probably never will. An opportunity comes up for the company to be acquired for $5 million. While not a home run, everyone should be relatively happy. Right? Maybe not.

    The Distribution of the Proceeds
    After two years, the preferred stock purchase price plus accrued dividends has grown to $1.2 million. After applying the multiplier of two, the liquidation amount is $2.4 million, which the investor gets “off the top.” The remaining $2.6 million is divided pro rata with the as-converted shareholdings, or 50-50, meaning $1.3 million each. The investor has received $3.7 million and you get $1.3 million. Under these circumstances, what appeared to be a 50-50 deal at the outset became a 75-25 deal!

    Advice to Entrepreneurs

    • Valuation is only meaningful in the context of the complete deal.
    • Preferred stock provides the investor with extra benefits and rights as compared to the common stock shareholders.
    • Understanding the arithmetic of deals is very important.
    • Surround yourself with professionals, mentors, and advisors who can help you level the playing field.

    Next time we’ll begin to look at the role of angel investors and how you can attract them.

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    By Frank Demmler adjunct professor of entrepreneurship at Carnegie Mellon

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    Business Plan Archive

    I found (it came out in 2002, where have I been?) a site called the Business Plan Archive sponsored by the Library of Congress.  If you have ever written a business plan you will understand why this site is so important.  Here is how they describe the archive:

    Welcome to the Business Plan Archive.  In partnership with the Library of Congress, the Center for History and New Media, and the University of Maryland Libraries, the Archive collects and preserves business plans and related planning documents from the Birth of the Dot Com Era so that future generations will be able to learn from this remarkable episode in the history of technology and entrepreneurship.

    The site includes actual business plans, executive summaries, powerpoints and press releases.  I am considering adding LayerOne’s stuff to the archive.

    [via Pukraj]

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    hResume Creator Online

    For those of you who want to create an hResume we built a creator. Check out the beta version here: hResume Creator. You simply enter your resume data, cut and then paste the code on your website. Give us the URL so we can ping it. We built the Creator for folks who don’t have a WordPress blog. Previously we released the hResume WordPress plugin.

    What is hResume? hResume is a microformat for publishing resumes and CVs. For those of you who are wondering what Microformats are I will steal from the Microformats site:

    Designed for humans first and machines second, microformats are a set of simple, open data formats built upon existing and widely adopted standards. Instead of throwing away what works today, microformats intend to solve simpler problems first by adapting to current behaviors and usage patterns (e.g. XHTML, blogging).

    The hResume project is a little idea I had that we talked about in a series of posts (ongoing) titled Napkin to Startup.

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