Archive: Entrepreneurs

Andreessen warns: don’t burn cash, or you’ll turn to ash

Cash Burn

Don’t burn cash, says Marc Andreessen. In a retweet of Fred Wilson’s Post on burning cash, losing money. Marc Andreessen warns that hyper valuations should be used by entrepreneurs to stash up on cash, not to have delusions of grandeur and spend it all until you have nothing left to spend.

 

This is an interesting and important point. Says Marc, we are not in a bubble unless the spending behaviour of entrepreneurs make it a bubble. Their companies can well create the value implied in high valuations, as has been proven by the many spectacular success cases of disruptive players from Facebook to Uber. But startups need to stay focused and not spend because they have.

 

As my early mentor Ken Morse was wont to say: the laws of gravity have not been repealed.

 

 

The Winds of Change in European Venture Capital

Lights in Europe

Recently I commented on my perception of the deficiencies of the Approach of European VCs to their investment decisions, criticizing what I perceive to be non-analytical herd investing reflexes. Startups are deemed “hot” or not, irrespective of their disruptive potential.

 

Two posts prove me a bit wrong and show that their may be a set of “new VCs” who are eating the world of the “old VCs”.

 

Ciaran O’Leary (@ciaranoleary) explains why he disregards business plan targets and focuses on the startup doing what is right to build its value proposition here: http://berlinvc.com/2014/09/19/doing-what-is-needed-to-achieve-the-plan-vs-doing-what-is-right/

 

Christian Hernandey (@christianhern) describes how a new(er) set of VCs are adressing the series A Crunch and taking a different approach, helping close the US-Europe gap in Startup Funding:

 

This is very encouraging, though understanding how Venture Capitalists decide remains the most important question LPs should ask themselves.

 

 

 

There’s something rotten in the Kingdom of Venture Capital

It’s generally a bad idea to generalize….(pun intended).

 

And criticizing VCs when you are in the process of fund raising is probably a bad idea and puts whatever you say at risk of being perceived as whining.

 

But having raised an excellent early stage round from some of the best Angel Investors and Entrepreneurs that I know, I cannot help but reflect on the contrast between the approach of the Angel Investors we have on board compared to the process and decision making that we – and others – experience with insitutional VCs.

 

The cliché of Venture Capital investments is that Angel Investors invest on a hunch, whereas insitutional VCs follow a more rational, risk-balanced and professional process.

 

Our experience has been that the really good, tough questions have been asked in detail by our Angels – to skim just the top of these questions:

- explain your metrics?

- what is the margin of error of your financial model?

- how do expect to scale?

- how much do you get out of a dollar spent?

- how big is your adressable market?

- what is your competitive moat (Buffet terminology)

- what are the strengths of your team, what do you need movong forward?

 

Too often, these were not the questions asked by VCs. It may be that in today’s market, they simply don’t have the time to parse their deal flow in depth and instead rely on market consensus that this or that startup is “hot”. This leads to herd investing, and that may explain the disappointment of portfolios largely kept alive by follow-on rounds and convenient “exits” to friend VCs portfolio companies. It even makes sense, in a way, by “pooling resources” – if, that is, the VC initially triggering the herd did actually ask and answer the hard questions.

 

What it does not do is create an environment for the type of long shot value creation that Silicon Valley excels at. Ueber, AirBnB, Twitter, Quora would not have stood a chance with how many European VCs – obviously not all – approach their deal flow.

 

Add to that the rituals of pitching, event networking, and buzzword-slinging that are endemic, and it makes you wonder whether these VCs really are following the right path to identify truly ambitious startups correctly. Today’s hot startup often gets caught up tomorrow in business model issues that were recognizable from the outset. I sometime miss an analytical response and understanding of the market, at least from VCs that do not have an industry focus.

 

It’s hard to picture a barefoot Steve Jobs convincing any of today’s European VCs to invest in Apple.

 

 

the Hamlet VC

Managerial Versus Entrepreneurial Decision Making

The following text is from a McGraw-Hill Book on Entrepreneurship published in 2005

The difference between the entrepreneurial and the managerial styles can be viewed from five key business dimensions—strategic orientation, commitment to opportunity, commitment of resources, control of resources, and management structure. Managerial styles are called the administrative domain.

 

Strategic Orientation
The entrepreneur’s strategic orientation depends on his or her perception of the opportunity. This orientation is most important when other opportunities have diminishing returns accompanied by rapid changes in technology, consumer economies, social values, or political rules. When the use of planning systems as well as measuring performance to control current resources is the strategic orientation, the administrative (managerial) domain is operant, as is the case with many large multinational organizations.

 

Commitment to Opportunity
In terms of the commitment to opportunity, the second key business dimension, the two domains vary greatly with respect to the length of this commitment. The entrepreneurial domain is pressured by the need for action, short decision windows, a willingness to assume risk, and few decision constituencies and has a short time span in terms of opportunity commitment. This administrative (managerial) domain is not only slow to act on an opportunity, but once action is taken, the commitment is usually for a long time span, too long in some instances. There are often no mechanisms set up in companies to stop and reevaluate an initial resource commitment once it is made—a major problem in the administrative (managerial) domain.

 

Commitment of Resources
An entrepreneur is used to having resources committed at periodic intervals that are often based on certain tasks or objectives being reached. These resources, often acquired from others, are usually difficult to obtain, forcing the entrepreneur to maximize any resources used. This multistage commitment allows the resource providers (such as venture capitalists or private investors) to have as small an exposure as possible at each stage of business development and to constantly monitor the track record being established. Even though the funding may also be implemented in stages in the administrative domain, the commitment of the recourses is for the total amount needed. Administratively oriented individuals respond to the source of the rewards offered and receive personal rewards by effectively administering the resources under their control.

 

Control of Resources
Control of the resources follows a similar pattern. Since the administrator (manager) is rewarded by effective resource administration, there is often a drive to own or accumulate as many resources as possible. The pressures of power, status, and financial rewards cause the administrator (manager) to avoid rental or other periodic use of the resource. The opposite is true for the entrepreneur who—under the pressure of limited resources, the risk of obsolescence, a need for flexibility, and the risks involved—strives to rent, or otherwise achieve periodic use of, the recourses on an as-needed basis.

 

Management Structure
The final business dimension, management structure, also differs significantly between the two domains. In the administrative domain, the organizational structure is formalized and hierarchical in nature, reflecting the need for clearly defined lines of authority and responsibility. The entrepreneur, true to his or her desire for independence employs a flat organizational structure with informal networks throughout.

 

Source: Hisrich, PhD, Robert D., Michael P. Peters, PhD and Dean A. Shepherd, PhD. Entrepreneurship. 6 ed. New York: McGraw-Hill Irwin, 2005.

Rezession die beste Zeit für Social Media? [German]

Peter Turi hat ein Video – Interview geposted, dass er mit mir auf dem DLD 09 geführt haben. Darin stellt er solche spannenden Fragen wie:

1) Ist Rezession eine schlechte Zeit für Startups?

2) Wird sich bei den Startups die Spreu vom Weizen trennen?

3) Wird YouTube sevenload verdrängen?

4) Was ist das “nächste große Ding?”

Hier sind meine Antworten:

Interview Turi2 (2009): Interview with Axel Schmiegelow about his entrepreneurship (German) from curtis newton gmbh on Vimeo.

CES Depressed

This year, all Las Vegas was abuzz with the expectations of attendance to CES – and how they were not met. From cab drivers to convention exhibitors, everyone was touting the scale of the downturn.

To us, the convention presented a more mixed picture. As often is the case in downturns, in an overall downbeat environment, a few interesting developments could be observed:

1) The Slingbox by Slingmedia: offering some 14 Mil. subscribers of its parent company, a midsize cable operator in the US, the opportunity to access Web TV content through their cable content.

2) The advent of HD to TV and other screens, including a number of interesting personal camera devices.

3) The increasing dissemination of “cloud” (now there’s a buzzword) logic to the consumer world: first through “thin client” notebooks that are not much more than windows to web services, and second through a push towards homes servers, ranging from Windows solutions to proprietary home hifi systems. Its too early to name this a significant consumer trend, but slowly we are seeing the first applications for the “internet of things”, “cloud computing”, and “semantic web”.

Recession is the best time for entrepreneurs, Ken Morse (and others) says. Now is the time to see and grasp the potential of these new technologies as they slowly approach end consumer relevance.

Excitement at SIME once again

Amidst all the depression caused by the financial crisis, attending SIME this year was like a breath of fresh air. Ola Ahlvarsson worked his magic once again. A very entertaining 60+ year old professor of medicine demonstrated an exciting new technology to create visual statistics called Gapminder, which was acquired by none other than google.org. Rockstar entrepreneurs and investors ranging from Morten Lund to the founders of Bwin infected the audience with entrepreneurial spirit.

Blowing away any clichés about a gambling company, Bwin demonstrated that they have a particularly modern HR Policy.

David Sifry showed how a leading rockstar blogger can become a travel tour guide entrepreneur. Among the most fascinating aspects of the conference was a panel of leading entrepreneurs from exciting international markets such as Vincent Fong for China, Joi Ito for Japan, Mahesh Kumar for India and Michael J. Wolf for the US. That was especially exciting for me as sevenload is in the midst of its internationalization. The most inspiring thing about the conference was the infectious “can do” spirit that the entrepreneurs’ presence radiated, especially those from Holland and Sweden- two countries with a distinct positive attitude that I sometimes miss in Germany.

What makes good leadership?

A lot is being said and has been written about how strategies and market mechanics determine the success or failure of ventures and large companies. But any entrepreneur will confirm that it usually is execution which decides the fate of the company, especially in venture companies. Thus, leadership capabilities may be the most important skill set of venture management.

Leadership, management, and the principles which guide how employees are motivated and directed in their tasks are usually treated either as a self help topic in management books or as the HR side of company organization.

It might be time to focus on leadership and HR capabilities in the strategic dimension they have for the company. This means to recognize that the best company strategy can be killed by the wrong leadership methods. Good leadership is not only an important requirement for management. It is the necessary condition for company success!

In the region of North Germany where part of my family comes from we say that a fish always stinks from the head, which in my opinion puts in a nutshell the essence of leadership. If your venture team is not motivated or doesn’t excel, start at the head.

Ted Levitt once said that

organizations exist to enable ordinary people to achieve extraordinary things,

which I believe is only a way to say that things happen only if people do them. The success of a company is only achieved if the employees and the managers of that company willingly take the necessary actions to enable that success.

That is certainly first and foremost a question of deciding which of the actions that are available in a given situation is chosen, but it is equally importantly a question of ensuring that every employee executes that strategy in the way that best ensures success, including feedback and adaptation of the strategy when problems arise.

Achieving this, however, is a question of leadership.

Since all dictatorships eventually fail, leadership cannot be reduced to the ability to bark orders. All great historic figures acclaimed for their leadership, from Julius Cesar to Napoleon, from Spartacus to Martin Luther King, are all admired for their ability to inspire, to motivate, and to convey a sense of purpose to a large number of people, i.e. to the organization that they led.

Inspiration however, is nothing without credibility. Credibility, in turn, is only achieved through authenticity. Authenticity is only achieved through honesty. Applied to the world of the 21st century and the context of leadership in business organizations, this means that a truly successful leader needs to combine the ability to inspire others with a set of skills and principles that are tenets of credibility as a leader:

1. An inspiring sense of purpose.

2. A clear set of unflinching values. Shifty leaders command no respect.

3. Honesty at all costs.

4. The ability to communicate necessities and convey a sense of urgency to a team.

5. The ability to define the organization as a community serving a common goal.

6. The ability to honestly admit own mistakes and address the weaknesses of the organization.

7. Relentless commitment to the company goal, including the necessary ability to “punish underperformance”, without humiliating anyone in the organization.

8. The ability to lead by example, including in personal matters such as health or respect for others.

9. The discipline to pursue a strategy and tactics that belong to that strategy and to adapt these whenever necessary, not only “acting from the gut”.

10. The intelligence to always overestimate competition and underestimate your own position.

Most of these traits require a certain level of self-assurance, respect for others, and clear view of your own shortcomings that is incompatible with most managerial egos. But while there are enough cases of at least temporarily successful egomaniacs, in the long run only those entrepreneurs intelligent enough to value, respect, and reward their performing team members, and self-critical enough to recognize their own mistakes become truly great.

Reps and Warranties in Venture Capital Deals

This weekend a friend of mine called me up, as he was completing – as a leading seed investor – the first round (series A) of a company that I have a minority stake in. He told me that the round being negotiated was just short of Signing, as all main deal elements had been agreed with the investor (a large and well-known VC Fund), but there was one last point of contention left, and – big surprise! – that was Reps and Warranties.

That made me think once again about the peculiar habit of venture capitalists to turn Reps and Warranties almost as much a difficult topic as in M&A. If you think about the term “Venture Capital”, the whole concept is that you venture into something and there is no precisely NO guarantee of success.

Of course it makes full sense to commit founders to proper representation of the state the company is in and to also make them liable for the so-called Title Guarantees, in effect making sure that the shares being transferred to the investor are free of third party rights, are indeed constituted legally and are not subject to any limitations. However, I do not understand why these Reps and Warranties so often go to the core of the risks of the business model, thereby in effect giving the venture capital investment more the character of debt financing, disguised in the Reps and Warranties clause.

Why do I say this?

Because if a founder signs up for – say – a 3 Mil. Euro investment and the company fails due to an event that is at the core of the typical risk of the business model, this may create a warranty case that in the worst of all contract agreements may include full damage to be paid by the founder. This then means that the investor may get up to the total sum of that investment in damages from the founder because of an event that constituted the essence of the typical venture risk.

So put very bluntly, by enforcing Reps & Warranties covering business risks, the investor covered his venture risk by making the founder liable for failure of exactly that risk.

We all know that founders who may be otherwise admirable do not like to focus on legal details and may have bad luck in a choice of their attorneys.

That can be a deadly mistake.

When founders find themselves in such a contract situation, it is not just a reflection of poor negotiation skills on the side of the founders, who – one might argue a bit unfairly – therefore would not deserve anything better.

Such contract clauses are also always a case of misguided priorities on the side of the investor.

While as an investor I have full sympathy for contractual rules that prevent an irresponsible founder from walking away, as in the old adage “with my time and your money to waste, we have nothing to lose”.

However, it is equally unfair to put the investor of a venture in a position where his investment becomes more a case of debt with higher returns and higher default risk than of real venture investment. Moreover, discussions and probable litigation about business risk damage retribution by the founder can divert vital energy from surviving the damaging event, since both the founder and the investor will bes spending considerable time hedging their risks or enforcing their rights. THat can ultimately be much more damaging than the damaging event itself.

Here is my advice to founders in any negotiation about Reps and Warranties:

1) Before negotiation of deal terms, identify the natural risk of your business model

2) Prepare to describe and argue to the investor what the typical risk of the venture is and make it clear from the outset that that risk cannot will not be carried by the founder(s).

3) Make the investor acknowledge these risks early in the process of negotiating the terms

4) At term sheet level make sure that the basic principles guiding an equal distribution of reps and warranties rights between founder and investor include the following

a. Liability of founders is limited to willful behavior and gross negligence

b. There must be a cap of a certain percentage of the investment, in my opinion not more than 50% of the investment sum.

c. For all cases of non-willfull behavior the warranty term should be at most 12 months

d. Each founder is only liable for the fraction of the cap that corresponds to his fraction of shares in the entire company, so a co-founder who has 20 % of shares in a company shall only be liable up to 20% of the cap.

e. All shareholder managers with shares smaller than 7% should be exempt from any liability unless there is a specific reason for that.

f. Damages should be paid only to the extent that the Founder / Manager liable had best knowledge of the Warranty issue.

g. Retribution of damage should be limited to the damage that is incurred directly by the damaging event, confirmed by court ruling and could be reasonably expected. There should be no damage retribution for a loss of valuation of the company, which should be explicitly excluded. Valuation loss is usually covered by downround protection clauses.

h. Retribution of damage should be limited to such damages as cannot be corrected or “repaired”.

i. No damage retribution should be given for damages that are incurred due to lack of cooperation on side of the investor. This could include anything ranging from late payment of investment funds, lack of cooperation in litigation cases, failure of the board members dispatched by the investor to agree in litigating to avoid the damage, and so forth.

k. The most important advice that can be given to any founder signing Reps and Warranties is to put a large amount of energy into the due diligence and disclosure process and the documentation of that due diligence and disclosure process. THis is where attention to detail is a very necessary evil. The contract must include a clause that no events or fact about the company that were or could reasonable have been expected to be known to the investor at the time of the investment can lead to a claim of the investor against the founder. Thus claims are excluded if the the facts that led to the damage were known to the investor.

l. Negotiate all these points, then focus on disclosing well all risks that are part of the business model or lie within the company.


Often investors will present the founders with tough Reps and Warranties basically to incentivize them to puta significant amount of energy in thinking through the risks of the company and the development stage the company is at.

However, founders should rate their investors on the basis on their willingness to accept clauses that correspond with or at least resemble what I advise.

Good Luck!


sevenload relaunches and secures new round of financing!

We spent the past months preparing our relaunch and securing our next, series B round of funding. I am very happy today because we just received confirmation by the German Antitrust Office that our Funding round is approved.

Our relaunch brings us to the next level, where we simplify channel navigation, combine it with social features, and open our business model one step further to content owners, by letting them have a larger share in our advertising revenue. We still have a lot of optimization work ahead, but the metrics of the past weeks suggest that we are on the right track.

The round of funding we just secured will lay the groundwork for our further expansion, and I am happy and proud that we now have French, Spanish, Italian, Polish, Russian and of course Turkish localizations.

Here’s our official Press Release:

http://corporate.sevenload.com/sevenload-secures-new-round-of-financing/

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