Archive: Business Model

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As my early mentor Ken Morse was wont to say: the laws of gravity have not been repealed.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

 

 

 

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.

The Future of (web) TV

Reflecting on the current discussions, last at the Delphi Executive conference in Bonn, and at CeBIT which I both attended as a speaker, I recalled the very lively panel at DLD 09 around online video and social media. If you are interested in the topic, the video gives you insights with Brightcove, Endemol, sevenload and Termor Media and a great moderator, David Kirkpatrick from Fortune Magazine.

About the specifics of how we perceive the value of recurring WebTV Content, please check my Interview at ETRE in Stockholm:

ETRE 2008: Axel Schmiegelow describes the sevenload community and “The Future of TV” from curtis newton gmbh on Vimeo.

Labor Costs and Service Prices in the US economy: hidden flexibility?

Travelling through the US once again and hearing comments about the recession every day, I was struck by the elasticity of US business once again. As much as the business climate is intoxicating to the point of being hectic in boom times, as seen in 1999/2000 and once again in 2007, in bear times everything gets very gloomy.

I was riding in a cab in Las Vegas headed to CES and for once in the habit of European cab fares I forgot to tip the cab driver. He commented “You Europeans never tip, do you?”. After paying the due tip, I reflected on how dependent employees in all services industries were on tips for their regular income. I also noticed that tipping behavior on the part of Americans differed strongly from what I had experienced just 6 months ago on my last extended trip to California. People now, out of need or out of fashion, were downright stingy. Given that such large portions of the US economy are service based, I could not help but wonder how that had the same effect as a wage cut in many of these industries. At the very least, it shows that employers, who deflect part of the necessity of paying market wages to the culture of tipping and its encouragement in the policies of their businesses, thereby have an instrument to reduce and flexibilize their labor cost. In boom times employees earn more from tips and in bust times they earn less without the employer having to enforce wage cuts. This benefits the employer because he remains at his (low) wage cost basis, keeps his prices stable and lets the customer reduce tips if he feels he needs to. Since tips are part of the price structure of using a service, this means that lower tipping amounts to a deflation of service prices from the point of the customer. Thus, in a way, the business owner is leaving part of the pricing to the customer who can deflate the price he pays at will if his pockets are tied – as is the case in a recession.

Now while this, from a European perspective, could be perceived as an unfair advantage the business owner has in his relation to employees and customers, it could also be described as an “entrepreneurial risk” of the employee. Employees that commit particularly well to the service they are a part of and endear themselves to customers will invariably in good or bad times reap better tips from the customers. An employee who does well will probably convince a business owner to give him the responsibilities (assigned tables, assigned services) that will have the highest likelihood of earning him tips. One can already observe that some businesses compete on a labor market by installing policies that encourage tips.

A hamburger chain called Fat Burger places a small tip box next to a big tip box at the cash register and each time a larger tip is paid into the so called “fat tip box” the cashier yells out “FAT TIP!” and all other employees chime in yelling “FAT TIP!” as well.

As ludicrous as a discussion of the macroeconomic effect of tipping might seem at first glance, the impact on the US economy must be sizable. Considering the service industry is a 10s of billions of dollars segment of the economy and that average tipping is between 10 and 20 % of a purchase, tipping could well amount to several billion dollars in the economy. Adding or subtracting billions of dollars of volume to the price structure of the service industry could in turn have stronger than imagined effects on inflation and deflation, as well as on purchasing power in low income segments of the population.

As I am not an economist, I will leave the discussion at that, but I sure would find it interesting to know if this has ever been explored academically.

Launching HD at LeWeb08 in Paris

This interview by Charbax, a great blogger/thinker from Switzerland, included his grilling me on tech questions around HD and making me explain the business model of sevenload from an independent publisher’s point of view.

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!


When do I Invest? – Video Interview [German]

Recently I had the nice experience of being interviewed by the blogger / founder of http://www.easn.de or Everything A Startup Needs. He asked me to relate:

- how dw capital grew out of denkwerk

- what makes our positioning unique

- what are my criteria for investment

- and how much idealism a Founder can sustain

Of course, an [edited] video interview cannot convey all the things and remarkable people that shaped the rich history of 10 years of denkwerk, but maybe the interview gives anyone interested an impression of the philosophy behind our seed venture unit, dw capital. So, here goes:

Video Interview of Axel Schmiegelow

For the record, and because I also have an agency background:

I do believe in Branding, but I don’t believe Branding should be an excuse for bad conversion of a media campaign.

Discussion: Monetization or Reach [English]

Frank Huber recently tackled my post about Monetization in his Blog

http://blog.firstmedia.de/?p=763 (in German)

and contradicted my views of the subject based on 2 reasons: in his opinion, YouTube has shown that “size does matter” and sevenload hasn’t followed my recommended strategy at all. Here’s my reply to his post:

1) It’s undeniable that the “natural market leader”, who’s the one that goes for reach first, is the one who can win the rat race for size. I did point this out myself in my own post. However, it would be wrong to believe that the YouTube strategy and more specifically the YouTube exit is something that can be replicated. Ex post, Google’s investment in YouTube makes a lot of sense for a company that gave up a fraction of it’s shares. But there is exactly one buyer fitting that profile, and that is Google. There’s always exactly one worldwide or www-wide dominant company per segment that can be successful with a sheer “reach” priorization and with such an Exit strategy – so it’s hardly good advice for startups to emulate that model unless the startup is entirely sure of being the first one in its category.

My argument wasn’t that reach or the number of users/clients won is irrelevant- in fact, it’s the opposite. I just think that it is healthier to achieve this reach or customer base with a working and efficient business model than without one. And XING is a good example of this: From its first day back in 2003, Lars Hinrichs (Founder of XING) was already charging 5- € in monthly membership fees, even though at the time subscription models were still widely perceived as unfeasable in the German internet market.

2) sevenload’s strategy is NOT that of gaining a gross increase in our reach at all costs. We’re following an approach of pure, organic growth (up to now we haven’t spent a single € for advertising) which allows us to best offer a differentiated platform and cover the “Long Tail” of content. This allows us to offer advertisers rates that are up to a factor of 10 greater than those of normal video portals – and of most most conventional internet portals as well. Because of this difference, we are the market leader as measured in:

- Unique Visitors (> 10 Mil real unique visitors per month),
- active registered users (> 300,000),
- average visit duration (> 25 min. per visit and registered users > 45 min),
- content volume and
- revenue (we will be the Web 2.0 company with the highest turnover in Germany this year and most likely the only one that will be profitable). We achieve all this thanks to a revolutionary advertising model that is highly effective for advertisers.

Interestingly, though gross reach was not a primary target, this strategy has led to an sustained increase in precisely our gross reach and has put us in second place in the German market in terms of gross reach, right ahead of Clipfish, despite Clipfish’s massive cross-media subsidisation by the leading German TV Channel, RTL, and a full integration in DSDS, Germany’s “American Idol” Format.

In my opinion this once again proves the wisdom of Al Ries’s main marketing theorem:

Create a new category, then dominate it

My post on monetization does nothing more than offer a methodic approach to defining the category a startup strives to dominate in business model terms rather than in media terms.

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