Business, Law, and Innovation
Mechanics of Building Value
Lecture 4
Spring 2014
Professor Adam Dell
The University of Texas School of Law
Basics:
Every company that is NOT cash flow positive is on it’s way
to going “OUT OF BUSINESS”.
Only the $ provided by VCs (and other sources) keep these
companies alive.
So, the goal is to find a way to get an investment CF positive
as quickly as possible.
This is why VCs look for business that are “capital efficient”
(software, services, etc.) and for the losers to “fail fast”.
How do you get Cash Flow positive? Growth….
Exponential, non-linear growth that yields positive cash flow…..fast!
Growth is necessary, but it isn’t necessarily sufficient….you also need a
business model
How Do You Get There?
Crossing the Chasm – When a new innovation moves beyond “early adopters” and becomes widely
accepted.
Critical Mass – Enough participation in a system such that its growth becomes self-sustaining. Often
occurs when a product or service reach mass market.
Tipping Point – Point at which a new innovation achieves critical mass. Can occur through word of
mouth, contagiousness, connectors & experts.
New adopters
Critical
Mass
Tipping
Point
Crossing
the Chasm
- Malcolm Gladwell
- Geoffrey Moore
Time
When Selling to Businesses..there is a “HYPE CURVE”
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Case Study: OpenTable
Electronic reservation book, table management and
Internet reservation system for the restaurant industry.
x
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OpenTable: State of the Nation, circa 1999
10-15 competitors, many venture backed
All doing essentially the same thing (Expedia for restaurants)
Some giving away the terminals for free
Lots of noise in the space
Very few restaurant reservations flowing through the system
Mechanics of Building Value
So, once you decide to invest what do you do?
1) Ensure sufficient capital to get to the next milestone
2) Ensure the right management team / board
3) Access to the right relationships / partnerships
4) Ensure the right strategy is pursued.
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Mechanics of Building Value
MONEY: Benchmark Capital, Impact Venture Partners ($5mm)
BOARD: Restaurateur Danny Meyer
PARTNERS: American Express, Zagat, IAC, AOL, CitySearch
STRATEGY: Own the restaurant relationship, focus on delivering
value independent of the rest of the world.
TEAM: President of MICROS, then Thomas Layton
PATIENCE / COMMITMENT: We doubled down in 2002 with
very little achieved in 3 years.
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OT.com: State of the Nation, circa 2008
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OT.com: State of the Nation, circa 2007
14,000 restaurant customers
Dominant, global position
Great team (Matt Roberts)
Great partners (Amex, AOL, Zagat)
Great business model
…Perhaps a natural legal monopoly
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3 Outcomes in every VC investment:
Shutdown
Sale / Merger
IPO
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3 Outcomes in every VC investment:
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Tipping Point ;)
""If you can book dinner on OpenTable or
a flight on Southwest or United online,
then why shouldn't you be able to make
an appointment at your local Social
Security office the same way?"
President Barak Obama, Jan 14th 2010.
Jeff Jordan, CEO of OpenTable: Steve
Ballmer was in the audience and came
over, gave me a high five and said “What
did you pay for THAT placement?!"
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Risk & Reward
HIGHLY RISKY
HIGHLY REWARDING
HIGHLY FUN

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