High Tech Ventures: August 2001
A Silicon Valley Perspective
Gordon Bell
Microsoft Corporation
&
Nanyang Ventures
http://www.nanyang.com.au/
August 2001
Summary
• We’ve witnessed the greatest, all time, wealth creation and
destruction period. Ponzi? Conspiracy?
• .com era allowed any idea to get extraordinary funding,
valuations, and payoff. Little technology!
• Silicon Valley has capital.
But, VCs busy with old projects.
• Real technology exists and is increasing!
But, I don’t see a chance to “spin a yarn” like www!
• What counts AGAIN, are fundamentals:
Team, product, marketing … and execution!
• Lots can go wrong!
Internet Bubble Lessons
• Laws of economics still apply
• Risk/reward at a new level
• Technology enablement available to all
• Infrastructure is means, not end
• Internet connectivity doesn’t mean integration
• Big changes take >5+ years.
In the long run, it will all be true!
• Cash is still king!
• Company failings is still growing. Peak by year end.
“Now this is not the end
It is not even the
beginning of the end
But it is, perhaps, the
end of the beginning”
Winston Churchill, 1942
TECHNOLOGY DEVELOPMENT
BIO INTELLIGENCE AGE
CONSUMER ACCEPTANCE
2000 BC
0
1500
1800
1900
2000 AD
TIME (year)
R. Satava 29 July 99
Outline
• Situation in Silicon Valley / Bay Area 2001 August
– Unlike our PR, streets aren’t paved with gold
– You have to dig for it versus pick it up
– Now it is much harder than 2 years ago
– Good business for pick and shovel makers!
• Bell-Mason Model for a startup and the diagnosis of them
… the fundamentals haven’t changed
• Look at the environment that supports it and compare it
with the area in Boston.
• Lessons for .au?
• Red flags and flaws … what to look our for
Slowdown in the valley: What's ahead
Mercury News 5 August 2001
Economic recovery may lag The Internet bubble burst,
as painful as it's been, follows a historical pattern.
Although a slow recovery is predicted, experts say
technology is still the key to future growth.
BY DAVID A. SYLVESTER
Silicon Valley, get ready for life in the slow lane.
After five years of turbocharged growth, the tech-dominated
economy here is still plunging toward a bottom.
WSJ 7/27… technological gloom
• Mary Meeker … famous for the rise of the Internet …,
estimated that $727 billion has been lost by the … 360+
Internet companies 12/99-07/01. Ms. Meeker adapted an
aphorism from the Great Depression … The "biggest risk
we face, is not being willing to continue to take risks."
• … many venture capitalists are so busy shutting down their
existing companies, or trying to arrange bailouts, that they
have little time or appetite for new deals.
• Stewart Alsop, a general partner at NEA, … made 10 or 12
investments this year, compared to 50 in the same period
of 2000. Instead of griping about excessive valuations
demanded by start-ups, he is now steeped in the onerous
contract terms that firms impose during "down rounds“.
Shutdowns & M&A 2000-present
VC Finding(t)
Some statistics and sayings
• Technology industry: $7.6B invested 2001Q2, vs $24.8B 2000Q2.
• 555 Internet start-ups have closed since the beginning of 2000,
>75% in the past eight months
• In the first half of 2001, 330 .coms shut down
– Consumer companies accounted for 26% of shutdowns,
vs 43% last year,
– Business-to-business accounted for 33% of shutdowns,
vs 22% last year.
– Electronic commerce start-ups comprised 40% of closings,
vs 54% in 2000;
– ASP shutdowns rose to 10%
from 8%.
• In June, 53 .coms ceased business, vs. May record of 60
• ``the biggest Ponzi scheme in the postwar era,''
says K. Rosen, UC-Berkeley.
``And we were in the center of it, right in Silicon Valley.''
California, Here I Go
b2c & b2b- back to Cleveland & Boston
"New technologies always SOUND HOT…the
problem is knowing what’s NOT." -gbell
• .coms NOT.
• Moore’s Law drives startups. 10X transistors/die /5 yrs.
– Microprocessor-based: Java, games, DSP, multiprocessors
– Communications: DSL, switch traffic 4x/year
– MEMs, leading to Nanotech
• Communications: 4x/year traffic growth. They are all in debt!
• Wireless NOT. Carrier & platform limited. Crowded.
• Games. Industry is > movie
• Drug discovery given the genomic map. Bio-x.
• Opportunities:
– convergence of computer with phone & with TV
– Energy conservation
"The technological possibilities are endless
...all we have to do is sort through them."
The Bell-Mason Diagnostic
A system for ...
• Measuring risk
• Predicting course
• Tracking progress
• Improving the odds of success
... of high tech, high growth, early stage ventures
The Bell-Mason Diagnostic Founding Premise
“You don’t have to understand the technology
to ask the right business questions.”
The Bell-Mason Diagnostic provides
the critical technology,
product, marketing, and people expertise.
The Bell-Mason Diagnostic
• Space
Twelve standard dimensions characterize a venture
(a chapter of High-Tech Ventures).
• Time
Four, well-defined stages of company development
with 7 sub-stages of product and market development.
• Quantification
Clear, yes/no questions (i.e. rules) encapsulate knowledge
for evaluating a company.
• Visualization
A relational graph shows company position.
12 Dimensions of Analysis
MARKET
PRODUCT
Business Plan
Manufacturing
Marketing
Service/Delivery
Product
Sales
Technology/
Engineering
CEO
Team
Control
FINANCE/ Financeable
CONTROL
Cash
Board of Directors
PEOPLE
Four Stages of Growth
Concept
Stage
1 day to
12 months
Stage 3
Stage 2
Stage 1
$
$
Seed
Stage
3 to 12
months
Product
Development
Stage
Stage 4
$
12 to 48 months
Market
Development
Stage
24 to 48 months
Concept
Seed
Product
Market
Ventures
Context for Digital Strategy Ventures
Stage 1
Angel $
Idea
Stage 2+3
Seed
Stage
$
Stage 4
IPO $
Concept
Stage
1 day to
9 months
Product
Development
Stage
Market
Development
Stage
9 to 12 months
11 to 30 months
Bell-Mason Diagnostic Staged Evolution of
Questions… from roughly 1,000 for all stages!
• Concept
“Does the company have evidence of product possibilities,
given the technology, that customers are likely to buy?”
• Seed
“Does a simple product specification exist with features and
functions that can be presented to potential users?”
• Product Development
“Are an appropriate number of beta systems (3 for large
systems, >20 for mass marketed software) operating in real
user environments with users satisfied and testifying that the
product exhibits unique capabilities and/or significant
performance and/or performance/price benefits?”
Evolution of the “Ideal State”
at Each Stage: Entrepreneurials
Stage IV.
Market Development
Business Plan
Manufacturing
Marketing
Product
Development
Stage III.
Product Development
Sales
Stage II.
Seed
Stage I.
Concept
Technology/
Engineering
CEO
Team
Control
Fundability
Board of Directors
Cash
Bottom line
• The startup process can be codified and measured
according to a model
• Deviating from “best practices” is a risk to
company and investors
• There’s rarely a shortcut for starting a successful
venture
© The Bell Mason Group
21
Context for New Ventures
• How do you support them?
• Look at Silicon Valley versus Boston’s
Rte 128
• Needs of area to support venture
© The Bell Mason Group
22
Sonicbox Garage
Sonicbox: Establishing Internet Radio
Si Valley vs Route 128
(Hi Tech Employment 000’s) Saxenian 1994
300
250
200
Si Valley
Rte 128
150
100
50
0
1959
1970
1980
1990
Rte 128 and Si Valley
VCs behave as bankers
Finance focused
Established industries
Military contract companies
Vertical integration (DEC)
MIT… few rich profs.
(Close to Washington DC)
Protection of IP
Silicon failed (large co’s)
Hi-tech is just another biz
Gen. Purpose infrast.
Risk is to be avoided
Work to live
VCs behave as investor/partner
Content, contacts & assistance
Growth from new companies
Large, and many startups
Horiz. Integration & compon.
Key ideas: IC, Micro, disk!
Stanford, UC/Berkeley
(Close to industries)
Free flow of people & ideas
Silicon from the beginning
Hi-tech is the only biz
Hi-tech focus
Risk is admired & rewarded
Live to work
& pay for lifestyle
Exogenous Effectors for Each Dimension
Tech workforce,
sub-contractors,
components
Reasonable
expectations,
patience,
Competitive
Products, co-components
Market, infrastructure for
"complete" product, partners,
strategic alliances, PR, etc.
Customers, sales personnel,
channels to international mkt.
Eng, sci., tech,
tech svcs, uni’s,
other companies,
consultants
Trained pool of gen. mgrs
successful "role models"
Trained personnel
to hire, area-specific
consultants
Acctng, legal,
financial/financing
infra- structure
Capital
market
supply
Cash &
financing
experience,
"patience"
BOD with Industry,
market, product,
engineering,
financial
experience
An “ideal” Venture Capitalist
• Has a reasonable sized fund, but not too large…
• Has access to friends who have plenty of funds
including bankers and M&A folks
• Has “done it” before as an operational professional
• Knows your industry.
– Customers and suppliers
– Consultants, potential employees
• Knows infrastructure: acc’tng, legal, recruit, PR
• Great company salesperson & recruiter
• “You’re happy to be with them in a law suit.” -Doerr
• Past success: knows difference between luck & skill
• Smarter than you are… and willing to teach you
Personal Failures… when I didn’t luck out
Failure to use the BMD! NO due diligence…use 2 sec. Gut!
•Buying a dream or idea, NOT team|plan.
• A lone ranger’s algorithm, isn’t a product or company
• Features, UI’s just aren’t products, let alone company!
•No viable biz plan… just an idea that one could exist.
•Gut > logic… just like the idea or team.
•CEO problems or Sociopath on the team?
•Team turns on each other. Won’t|can’t hire CEO or x.
•Friends: “helping” in some capacity!
•Flattery|need: we need you on the BOD!
•Do it for money… w/o due diligence.
•Poor “money manager” post IPO
Chameleon: PC/XP & CE phone
I. Concept Stage Activities
•
•
•
•
•
•
•
•
"Inspiration and Speculation"
Average Duration: 0 - 6 months
Principal Activities and Achievements:
Formulation of idea for technology/product
innovation.
Initial field investigation to "test" application vision.
Acknowledgement by 3 reputable outside sources of a
product and business.
First business plan (6-10 pages).
First funding to go to Seed and make a proper plan.
I. Concept Stage Flaws and Flags
•
•
•
•
•
•
•
•
•
•
No clear articulation of vision or competition
Faulty or non-existent business plan
The vision constitutes research or hope
Not a company, but a: feature, algorithm, one product event
Over-reliance on new components or new suppliers
or new infrastructure
Lack of credible sources who support the
technology/product premise
No acknowledgement of competition
NO team or the wrong team...
(e.g. too many new tricks for old dogs?)
No risk assessment
Over financing without going to Seed (planning) Stage
II. Seed Stage Activities
•
•
•
•
•
•
"Exploration and Resolution"
Average Duration: 3 - 12 months
Exploration key technologies to prove feasibility
Product Specification and Products Requirements
First product devel. schedule made with team
Exploration and refinement of key market assumptions
and positions, models, applications, and channels
• Preliminary Customer/Application Profiles built
• Full, formal business plan
• Funding for Product Development
II. Seed Stage Flags and Flaws
• Insufficient technology feasibility (product may be
research); or it may not be unique or differentiated; or
it may be one shot
• No clear product specification (and no predictability
on scheduling and real resources required)
• No "design for manufacturability“ or
“delivery/support”?
• Engineering and Marketing both have a great
product vision -- but they're contradictory
• No Product Requirements Document or Lack of
Market Vision
• Untested market assumptions and models
• No written Customer/Application Profiles and loose
definition of market segments
II. Seed Stage Flags and Flaws-2
• Insufficient model of the lead-time to sale by segment
and channel
• Miss-perceptions re: competition and advantage
• Flawed team: lack of credentials and no clear solution to
attract the right talent and fill voids
• "Penny-wise, pound-foolish"-- delaying expenditures for
critical resources
• Business plan is a fund-raising document, not a dynamic
control document -- i.e. the top line is unrealistic; sales
forecast is just a 'hockey stick'
• The Board is just founders and VCs
• Company misses Seed milestones
III. Product Development
"Construction"
• Average Duration: 12 to 48 months (avg. 24)
• Principal Activities and Achievements:
• Engineering team is hired and product is built, according
to specification. Development goes through four phases:
– a)hire the team, specify the product in detail and plan
the project and all support processes
– b)test the specification and simulate its operation,
building operational prototypes
– c) integrate and alpha test under operational conditions
– d) beta test in the field at customer sites.
III. Product Development-2 "Construction"
• Engineering and Marketing iteratively refine FFB's and
product positioning according to Customer/Applications
Profiles and requirements.
• By end Beta, delivery organization and process, including
manufacturing is completely formed.
• Marketing works iteratively, closely with Engineering
throughout this stage.
• Marketing's programs are in place at end Alpha and
beginning to be implemented in Beta.
(Note: Beta is the last opportunity to test under a shield of
privacy and confidentiality.)
• Additional funds are often raised to finance market entry
and calibration, based on Beta progress.
• III ends with product introduction.
III. Product Development
Red Flags and Fatal Flaws
• Technology-to-product translation simply didn't work as
planned (too low, too high, too elegant)
• Company needs new tools to develop the product -- couldn't
invent or obtain given current plan.
• Company reliant on other vendors for product
performance.
• No product architect.
• Schedules/milestones are constantly missed; funds used
faster than forecast.
• Product isn't Beta Tested.
• Systems integration problems.
• Manufacturing can't produce product for target cost.
III. Product Development
Red Flags and Fatal Flaws-2
• Business Plan isn't updated, and reflects unrealistic
break-even point.
• Key customers aren't identified per segment.
• Pricing and availability are still in flux.
• Strategic partner candidates not interested.
• Product is introduced before it exists.
• Sales is on too early; marketing is on too late.
• Marketing is vision-less and has no written plan.
• Marketing has no Market Segment Development
Schedule.
• Sales and/or channel strategy is mismatched to
product.
• Team is at war, and there's no consensus.
IVa. Calibrate the Market
“Commercialization"
• Average Duration: 3 to 9 months (avg. 6 months)
• Principal Activities and Achievements:
• Every line of business plan is now operable and tuned
for determining profitability.
• Every department's operations and plans are tested.
• Engineering responds to field problems and joins in
team sales.
• Modifications to product, enhancements, next releases,
new products are handled by Phase Review product
planning process.
IVa. Calibrate the Market-2
“Commercialization"
• Manufacturing is fully staffed and delivering product
on schedule at the correct cost, quality and volume
commitments.
• Marketing and Sales drive the company.
• Marketing validates/recalibrates its Market Segment
Development Schedule, positioning, unique selling
propositions per segment, sales gestation times.
• Sales hones its prospecting and pre-qualification filters,
and tunes its forecasts.
• Making sales is the top priority of the company
(meeting 3 and 6 month forecasts).
• Financing for IVb Market Expansion is often
undertaken.
IVa. Calibrate the Market
Red Flags and Fatal Flaws
• Engineering ships a buggy product and spends all its time
fixing the product in the field.
• Weekly meetings to cover product status and
categorize/prioritize change requests don't happen (changes
are ad hoc and priorities are not established).
• Departments aren't following their own plans as central
control and measurement documents.
• The Phase Review (or some other similar process) isn't
instituted as a means to organize cross-company
communication and decision making re: the product and
follow-on's.
• Engineering is understaffed to handle field maintenance and
new development.
IVa. Calibrate the Market
Red Flags and Fatal Flaws-2
• Engineering ships a buggy product and spends all its
time fixing the product in the field.
• Weekly meetings to cover product status and
categorize/prioritize change requests don't happen
(changes are ad hoc and priorities are not established).
• Departments aren't following their own plans as central
control and measurement documents.
• The Phase Review (or some other similar process) isn't
instituted as a means to organize cross-company
communication and decision making re: the product
and follow-on's.
• Engineering is understaffed to handle field
maintenance and new development.
IVa. Calibrate the Market
Red Flags and Fatal Flaws-3
• The product is introduced far before it can be shipped
("vapor").
• Manufacturing can't product the product at appropriate
unit cost, according to committed schedules, and the quality
levels aren't met (DOAS, bad installation procedures, lack of
service, no spares, etc.)
• Marketing's assumptions, positioning and unique selling
propositions are off (beyond fine-tuning).
• Marketing's specifications/programs for customer service
and support are insufficient to maintain "satisfaction" level
(e.g., can't respond to problems within 24 hours, inadequate
documentation, insufficient level of initial and ongoing
training, many complaints).
• Marketing doesn't have a completed Market Segment
Development Schedule and a completed market plan to drive
Its own operation and strategically direct Sales.
IVa. Calibrate the Market
Red Flags and Fatal Flaws-4
• Marketing and/or Sales' forecasts of lead time to sale
per segment are off.
• Marketing has a completed Market Segment
Developmenth Group 1 early adopters, but can't
transition to Group 2 segments to expand the market
position and sales volumed Engineering stalemate on
action required by changes to FFB's; political
infighting and finger-pointing starts eating up time and
energy.
• Marketing and Sales have presold functionality that
now can't be attained in real product operation in the
field (in specific applications, or "across the board").
IVa. Calibrate the Market
Red Flags and Fatal Flaws-5
• Marketing is short on strategy and long on tactics.
• Marketing Is understaffed, or inappropriately staffed.
• Marketing doesn't strategically drive Sales with
segment targets, key reference customers, training and
support necessary to make sales (e.g., Sales is on its
own).
• Sales doesn't agree with Marketing's Market Segment
Development Schedule, market plan, or with specific
identification and prioritization of sales targets.
• Sales is completely opportunity and personality-driven
that makes forecasting unpredictable, at best.
• Sales has hired the wrong type of sales people for the
product/company.
IVa. Calibrate the Market
Red Flags and Fatal Flaws-6
• The company's third-party distribution agreements,
now operable, are in conflict (e.g., the company has an
agreement with a retail chain and begins mail order
sales in the same areas.)
• Marketing has underestimated the level and cost of
support for third-parties (e.g., VARs end up requiring
more training and assistance; company must team-sell
to close VAR sales; volume doesn't Justify support
costs; VAR getting deeper discount, but is operating
like, a non-value added distributor.
• Marketing hasn't created enough interest in the
product in the end-user markets (through marketing
communications and key sales) to motivate
aggressiveness from OEMs and other third parties.
IVa. Calibrate the Market
Red Flags and Fatal Flaws-7
• The product's current feature set is insufficient to
support third-party requirements.
• Sales forecasts for the first 3 and 6 months weren’t met.
• Sales forecasts for the first 3 and 6 months were met,
but do not support the business plan's model of
operation for the next 12-18 months (IVb), pushing out
break-even.
• Funds were raised based on a plan that is no longer
feasible.
• The company is unable to raise more funds, or can do
so only by diluting current stock value, because of
disappointing performanceIVa.
IVa. Calibrate the Market
Red Flags and Fatal Flaws-8
• The CEO isn't current on the issues across the
departments and through exec staff MBOs.
• The CEO makes far-reaching decisions too quickly
or too slowly.
• The CEO isn't making weekly or bi-weekly customer
visits and key sales calls.
• The CEO is an Ineffective spokesperson for the
company and product.
• The CEO is totally immersed in Sales and neglecting
ongoing strategic business planning for the company.
IVa. Calibrate the Market
Red Flags and Fatal Flaws-9
• The Board of Directors is involved in day-to-day
operations and decision making (i.e., the CEO isn't in
control).
• Cash flow is unpredictable (e.g., accounts out greater
than 60 days).
• The company's expenses are higher than forecast.
• The company isn’t managing to the “bottom line”, but
is hoping for a miracle.
End Bit
Engineering & Marketing Stages Synchronization
Engineering
Concept
Stage I
Seed
Stage II
Aug. 95
Product
Development
Stage III
a | b | c |d
Market
Development
Stage IV
a | b | c
Marketing
Concept
Stage I
Jan 96
Seed
Stage II
June 96
Product
Development
Stage III
a | b | c |d
Market
Development
Stage IV
a | b | c
The Bell–Mason Group, Inc.
Systems for Venture Development, ©1996
New Venture Models
Stages of New Venture Growth
Concept
Seed
Product
Dvpt.
Independent
Start-Up
Venture
Capital
Funding
Self funded
Market
Dvpt.
Estab’d.
Business
Corporate
Ventures
Spinout
Business Unit
Internal
Marketing
Joint
Venture
Engineering
Strategic
Alliance
Acquisition
Entrepreneurial vs. Intrapreneurial Ventures
Venture goals
Funder’s
measures of
success
Competition
Resources
Structure
Entre
Independent
Profits, ROE,
IPO/Aquisition
External
Scarce
Simple, stand alone
Staffing
CEO+ small team
Intra
Set by parent
Revenues, strategic
business position,
market share
Internal & external
Plentiful
Complex, ties to
corporation
Larger teams, matrix
organizations
Entrepreneurial vs. Intrapreneurial
Category
• Tech./Eng.
•
•
•
•
Product
Mfg.
Plan:
Marketing
Entre
no process, few people
Intra
many processes, questionable goal
more related to a market likely to be "Field of Dreams"
often out-sourced
forced to be internal
crisp,but often unreal
variable (0 to very detailed)
weak, hard to do .........
unrealistic, hard deal-making
venture $s drives a plan no early market planning
incompetence is size &
organization independent
• Sales
built as needed
co-mingles with corp,
• CEO/GM
founder or vc choice
often missing, hard to find
• Team
focused on venture
diffused throughout organiz.
• Board
important mgmt. comp. missing
• $s
too few, easy to hire/fire blank check... few people ²s
• Financeable a concern, easy to stop blank check, hard to stop
• Control
lax
over-control, long time const.
Summary Observations: Imperatives for Success
• Corporate body guiding new ventures must understand new
venture development model
• Corporation must inventory and leverage core competencies
(otherwise, true roulette)
• Start-up’s don’t naturally live in established, large
corporations: must be structure that provides early insulation
and (much) later assimilation
• Entrepreneurs don’t exist naturally in established, large
corporations: personnel must be continually trained and selfselected— and imported
• New ventures must acquire understanding of missionary
marketing/sales techniques and build new positions/job
descriptions that reflect it