Archive for the ‘Venture capital’ Category

PART FIVE: WATCHING THE CLOCK

April 28, 2021

By Peter Zaballos

TALES FROM THE EARLY-ISH DAYS OF SILICON VALLEY

The early 1980s were a sort of a “between” era in semiconductors – between the era of predominantly manual chip design and fabrication and the era of computer-driven design and highly automated production.

One awesome aspect of working at LSI Logic in this “between” era was that so many of the founders and executives there had been in the semiconductor industry from the very beginning of its existence, or pretty darn close to the beginning. And they had stories to tell as they helped propel the industry forward.

In my first year at LSI I was in a meeting with Wilf Corrigan (co-founder/CEO) and a small group of executives from one of our customers – they were there to check out our fab and processes. One of these visiting executives was someone Wilf had worked with ages ago. 

At a break in the meeting he and Wilf started swapping stories of the early days of the industry, back when he was a manufacturing engineer. He said something like “do you remember when we were at Transitron, and we’d hold the wafers with tweezers, dip them in acid to etch them, and then look at the second hand on the wall clock to time how long to keep them in the acid bath?”

Then they both laughed long and hard. Because that’s how they made semiconductors in the 1960s.

In the 1960s and 1970s semiconductor manufacturing was still largely manual. Wafers were literally carried from one manufacturing step to the next. Photolithography machines were manually set up, aimed, and operated.

In the 1980s all of that started to change. As a result of Moore’s law, the line widths of semiconductor traces were steadily shrinking, the density of devices per wafer were increasing, and the size of the wafers were themselves increasing – from 4 inch diameters in 1975, to 6 inch diameters in the early 1980s – to today’s 18 inch diameter wafers. And the reasoning is pure economics – an 18 inch wafer can produce 200x more chips than a 4 inch wafers.

An 18 inch wafer

This also meant that fabs had to get much cleaner. Contaminants smaller than specs of dust could get in the way of a photolithography trace or cause a short between two metal lines and as wafer sizes grew, process variations or human error were that much more prevalent.

So conditions you could tolerate in a fab in 1975 would cause serious manufacturing yield problems in the factories of the 1980s. This is when the concept of a “clean room” took hold – a manufacturing environment with a system that could control the amount and size of airborne particles.

That latter metric – size of particle – would become super important. In the early 1980s Class 10 fabs were just becoming necessary – so in a cubic foot of air in the fab, there could only be 10 particles whose size is 0.5 microns. Class 1 fabs were being talked about, but no one could afford them in the 1980s.

Today, clean rooms are orders of magnitude cleaner than Class 1. 

This is also when “bunny suits” became mandatory. It was when automated wafer transport systems were just coming on line, so wafers could be stacked in sealed “boats” and these could be transported between manufacturing stations and removed only when the wafer was being operated on. 

Back in the mid-1980s wafer defects were pretty evenly caused by airborne contamination (airborne particles), process errors, equipment errors, and human error. This has changed a lot, today automation has almost completely eliminated human error, and technology has almost completely eliminated airborne contamination.

Final yield ultimately determined how many chips met the specification the customer had ordered. Poor yield meant they were getting less than they expected – and would have to make some painful adjustments to their own manufacturing schedules and revenue plans. Good yield meant we could either sell the customer the excess or stockpile them for follow-on orders.

Back to the stories.

In my second year at LSI we hired a super talented VP of Manufacturing, Travis White. He was a talkative and friendly Texan and loved to wander into the cubicle area where the marketing folks were and tell us stories about “way back when.”

I remember him telling us a story about when he was running a fab for Texas Instruments, and their yield suddenly plummeted. It was a true crisis and he and his team spent days and weeks analyzing their manufacturing data and processes and couldn’t figure it out. They were running out of ideas and understandably, the CEO and TI’s customers were getting impatient. They’d gone through all their processes, checked all the machinery, again and again. But could not find what was killing their yield.

So Travis walked down to the fab and just spent time looking around, observing. 

And then he saw it. 

They’d changed suppliers of semiconductor boats and needed to secure them with rubber bands. And a well intentioned supervisor had gone out and purchased a container of rubber bands for each work station.

Rubber bands dusted with talc. To make the bands easier to pick up.

And with every ‘snap” those talc particles were floating through the air, finding their way onto the wafers. That was what was killing yield.

Travis was as horrified as he was amused that something that simple could wreak such havoc, and go unnoticed.

He could wander into the marketing area because we literally had a semiconductor fab attached to our building in Milpitas, CA. In fact, the fab was the majority of the building.

It was a key selling point for our customers. We could walk them to the back of the office portion of the building and they could look through observation windows to see a few steps of the manufacturing going on, with all the employees busy at work. Some of our competitors couldn’t afford their own fabs, or had other companies make their custom semiconductors. But we had our own fab and controlled that part of our destiny.

More generally back then there were lots of semiconductor fabs in the valley – AMD, Intel, HP, MMI, National Semiconductor and dozens of others. That’s where the “silicon” of silicon valley came from.

I believe only Intel has a fab in Silicon Valley today. Everyone else stared down the face of the multi-billion dollar investments required to stay on the leading edge of semiconductor technology and outsourced their manufacturing to a small number of companies in Asia who act as “foundries” – you give them your design and they make the finished chips. Companies like TSMC and Samsung.

Even Intel is staggered at the expense required to build state-of-the-art semiconductor processes and fabs, and has recently acknowledged it can’t compete with these foundries. They themselves may start using them, or be faced with some serious investments to keep up.

So I frequently think back to Travis White’s stories and Wilf’s stories. It was awesome to be working with them when this industry was truly growing up. A small window of time at a point of significant industry transformation. 

To this day I smile when I come across a rubber band that has talcum powder on it. Or see a wall clock and think of Wilf Corrigan, holding a wafer with tweezers checking the second hand on that clock.

What I’ve Learned Over a Career

September 19, 2019

By Peter Zaballos

Reflections Upon Retiring

I have officially “stopped working,” which is a way of avoiding saying I have retired. I’m still active on two technology company boards. Still very much on a number of near-vertical learning curves.

But leaving my professional role has caused me to look back. And looking back, it’s easy to see and feel what was meaningful — and what wasn’t — in 30+ years of building high-growth technology companies. Let’s start with what wasn’t.

What wasn’t meaningful were the financial and business milestones I had a hand in achieving,  because business metrics are outcomes — of strategy, execution, and culture — but they aren’t the end in themselves. They’re the means to an end. I helped three companies change the very shape of computing, and only one of these companies — LSI Logic — had the winning trifecta of brilliant strategy, incredible execution, and a culture of compassion and performance. C-Cube Microsystems and RealNetworks failed miserably on culture.

And along the way I met some incredible, incredible people. People with staggering intellect and, most importantly, people with huge hearts and abundant generosity. But I also met a lot of people with none of those qualities. And who seemed to become quite successful as well. That was puzzling and frustrating.

And the long hours I put into my different roles? Not a lot of meaning there. As a matter of fact, the further into my career I got, and the higher I rose in the executive ranks, the more jaded I became at the devotion to long hours. 

I wish I could have told this to my younger self, especially when my wife and I were in the thick of raising four children born over a span of five years. A few years ago, when I was at SPS Commerce, I heard a sales rep tell a group of people they had cut their honeymoon short by two days, at the insistence of their manager, to attend a meeting. As I sat there I thought — with the benefit of hindsight — that no meeting would be worth cutting your honeymoon short.

[And it told me about the real culture at that company. Not the one written down. More on this topic further down.]

And on a related note, I also grew weary of the need to always being “hard core” about competing, about winning, almost for winning’s sake, of what in the end were ephemeral competitions.

But when I think back to what was meaningful, it really came down to this: being in a position of power and authority to create the conditions where the people that worked for me could do their best work and discover their best selves. To set the tone, to shape the culture. To be able to actively work to achieve equality in the departments I led. And to be a voice on an exec team pushing for equality across the companies I worked at.

Equality created lasting effects for the people on my teams, and is the polar opposite of a business metric. The people on my teams were able to achieve and exceed business metrics/targets because they could be valued for their contributions. 

The first time I noticed inequity in a specific case was when I was at RealNetworks in 1999 — having joined through their acquisition of Vivo Software — and I inherited a department to run. The first homework I gave myself was to look at compensation across my teams, by role and by gender. I discovered one woman was paid substantially less than her male counterparts. 

It took almost a year of fighting process and bureaucracy to “true-up” this woman’s compensation. And it started me doing a similar analysis in every leadership role I had after that. But that was super tactical, from ground level looking skyward.

I think the first time I realized the impact I could have on equality and culture from the top down was when I wrote my first user manual when I was an exec at SPS Commerce. This simple document simply outlined what I expected of myself, my peers, and the people on my teams. 

Feel free to check out my User Manual

It was the act of writing this document where it dawned on me that not only did I have the ability to set a tone of equality in the orgs I led, but that I had an obligation to my teams and to myself to do so. I was literally kind of giddy over the next few months.

The flip side is that it was sobering to realize how much opportunity I took for granted as a man that women had to work for, fight for, or just resign themselves to never having. And I discovered this because once it became clear for my teams that our values and culture were real, the results were shocking:

  • That the  woman on my team (quote is above, sent to me and her manager) thanked me for making her feel comfortable and empowered to take time off to attend her kindergartner’s graduation.
  • I have had a woman tell me I was the first executive to tell her that taking care of her health in her very stressful role is more important than her job.
  • I have had a male boss ask me, every single time a woman on my team was pregnant, “Do you think she’s going to come back after maternity leave?” He never once asked me that question about any of the men on my team whose wives were pregnant.
  • On the day when we finally (after weeks and months of proposing this) had “equality” on the exec staff agenda, I had our male CEO open the discussion with “Well, I assume if we had an all-female leadership team that would be sexist.”
  • I have seen women on my teams treated like servants by men who were their peers — asked to literally get coffee for the men or rebook their hotels with better rooms when they were traveling as a group.

I have also seen people make amazing contributions and incredible achievements in their roles, when provided the conditions to be their best.

  • I witnessed a shy, unsure of-herself customer service rep make the huge leap into product management and then, over a period of 18 months, turn into a bad-ass, decisive, confident product manager responsible for more than half the company’s revenue.
  • I witnessed a woman who had previously sold cell phones at a Verizon store become a master of marketing and digital demand gen and, as a result, was headhunted to be a marketing executive at another high-growth technology company today.
  • I had the good fortune to hire two phenomenally talented product designers, one in his first role designing software. And by giving these people the freedom to follow their creative instincts, create a culture of design excellence that produced truly delighted users of their products.
  • I witnessed a two-member team apply record-breaking amounts of curiosity to become masters at digital marketing through constant reinvention and data-driven refinement. 
  • I hired a brilliant person from a shoe company into his first full role in marketing. He left a year later to go back to the shoe industry and has so far reinvented two blockbuster, multi-billion dollar international footwear brands.
  • My partners at Frazier Technology Ventures – Len Jordan, Scott Darling, Paul Bialek, and Gary Gigot – discovered that when we stripped away our egos we could have direct, blunt conversations about decisions we were making. This set the standard for me valuing the lack of ego as a chief hiring criteria.

What have I regretted? Well, I mentioned above, working long hours in the end just took time away from my family, and I really can’t point to a meaningful source of business satisfaction that makes up for that. Other regrets:

  • That I did not listen to that little voice inside me when I had to fire people — or ask them to leave — because they were not performing or were not able or willing to live up to the expectations for conduct I had for them. That little voice said to go the extra mile, to fight with HR and in some cases the CEO, to get these people a package that would let them leave gracefully.
  • That I did not listen to that little voice inside me and instead followed the advice of others in letting people go with the bare legal minimum in notice, disclosure, and dialogue. I expect those people left my departments feeling they were not treated with the respect they deserved, and earned, through trying as hard as they could.
  • That I did not put my own job at risk more often pushing for more equality as a company, pushing the CEO and leadership team to take a more difficult but right path. This is where hindsight really stings — when I can see I was right but was afraid or buckled under pressure.

What else I’ve learned along the way:

  • Your brand – personally and as a business – is built on how well you say “no.” You say no 10 time more than you say yes. Doing a good job saying no means you are creating 10 times as many positive word-of-mouth evangelists. It also means you keep your focus on empathy and humility.
  • And since you say no much more than you say yes, you’ll spend time with people who you won’t say yes to. Learn to give more than you take when you do this. Help them some other way. Introduce them to someone else who can help. Offer wisdom and experience.
  • Treating people well on the way out the door is as important as it is rare. Being generous to people you fire, who decide to leave to advance their career, or who are just not a good fit matters. A lot. It is shocking how rarely I have been supported by HR leaders and CEOs on this topic.
  • How a company treats the behavior of their salespeople and developers defines the culture, not the “values” that are written down. I have seen sales people lie (to customers, to me, to other employees) but suffer no consequences because they “deliver.” Same for developers. That corrodes the culture and causes the high-value talent to leave.
  • How a company handles equality defines the culture, again regardless of what “values” are written down. It takes real bravery to foster equality in a culture. It is always easier to let fear cause a company to tolerate harassment. We need more bold, brave leaders. We absolutely need more women leaders. And leaders of color. And leaders from other cultures.

So at the end of this phase of my professional life, I would say that what mattered, what was meaningful, what was important was creating conditions for people to be their best selves. And that how you treat people matters, enormously.

What’s next for me? I’m on the board of two tech companies in Boston and am for sure going to continue stay on steep learning curves there. 

And my wife and I are launching the Diamante Scholars program at Diablo Valley College (the community college I attended)  to help under-performing, high-potential students find their path (more on that in an upcoming blog post). 

I’m attending community college myself to learn Spanish. 

And I am learning to drive race cars

But most of all, I am going to keep learning to be better. At everything I do and am. If I learned anything from 30+ years building high-growth tech companies, it’s that you can always be better. You can always learn.

Category creation – Why a messaging pivot is frequently essential. By Peter Zaballos

February 19, 2018

Part Three: The fallacy of “Everything is working, we just need to tell the story better”

So your CEO has articulated a bold vision of what is possible for your customers. Fundamentally different from what they have today. A change so dramatic they can’t imagine it. But you can.

This all got written down. And these words matter. A lot. They didn’t come easily or quickly. At the beginning they were directional, not precise. Intensive scrutiny and many iterations produced the exact set of words that describe the change you envision, and the category you’re creating.

Now you shift your focus to putting those words into action. And those words will inform and bring to life the go-to-market orchestration that will position you as the leader, the creator of this new category. They will inform the demand generation, the events, the company communications and training, and most important, the experiences customers have when they use your product. Let’s call this your category story.

The category story is the collection of words and visualizations that tell the market, your customers and prospects, and critically your employees about your role in bringing the bold future to reality. It’s the core creative idea that fuels any of the forms of the media you will deploy.

A SpaceX Falcon Heavy rocket lifts off from the Kennedy Space Center in Cape Canaveral

The story can and should live in lots of people’s hands. It’s what gets amplified through marketing. Evangelized through events and workshops. It fuel’s the virtuous circle of adoption. It informs every step of the buyer’s journey. It creates the triggering events that makes someone open to switching from what they’re using now, to the future you inspire them to join.

The reality is that a lot of companies formalize their category vision after they’ve shipped their product. After they’ve sold it. After they’ve figured out how to create demand.

When I was a venture capitalist, I lost track of the number of Series B and Series C financings I was pitched where the CEO would sheepishly admit that they’d “shipped their demo.” It worked well enough to get traction and funding. And that part of the next financing was to finish and fix what had gotten them started.

So a lot of companies need to make this pivot to build their category while running their existing business. With demand gen working. Salespeople selling. Customers using the product. Going back to what I wrote in Part One, category creation is for the bold and means you’ll need to make some pretty scary choices to leave the familiar past behind to realize the category’s potential.

It’s crucial that you amplify the category value proposition. Not the tactical value prop that got you here. The chief warning sign that’s you’re falling into that trap is believing…

“Everything is working we just need to tell the story better.” 

But that’s the wrong story. The old story is made up of well thought through campaigns and tactics, but without the purpose of creating your category dominance. The old story may produce near term success, but it sure won’t build your category.

This is the “make or break” juncture for the business. You can certainly amplify the tactics that got you to where you are today. Increase the paid search budget targeting potential buyers of today’s tactics. Scrape for more organic visitors by tuning the search performance of your pages to the value prop of today. Train your salesforce to sell what got you to where you are today.

You’ll just dig the hole you’re in a lot deeper. You’ll acquire customers and partners who aren’t aligned to your category vision. Who won’t evangelize it’s potential for you. Whose product and service feedback will be a distraction from your category progress.

So when I’m asked by executives and CEOs about how to scale their growing business and how build awareness of the role their solution plays in the market, I always go back to “what is your category and how is that aligned with your growth campaigns?”

This is where the CMO’s marketing organization needs to carry the responsibility to transform words into bold actions. If you start from anything else, you’re applying bandaids to a wound that won’t heal, and will instead get worse. And more bandaids won’t fix that.

With category alignment you can build kickass marketing campaigns. Your events will bring your ecosystem together and send them off evangelizing your value. Your paid search and your organic search will be aligned and fill your demand gen funnel.  The C-suite at your prospects will see the value in standardizing on your solution.

That’s the kind of foundation durable leadership can be built. Category leadership.

The Unfamiliar State of Funding a Startup

March 8, 2012

I work with a lot of startup companies, and am currently involved with three that share the same characteristics: pre-product, pre-revenue, and at the very beginning of fundraising. And I’m having the same conversation with all three. It goes like this:

  1. The cost of getting a company to scale and even to profitability has dropped dramatically in the past ten years.
  2. The nature of venture capital has shifted from an early stage focus to late stage or even growth equity investing.
  3. Angels and experienced high net worth folks have stepped in to fill the role VCs served for early stage investing.
  4. A viable fundraising strategy can default to a path that doesn’t assume VCs participate at all, or perhaps only towards the end.

Let me expand on each of these points.

COST OF GETTING TO SCALE – THE RISE OF THE MACHINES

There are a lot of factors at work here, to the benefit of entrepreneurs. The rise in cloud computing means that fixed infrastructure expense has largely been eliminated from the business plan, and this will only get better (Amazon just announced it’s 19th price decrease in six years). Virtual teams + Google Docs drive OPEX down even further unburdening you from lease costs.

The shift to “inbound marketing” – social media, blogs, SEO, viral – can drive large volumes of traffic at significantly lower costs (60% less or more) than traditional “outbound methods – and at higher conversion and retention rates. It takes a lot less of your marketing budget to reach and acquire users. With the shift to freemium and subscription business models you can also let your most active users decide for themselves to pay for your services through in-app messaging and offers – significantly reducing the cost of sales.

I call this the “Rise of the Machines” because metrics and machine-driven resources/methods do much of the heavy lifting at a fraction of the cost of human-intensive alternatives. Josh Kopleman surveyed his portfolio and found “…that companies today are 3 times more likely to get to $250K in revenue during an eighteen month period than they were six years ago. ”

VENTURE CAPITAL IS DEAD – LONG LIVE VENTURE CAPITAL

The money that VCs invest comes from “institutional investors” – pension funds, endowments, insurance companies – and these institutions allocate their investments across a wide range of “asset classes” to manage and diversify risk. They tend to make these allocations based on ten year return performance averages, and beginning in 2009 (as my partners and I found out with unfortunate timing) the ten year return for the VC asset class went negative.

That’s for tough the VC industry overall, but if you look at the top 20-25 firms, the ten year return is quite good. So what institutions did was stop putting money in general into the VC asset class, and only put money into the big, established firms. This caused fund sizes to swell (Accel’s most recent fund was $1.35B+ comprised of $475M “early stage” + $875M “growth equity” funds), which incents those firms to put larger and larger investments to work in each deal (to justify their partners’ time).

So at a macro level, investment into VC funds dried up for all but the top firms (reducing the total number of VC funds) and poured into the top firms, shifting their focus to larger investments in later stage firms.

ANGELS BECOME ANGELS ALMOST LITERALLY

At the same time early stage VCs moved out of the market, a wave of experienced tech executives who had made fortunes building internet companies became very active investors. They brought more than deep pockets, they brought valuable insight and experience and even better – intensive, engaged roles with the companies they funded.

And along the way, incubators emerged as mini-factories where angels could become involved with lots of companies and let the law of large numbers help them there. Overall, angels are investing 40% more than they were even a year ago – now over $700K per round, and there are concerns there’s a bubble happening with incubators. But the headlines are, angels have stepped into early stage investing at a scale and role traditionally reserved for VCs.

STARTUP FUNDRAISING HAS NEVER BEEN BETTER, AND WORSE

What this means for startups is you can get your business to scale with ten times less money that you needed 10-15 years ago. $3M – $5M. If you plan well and are well connected you can do this with individual investors who add a ton of value and will roll up their sleeves to help out. The real benefit is you can also find individuals who share the same expectations you have for the outcome of the business. A 5X return on $3M may be the right outcome for the business and for investors who define success as a financial return coupled with a durable business that solves a problem they care about.

It also means you can liberate yourself from having to map your business and outcome to the trajectory that many of the larger VC firms need their investments to align with – they need billion dollar exits to generate the billion dollar returns they committed to their institutional investors.

Don’t get me wrong here. VCs are an important and valuable catalyst to the technology sector and the economy – and many are out there doing what they’ve always done to identify the next great disruptive business. And for your business, a VC can be the exact right fit either at the beginning or once you’ve gotten to scale.

It’s just that now VCs are playing a different role than they have in the past, and for startups this means it’s a brand new, unfamiliar, day out there.

Back online

February 29, 2012

Well, that was a long hiatus. But for a lot of good reasons I needed the time away from this and feel ready and enthusiastic about resuming the exploration of technology and startups and how failure critically enables their success.

Next post to follow, and will be on the theme of how user acquisition costs and leverage have dramatically reduced the financing required to get a company to break-even (and to a seven figure user base), and how that’s reshaping not just early stage businesses, but mature enterprises.

Stay tuned, and thanks for your patience these past months.

Pete

You miss 100% of the shots you don’t take

December 15, 2009

Something I have just loved about being in the venture capital business is the people I’ve met, running businesses I did not fund.  And of those there are a few I found so relevant to my own interests, and with founders who had such passion and integrity, that I continued to meet with them well after saying “no.”  Trying to be a productive sounding board, making introductions, passing along knowledge or experience where it seemed helpful.

It’s always been such a pleasure to get the updates from these CEOs, they arrive when you least expect them and it’s exciting to see how things are developing, where the connection is no longer the possibility of financing, but a genuine interest in the business and a relationship with the CEO/team.

Dustin Hubbard of Paperspine is one of these.  His company offered a subscription service for books.  Physical books.  He  had the idea for his company after finishing a book, and having no room for it in his already jammed bedside table.  So, he planned and planned, left his job at Microsoft, started and ran Paperspine out of his garage.

Paperspine worked really well, and solved problems that people cared about.  It probably saved my family hundreds of dollars, just with my 16 year-old daughter, a voracious reader, and who routinely dropped tens of dollars at bookstores, only to read the books once.  She loved Paperspine.  She was on a five book out at once subscription at one point, and it enabled more massive reading without bankrupting her.

And while Dustin had gotten Paperspine off the ground with funding from friends and family, he couldn’t raise his next round of financing – in a market where raising money is almost impossible anyway.  But he applied himself to solving this problem with every ethical means imaginable.  Cut costs to get to break even, went back to work at Microsoft, tried to expand into ebook rentals.

Dustin and I spoke every 45-60 days, where he would walk me through his latest set of challenges, his ideas to address them, and we’d then spend the next hour testing his assumptions, plans, and brainstorm solutions.  But he always arrived prepared and ready to dive into a meaningful discussion, and sometimes I could help, other times I think he just valued the opportunity to have someone outside the company to run his thinking by.

But for many reasons, some within in his control, many outside it, he was unable to get his next round of financing.  And he seemed to be reaching the limit of how much this business was encroaching on his life, quality of life, and family.

So, last night I was truly saddened but not necessarily surprised to receive an email from Dustin, saying that he was closing the doors.  I can only imagine how hard this was for him, how heartbreaking.

And he closed off his dreams for Paperspine with the kind of grace and thoughtfulness that we should all take note of, and admire.  You should read his final blog entry, a real fitting testimonial to a worthy business, and an incredibly decent founder.  And you can see pictures of his “warehouse” in his garage, and learn more about how he took his idea and brought it to life.

His wife framed this so well, reminding him that “you miss 100% of the shots you don’t take.”

That phrase captures the essence of what it means to take an idea that crossed your mind, and have the courage to start a company to bring that idea to life.  And you bring it to life focused on why it will and should succeed, while also keeping, in a separate place, the knowledge that there are many reasons why it could fail.

Dustin, you should be very proud of what you accomplished and learned these past two years, but you should also be very proud of how you ran your company, and how you finished.  Well done, not painless, but well done, indeed.

Preparation for a long offsite

July 23, 2009

I’ll be hiking the John Muir Trail in the Sierra Nevada mountains in California next month, which is something I’ve wanted to do my entire adult life.  The Sierras and backpacking really took root with me in high school, where a core group my friends went every summer, and continued through college and a few years beyond before losing the thread to careers and starting families.

Three years ago we restarted these annual trips, and about then I realized how much I enjoy being up in the mountains, away from all forms of electronic communication, as a way to get some perspective and some balance.

So this year I leave on August 4, and my friends and I will start down the John Muir Trail, five days later they’ll leave the trail at Red’s Meadow, and I’ll resupply there and continue on, on my own.  I’ll finish near Mt. Whitney, two weeks and 170 miles later.

And I’ve been doing a lot of reading to prepare for the trip.  Mostly trail guides, even a book on the geology of the Sierras (ensuring I will be the most boring person at the next cocktail party I go to).  But one that’s proven particularly helpful is a book called High Sierra by Phil Arnot, and it’s been great at providing detail on side trips I can make along the way.

300+ pages of detailed route descriptions, elevation changes, permit locations…in short a bunch of data and information about as “touchy feely” as the phone book.  It even has a section on “Hiking Solo” with a set of very pragmatic preparation guidelines regarding safety.   But then it went in a direction I didn’t expect, with the following passage:

“So, in a way the wilderness experience may be catalytic in bringing us to face, really face, the most important questions we can ever ask ourselves:  Am I really living the life I want to live?  Am I fulfilled in my work?  Are my relationships based on sharing and intimacy or are they primarily obligatory?  What do I really want to do with my life?”

Well, for those of us who love backpacking and being in the mountains, that set of questions told me the author truly knows his subject.  For me, these are the questions my mind gets drawn to when my “job” for the day is to traverse six or eight miles (or more) of trail at 10,000 feet, and what separates you from the beginning and end of the hike is a lot of time to walk and think.

Take the “fulfilled in my work” question.  That one’s easy.  I love my job as a venture capitalist.  I love that it requires that you think hard about strategy and equally hard about operations and execution.  You’re on a constant learning curve looking at new businesses and needing to quickly get to their essence to make a funding decision.  And when you find a business you want to fund, you get to go deep with it, for years, to help it (hopefully) succeed and grow.

But that’s the “work” part of this, and what makes my job truly fulfilling is who I work with.  Through equal parts self-selection and deliberate effort, my partners and I have created the kind of transparent, friction-free, trust-based working relationship that up until this point I had only read about.

The fact that we had all worked together before getting into this business helped, but over the past five years we’ve had to make our way through uncomfortable, difficult conversations that required egos to be set aside, and personalities to be parsed from the logic and data.  Everybody talks about this, it’s the first time I’ve experienced it first-hand.

That’s great, but actually making money in this business is getting incredibly hard.  The whole industry is in a state of transition and transformation.  Fred Wilson has done a good job explaining this, but in short, it’s taking longer to get companies sold, the IPO market is dead, and the median valuations at sale have been declining for years.  In order to generate the returns institutional investors need, you’ve got to as a firm perform well above median.

It’s daunting.  We’re doing well as VCs, but looking at the whole industry it gives you pause.  This business will be getting smaller before it gets larger, and as I’ve written in an earlier post, the old stuff gets broken faster than the new stuff is put in its place in industries who are in a state of transition.  And this is an industry in transition.

But that’s where the exciting part of this job is.  Transitions create no shortage of opportunity, and challenge.  I’m grateful I have the chance to put some more thought into this, during my long offsite.

Between now and when I “go off the grid” on the 4th, I’ll be posting on some related topics.

The vulnerability of a big idea

June 15, 2009

As Twitter approaches mainstream relevance, it’s also entering a period of strategic and operational vulnerability that startup companies with big ideas run into. 

By going mainstream it’s exposing the structural opportunity its founders saw years ago, but back then, only the founders and the investors were in on the secret.  There had to be a slide in the Series A deck that said  “Here’s the opportunity” and it wasn’t about building a small, derivative business.  It was about building a disruptive, billion dollar kind of company.

In Twitter’s case it’s the opportunity to redefine how people communicate, and shaping how the economics flow in and around this new communication.  It involves getting to scale, developing a third party “ecosystem” of other companies integrating with and depending on Twitter for their own success, and then monetizing all this in a compelling, huge way.  This is really hard, and the folks at Twitter are still struggling a bit with the exact business model that will do all this.

Eighteen months ago, only people in the echo chamber were exposed to the nature of the opportunity.  But today, with Twitter’s explosive growth and visibility, everyone can begin to comprehend the potential.  When Ashton Kutcher gets petulant about his million followers, when Dell trumpets that they’ve sold $3 million of products to their Twitter followers, the incumbent titans in the internet and advertising sectors, well they notice too, and they notice “threat” ahead of “opportunity.”

You saw this first with the Facebook redesign that provided a real-time status update feed a la Twitter.  A classic “fast follower” approach to someone else’s innovation. Facebook already owns a lot of people’s mindshare and time online, so the fact that they’re tracking Twitter tells you how significant the threat appears to them.  By the way, Facebook is also struggling with business model and opportunity vulnerability too, they just are further along the scale path.

How does Twitter keep eyeballs and session times growing if Facebook is just going to “fast follow” them, treating them like outsourced R&D?  This will be really hard, but let’s assume Twitter wins this round of the battle, gets to scale with a loyal and large audience for their new medium of tweets.  Do they jump out of the frying pan and into the fire?

What’s differentiated about tweets is that they flow in real-time, and finding out what’s interesting and relevant instantly has got to be worth something, and it’s so different from the problem Google solves.  Google crawls the web at a frequency measured at best in minutes, more frequently hours or days, so you could envision Twitter creating a new category Google can’t participate in. 

But what if “instant” isn’t in the end all that important.  The NY Times dug into this a bit, looking into  why Google isn’t Twitter.  And they observed that real-time search is hard and neither Twitter nor Google are currently architected to do this efficiently, or well. 

What became clear is that if you need anything other than instant, real-time search, Google can give you “close enough” search, and get closer and closer over time due to their scale.  We can all figure out who will reap the revenue rewards if all Twitter’s creates is another type of page Google can place ads on.

This kind of battle doesn’t result from incremental thinking, from safe bets.  Twitter’s vulnerabilities are proof of the significance of the idea, and what Twitter’s investors funded.  But it doesn’t mean it will have a happy ending. 

And there’s food for thought here for anyone running a startup.  Expect that you will become vulnerable to the incumbents just when you’re hitting your stride, just when people acknowledge your value and relevance.  The presence of that vulnerability is your ticket to the next round of the fight, validation that you’re headed in a worthy direction.

I dearly hope Twitter pulls this off.  I love to see the status quo up-ended, I love the mental image of apples spilling all through the marketplace as someone with a bold and compelling idea runs through, knocking the carts over along the way.

In defense of the echo chamber

May 28, 2009

I had two interesting conversations this week with super smart technology execs, and found myself uttering the same phrase to them, in different yet related contexts. The phrase was “…and it made me feel a million years old”. The context in both conversations was remarking on how long it takes for real, pervasive technology innovations to take root and how you reconcile that with early stage investing.

And I can’t really explain it to myself. I spent a 15 year phase of my career at companies transforming the entertainment and communications sectors, totally in the thick of the “next big thing”, and felt so urgently and palpably that we were shaping and enabling the next “normal”.

At one of those companies, C-Cube, we were making the foundational video technology that enabled the whole transformation to digital cable, satellite and DVDs. I spent countless hours with executives in these industries while we figured out how this would all work, and around 1994 I heard them tell us all that “500 channel cable” would be here, the coming year, maybe the year after that. Right around the corner.

Except it wasn’t. It only took about another 15 years.

But it never would have happened if we all hadn’t been working away, really hard and for a long time, acting, believing that “right around the corner” was really true.

I felt like I was a little smarter when I was at RealNetworks in 1999, and I heard many of these same executives talk about how by using the internet over cable (or telephone lines) they could deliver movies and 500 channels of TV the next year. Maybe the year after that.

And I remember leaving some of these meetings and telling my colleagues I’d heard this before, and it wasn’t going to work out that way, that they were “breathing their own exhaust fumes”. But I still worked really hard, and for a long time, trying to make that “right around the corner” become true too.

So here we are, in 2009, and I can order a movie from Amazon over the internet and have it delivered to my Tivo. Just ten years later, or 15 depending on whose vision of the future is the reference point.

And it struck me in the conversations I was having with the execs, that perhaps it’s not so much feeling a million years old, it’s realizing that early stage investing and startup companies places you in this strange place, where you straddle two worlds. The world “inside” the vision, where the idea is bold and the future seems right in front of you, and the world “outside” where you can look at these companies and understand it will take a decade, maybe more, for that reality to be commonplace and accepted.

There’s a semi-derogatory name for this inside world, and it’s “the echo chamber”. Most of the time it’s focused at Silicon Valley, but I actually think it’s not geographically constrained. The boundaries are more around the locus of a really big idea and a group of people who can pull it off. They get a bunch of other people to believe them, to buy into the vision – customers, partners, press, analysts – and now there’s a cohort that reinforces the belief system.

You can see this playing out, right now, with all the convulsing about Twitter. It’s been ascribed to being useful just to folks in the valley, just the people whose whole focus in life is in the development and consumption of technology most of “the rest of us” will never need or see the use in.

Kara Swisher of the Wall Street Journal wrote about Twitter in this context a year ago. And I read her column at the time and my reaction was “I’m glad she called this one out, it’s ridiculous how much hyperventilating goes on in the valley about stuff like this – it really is an echo chamber”.

But there’s nothing wrong with this, in fact it’s exactly how we ended up with Tivos at home and can’t imagine life without them, how we watch Susan Boyle shatter our expectations and assumptions about image and substance, and how a billion apps can be downloaded onto iPhones in nine months. And how we will all be tweeting and wonder how we ever communicated without it. In about ten years.

Slide decks and spreadsheets

March 26, 2009

This morning I came across an article in mocoNews.net about how Charmin is using a wiki to create a community cataloging the locations of public toilets in ten countries.  As the article points out, it’s not so much the magnitude of the initiative, but the direction it points for how a large CPG organization thinks about its customers and how best to engage them in a conversation about one of its brands.  It’s easy to see when they “get” this transformation and when they don’t.

There’s been a lot written about how brands should be thinking about social media, and our portfolio companies like Wetpaint, Smilebox, and Icebreaker are all deeply engaged in developing products or services enabling a richer interaction between consumers and brands.  I spend a lot of time digging deeply into the trends and subtleties driving and enabling this broader opportunity space, and understanding how important the “understanding of the audience” is to this space.

So a while ago I was asked to guest lecture at a “Top 25” university MBA program on the subject of venture capital and entrepreneurship.  It was at a time when I was travelling a lot, and was really, really busy (which is a cop-out, when are any of us not busy?).  I prepared my talk from a very “inside-out” perspective:  my observations, my points of view, my experiences.  What I didn’t do was spend time examining the course syllabus – admittedly, a brain-dead and inexcusable lapse in not just effectiveness and basic marketing but also common courtesy.

About half way through my talk I made an observation that my job was basically one of digesting information, and that it came in two formats:  slide decks (PowerPoint presentations) and spreadsheets.  I mentioned that between these two documents, you really get the essential information you need from the company, before you dig into the really useful information to help make a funding decision – your own research, your own contacts, your own scar tissue.  

A hand was raised.  The question?  What about business plans? 

I told these students that not only do I rarely come across these, when I do, it’s usually a sign that the entrepreneurs are first-time entrepreneurs, are “old school” in a not good way.  That extracting the salient information from within all that prose takes more time, and in my world, time is a  hard commodity to come by.  I thought this was a useful and helpful piece of “real world” insight.

Except that the class I was speaking to was a few weeks into learning how to write business plans. 

How was it that I was standing in front of 75 MBA students delivering a message that wasn’t “wrong” but clearly was not effective given the context.  Well, with the same arrogance and ignorance large brands who just “don’t get” social media have.

I had completely failed to understand my market and audience.  I hadn’t thought through my objectives for the talk from a perspective any other than my own. I wasn’t thinking “conversation” I was thinking “talking.”

I’m headed back to the same class to lecture again in two weeks.  I know how I will approach the development of my message: a clear set of objectives and a set of messages informed from my point of view and the context of the students and the syllabus.

But back to slide decks and spreadsheets.  As true as it may be that this business is all about digesting information, getting to the point quickly, and that business plans are no longer the mechanism to do this, communication is about by listening, not talking – whether you’re a brand engaging consumers or just someone talking to a group of students. 

I wish Charmin well; that’s not an obvious tactic they’ve chosen, and I hope it’s one based on listening, a lot.  I think it’s brilliant, and reveals an understanding of the audience, the medium, and thier brand.  I plan to be listening, a lot, when I’m in front of those students in two weeks.