The 5 Steps to Making Successful Comebacks - Listen Up RIM

People often ask me:

"VC Whisperer, are comebacks possible?"

The short answer is yes, but not without quite a bit of effort. That question and the following article on Engadget got me thinking about comebacks:

Shareholder calls for RIM to sell itself or its patents, in critical open letter -- Engadget

RIM shareholders are furious, and demanding change. They want to believe in comeback potential for the business, but many are losing hope. Startups are notoriously good at re-inventing themselves and big companies like RIM could learn a thing or two. Only then will they have a chance at making a comeback. Here are the VC Whisperer's 5 steps to making a comeback (and advice that RIM is surely hearing many times over from its shareholders):

1. Vision. Comebacks often require companies to change direction. And they always require everyone to be moving in the same direction. None of that is possible without a compelling vision being communicated from the top. 
2. Focus. It's hard to be good at everything. Paring down projects, focusing on strengths, getting scrappy. These are all important to staging a comeback. Focus not only on the high level, but on the nuts and bolts as well. 
3. Fresh Ideas. Clearly the status quo is not working. That means you need to bring in people with fresh thinking. Or encourage it from your existing employees. Stop worrying about process or "how things are done" here. Throw everything you knew about your business out the window and start with a fresh slate and fresh perspective. Hire MBAs from top tier schools who have crazy ideas and the energy to make them happen. 
4. Risk-taking. Comebacks often require swinging for the fences, and that's not without risk. It's the homerun plays that will turn a company around. Risk-taking also means sometimes sacrificing a profitable (but declining) business in the short term, to ensure long term success. For publicly traded companies, this is especially difficult, when analysts only care about your next quarter. 
5. Listen. To what people are saying about your failing business. They might have good ideas. And listen to your customers. They're the ones who are going to fund the comeback. 

What's most interesting to me is these happen to be all the things startups are really good at. Take note RIM, telcos, traditional media, and any other company/industry under fire: Companies in turnaround or comeback situations would be well served to learn from the startup world. 

Don't Lose VC Money - Get to Cruising Altitude

People often ask me:

"Paul, when does an early stage VC start to feel comfortable with an investment?"

Early stage VCs regularly evaluate the companies in their portfolio. They do this to decide if they should continue pouring time and money into a particular company, or if they should shut it down and swallow a loss.

This type of evaluation often starts with a rough measurement of the risk involved with the company. For a VC, a huge amount of risk is eliminated when you've achieved what I call "cruising altitude". Cruising altitude is the point at which a VC is confident that at least he won't lose all of his money. In other words, at that stage, the VC believes that your company could be sold to someone (often just for the technology).

When you've hit that point, the scariest part (takeoff) is behind you. So don't put the VCs money at serious risk and you're halfway there. But the flight definitely isn't over, and your focus needs to shift to executing a safe landing (read: exit).

Cash Is More Important Than Your Mother - Mo' Money, Mo' Problems?

People often ask me:

"Paul, how much money should I take from VCs?"

This is a difficult question, but a good problem to have. If you're at the stage where VCs are offering to fund your company, that's a very good sign. At that point, you have to figure out how much money you actually want to raise. To understand this problem better, I will paint the scenario from each side of the table. First, from the VC side:

• More. A VC might want you to take more money because they are looking to take a larger position in your company. For example, you may have asked for $2M, but that small of an investment may not be worthwhile for a lot of VCs. VCs also want to make sure they aren't underfunding businesses. Every VC wants to give their portfolio companies the opportunity to succeed. VCs are quite savvy about how much money it takes to build a great company (we see it a lot). Entrepreneurs often underestimate how much money it will take and how long the process is.
  
• Less. A VC might want you to take less money because they want to minimize their exposure. Their is always a high risk that a startup goes south and all the money is lost. You may have asked for $10M, but the VC might only want to put $2M at risk in your particular industry/space/company.
  

Now let's look at it from the entrepreneur side of the table:

• More. You might want to take more money for a few reasons. First, it's a big weight that is lifted off of your shoulders. Fundraising is an arduous process, that takes an inordinate amount of the CEO's time. The less often that you have to fundraise, the better. Second, more money provides more speed. Speed and the ability to throw resources at a problem immediately are very significant competitive advantages. Finally, taking more money provides stability to the business. You are more likely to hire a superstar if he is confident that your startup will be around for a few years, instead of being unsure if it will last the week.
  
• Less. You might want to take less money from VCs to keep a larger share of your company. The idea here is that you take less money in the present, and then raise more later when you can demand a higher valuation.

The VC Whisperer's opinion on this? Take as much money as you can get when it is offered to you. The golden rule should be all the reason you need: companies always need twice as much time, and three times as much cash (relative to their initial expectation).

Follow the golden rule, and take every penny that's on the table. When there is lots of money in the bank, you increase your chances of success, and you eliminate a whole set of potential problems. Cash is like oxygen for a startup. Without it, you're dead. Thus, there is no point protecting ownership in something that you don't have enough money to build.

If you remember just one thing when you're running a startup, remember this: CIMITYM - Cash Is More Important Than Your Mother.

Is Your Company Right For Venture Money? 4 Questions VCs Ask Themselves

People often ask me:

"Paul, what type of projects are suited to venture capital funding? For example, is venture capital a viable source of funding for film and other entertainment projects?"

To answer this, let's put business issues aside for the moment. When I say business issues, I mean things like management, business model, customers, etc... Attracting venture capital depends partly on the business issues, but also on how well your business fits with the type of investment a VC wants to make.

When considering a project, VCs always ask themselves 4 questions (among others, but these are always considered):

Question #1 - How much money will this business need and over what period of time?

• VCs are limited by the size, structure and focus of their funds. Those factors determine a VCs sweet spot. For example, many VCs can't make investments representing more than 10% of the total size of their fund. Also, many VCs identify themselves as "stage" investors: seed stage investors, early stage investors, or late stage investors. Others, on the other hand, like to participate in various rounds of funding throughout the life of the company. Each has a sweet spot. 
  

Question #2 - What is the expected risk?

• This is difficult to quantify without getting into discussions about business issues. However, it is important to know that different VCs have different appetite for risk, which is (once again) often dependent on the nature/size/structure of their fund. There is no absolute right answer to this question. Stay tuned for more about risk in a future post. 
  

Question #3 - What is the expected return?

• For most VCs, the expected return is a homerun, sometimes referred to as a "10-bagger". In other words, a VC has to believe that there is a chance this investment will return 10x his money. If a VC knows ahead of time that an investment could "only" return 3x his money, then that's usually not an attractive investment.
  

Question #4 - Can I add value?

• For most VCs, the answer to this question has to be yes. If a VC doesn't believe he can add value through his own network or domain expertise, then he is relegated to being just a passive investor. VCs get paid to actively manage money, not be passive investors.
  

Now let's look at film and entertainment projects using the same 4 questions as an initial screen:

1. Money/Time Required: Major motion pictures require tens of millions of dollars, invested over a very short period of time. Thus, that type of project is outside the mandate/capabilities of most venture capital funds. Independent films require less cash, and therefore are more amenable to venture capital investment. --> A film project might pass.
   
2. Risk: Film projects are very high risk. Having said that, the level of risk is similar to the risk assumed in an early stage technology investment. --> A film project might pass.
   
3. Return: Successful movies can be tremendously profitable, and those big wins occur with roughly the same frequency as traditional venture capital investments. However, for most VCs, the biggest exits are generated by IPOs. A movie isn't a business, and therefore the potential for an IPO is ruled out from day 1. That's not an attractive prospect for a VC. Additionally, a VC would likely have to take a huge ownership stake in a movie to make it worthwhile - an arrangement that might be difficult to swallow for most filmmakers. --> A film project would likely not pass here. 
   
4. Ability to Add Value: Very few VCs could add value to a film project. Filmmakers aren't building businesses. A VC's network and experience could very rarely affect the outcome of a movie. This is where a film project wouldn't make the cut. VCs don't want to be passive investors. --> A film project would not pass here. 

The 4 question screen explains why few VCs (if any) invest in film projects.

It is important to be aware of the fact that VCs always ask themselves these 4 questions. You don't have to answer them explicitly in a pitch deck, but you should know ahead of time if you're a good fit for venture money. Not every idea or business can attract venture capital. Fit matters.

Think of these 4 questions as the first screen that a VC will use. But don't be discouraged. All venture money is not created equal, and different VCs will have different criteria. Just make sure you understand the baseline, and the expectations. Venture money can be your ticket to explosive growth and the creation of a great business.

Always Be Looking Over Your Shoulder Or Your Startup Will Get Mugged

People often ask me:

"Paul, why don't VCs seem to understand that I have no competition?"

VCs hear this from entrepreneurs on a very regular basis. Claiming that your company has absolutely no competition is another sure way of shooting yourself in the foot when you talk to VCs. They don't understand it because they know it to be untrue, no matter how convinced you may be. Even if you don't have any competition right now, you most definitely will in the near future. 

Thus, making this claim hurts your credibility. VCs know that you have competition. Furthermore, VCs know that the probability of competition emerging is very high. Claiming that none exists signals to the VC that you just haven't done your homework thoroughly enough. If you haven't taken the time to fully understand the space you want to do business in, then why should a VC trust you with his money? A VC would much rather fund someone who has identified where the competition will come from, and what the plan is to beat them.

If, at first glance, it seems like your idea or business has absolutely no threat of competition, dig deeper. Here are some good places to look for potential competition:

• Behind You: The incumbent is your most obvious competitor, and virtually all entrepreneurs fail to identify it. In fact, many don't even think about it. But changing the way people do things is very difficult. Incumbents are also dangerous because they could potentially evolve their product to match yours, with the added benefit of more established customer relationships. 
  
• Above or Below You: These are vertical competitors. They are operating in the same industry, and likely have the same customers. However, their product or service addresses a different part of the value chain. It might make sense for them to branch out into a complementary product, one that competes directly with your own offering. For example, say you've developed a great new operating system for cell phones. Samsung builds cell phones (the hardware). Tomorrow, they might decide that they want to create an operating system for the phones they build. This would then directly compete with your own new product. 
• Next to You: These are horizontal competitors. They are operating in a different industry, but likely have a very similar product (in terms of functionality and purpose). It might make sense for them to modify their product to serve the customers in your target industry. For example, say you produce high power transistors for the telecom industry. A company building high power transistors for electric cars might decide that it would require minor modifications to start selling and marketing their product to the telecom industry, thus becoming a direct competitor.

It is important to assume that not only will you have competition from day 1, but that it will be fierce. It's not enough just to be there first anymore. You have to show a VC that you've anticipated and thought about who your potential competitors are. Of course, it is impossible to predict every competitive move, but thinking about it makes you far better prepared to deal with competitive threats when they do emerge.

If you were walking home at night in an area full of muggers, alone, with your pockets full of money, and a bright future ahead of you, wouldn't you be looking over your shoulder?

Hand Over Your Company and No One Gets Hurt

People often ask me:

Paul, is it true that venture capitalists are out to seize control of my company?

This is in fact not the primary goal for an early stage venture capitalist. While most will take significant positions to account for the significant risk involved, VCs do not want to take away the financial incentive for founding management teams to succeed.

For a venture capitalist, there is a delicate balance that needs to be reached between 3 goals:

1. Capitalizing on the upside
2. Protecting against downside (managing risk)
   
3. Ensuring the entrepreneur is motivated to make the business successful

Stay tuned for a more extensive post about the 3 goals of VCs. But it is clear that taking complete control of a company achieves only the first goal, and runs contrary to achieving the others.

Early stage VCs don't want your company, because they would rather rely on you to make it successful. They want you motivated and engaged. Just don't screw up, and definitely don't check out...