Monday, November 15, 2010

Twitter, Facebook and Questions with Unintended Consequences

Last night I worked very late, so late that I fell asleep at my desk. I found myself walking into a huge building by the sea, a convention center.  Admission was free, inside there were many rooms.  The doors were labeled with subjects of interest: Politics, Business, Poetry, Religion, Internet Services, Sustainability, Global Warming, Venture Capital, Innovation, etc. I entered one that appealed to me.  In it I found thousands of people standing elbow to elbow, people of all sizes and colors, speaking many languages, but English for the most part, many with interestingly English-as-second-language sentence structures and words. Their attires reflected the world, and activities and lifestyles ranging from poets to explorers to programmers to marketing consultants to business managers and entrepreneurs just starting new internet ventures. Those you could single out from the unassuming clothes and visible optimism and excitement in their faces.
They all stood around, some in clusters, each seemingly shouting to all and occasionally attentive especially to someone at the center of a cluster. They all spoke short statements beginning with “Did you know” followed by few words. Frequently they’d move on across the crowd, as in a Brownian motion, until they orbited a new cluster where they seemingly recognized the shouter at the center.  One cluster was notable for its size, over 200,000 people coming and going. The man at the center had his nose to his laptop’s screen typing frantically at high speed.  Every few minutes he’d shout “Did you know: I just published blah blah blah”.  The participants of the cluster would eagerly elbow their way toward him and each would pull away a page he had just written and read it attentively.  Some would then turn around and, raising the page in the air, would shout “Did you know: Marty Zwilling just published blah blah blah” and people from other clusters would eagerly reach for the page held up high.  The cacophony of Did-you-hears was almost like white noise, but with practice I learned to listen.  There were some twits shouting “Did you hear: I am Bozo, I woke up this morning, you all have a nice day”, others holding a book of quotations of famous people they did not know, shouted “Did you know: carpe diem – make good of the day” (thank you for the translation) “Did you know: DailyWisdom: "He who guards his mouth preserves his life, But he who opens wide his lips shall have destruction" or “Did you know: I took my dogs for a walk, they are so sweet” or other personal world-stopping insights. Despite the apparent annoyance of the people surrounding them the twits of the Inanities Club persisted with their pronouncements “Did you know: I am at Starbucks at Park and Main” - no one went to meet them, so they shouted it again – another replied “Did you know: I am Mayor of that Starbucks and I unlocked the public toilet at 1st and Union”.  Most people, clearly aggravated, ignored them. 
It took me a while to learn to filter out the twits, the mayors and the small minds repeating big thoughts.  Eventually I learned to be on the lookout for Marty’s shouts and of others like Dakshinamurti, Steve Blank, Smart Planet, TED and Smart Bear, Venture Hype and more.  Even filtering out the useless shouts, it was tiring, but the value of the worthy shouts made it almost addictive. It was like having the Smarts Club doing research for me on what to read and what to learn, publishing their findings seemingly just for me. Despite the addiction, I exited the room then the building on my way home.
I woke up staring at my Twitter page and wondered about it all.  If only a filter could be built to separate the twits from the Smart Club, imagine!  What if this whole Twitter thing had started with “what are you reading” or “what did you learn” instead of “what’s on your mind” or "what's happening" – Some questions do have tragic unintended consequences. Well, let’s hope someone is working on that “twits filter”.  I got up and went to bed.

Marco Messina

Monday, September 20, 2010

The Multiparty Line (over and again)

Suddenly more and more of my friends and family of the "not-early-adopter" personality type are signing up for Facebook.  They think I am a digital technology early adopter, so I am flooded with "how to" and "why" questions. 

We must have reached the tipping point in social media. In most of he country it is now presumed that you can read and write, watch plenty of TV, own a personal computer and a cell phone AND that you "are on Facebook". If not, you'll feel that you have to explain why not: After all, if you want to hear from your children or get photos of your grandchildren you better be on Facebook.  Furthermore, many of your friends probably have given up email and switched to Facebook, social gatherings will announced there - be there or be square.  The more hip only "do Twitter" and text from smart phones.

As I look at how most people use Facebook and Twitter I see a similarity with past chapters in the evolution of telecommunications: The tolerance for multiparty line communications and loss of privacy swung as follows:

Telephones between 1930 to 1960's and even beyond for outlaying rural communities: Seniors still remember that in those years, presuming to have private telephone conversation in a small town was a joke.  Either your neighbor(s) or a bored switchboard operator was presumed to be listening on. 
Automatic switchboards and sufficient telephone lines brought privacy back.

CB radios became popular, not only with long distance truckers, but also with aunt Mae and cousin George from 1972 (because of the First OPEC Oil Embargo and resultant gasoline shortage) until the early 80's.  With some planning (for a trip in convoy) you might manage to talk to someone you knew, but by en large it was the "first Twitter" where you told strangers what was on your mind or "in the road" - listeners "followed you" and you were "Buddies" only because you had in common the same piece of interstate highway at the same time:  10-4 Good Buddy...
Cell phones eventually brought an end to CB radios and brought privacy back.

Computer Bulletin Board Systems (BBS) created the first multiparty communications for computer users around 1975, their use exploded with personal computers in the early 80's until supplanted by the internet in the early 90's.  Again you could "talk" (type) on an open line to all those that had a similar interest: computer software,  computer games (text-based, before-video), dating services (professionals or lonely hearts), etc. 
The first user friendly Internet Browser (Netscape) in 1990 opened the Internet to the masses and with email, privacy was back. By 1999 you had better be ready to explain under what rock you lived if you did not have an email address. 

Web2.0 Social Media Arrives
Social Media  could be said to go as far back back to the PLATO system (1973) at University of Illinois, but in its current Web2.0 form it started with Friendster in 2003, followed by the explosion of  MySpace (driven by the high school crowd), Linkedin (the professional crowd), Facebook (the college grads crowd) and Twitter (the short comments crowd). 

All provide a choice of communication channels that vary from open-line to private-line telephone emulation. In Linkedin and Facebook anyone known or unknown can be friends by invitation and mutual agreement. Friends of friends can be more or less shared depending on user choice and the fee paid for one's account. In Twitter anyone can be anyone's friend, just because they are there.  With something valuable to say and consistent effort nurturing the audience one can garner 200,000 followers or more. In Facebook, with a "poke" you can be "friends for 3 days" and show a little tease (A "poke" is intended to get someone's attention allowing them to see your Facebook page for 3 days, so they can know who you are, and hopefully add you as a friend).  

Those who bother to manage their privacy can hide their Facebook friends, but most users are pretty open, by accident or by design.  Some do not know any better (instructions for adding friends are jammed down your throat while those to manage privacy are far from clear), so they have all their friends visible to all friends of friends. Then they write on one friend's wall a private message (trivial or important) only to discover they were shouting on the town's party line.  
We are back to telephone privacy circa 1945, but this time the technology is not to blame. 

The psychology and sociology of multiparty lines
At this point you can go on to something more productive than reading the remainder. Following are my speculations and opinions on the subject, and you know what they say about opinions.

I always interpreted the user's tolerance of a multiparty line as the price to be paid in the early stages of a new technology introduction: When the resource is limited, the price of privacy is high and beyond the budget of most, but eventually mass adoption scales the system to where privacy is affordable to all.  

Today, however I see the commonplace use of open communication channels for private matters, seemingly with little concern, when means to achieve privacy exist.  Why?

Is there a group psychology in play here, similar to that found in American high schools or colleges: The dynamics of wanting to belong, wanting to be heard, wanting to be included, wanting to be popular?  It would surely explain why the first big successes by social media sites were with students in high school  (MySpace) and college (Facebook), whereas the membership process and the chatter in Linkedin (business leads and job hunting professionals) have been far more private and resulted in slower growth.  

Is this why some feel compelled to announce to the world "I at the airport waiting for a flight to London" (as if we would care) or "Stranded in Paris on the way to Moscow" (it happens to everyone that changes planes in Paris), or "traveling from A to B stopping at C to walk the dog" (as if we all were waiting for them), or "standing in line to buy my iPhone tomorrow morning" (so you are one of a million)?

It's easy to say - just stop following them, drop them from your friends lists, etc. But that is not the point. 
First, those same people at times make public announcements of value ("iPhone proven to lose call" - Good to hear, I am not crazy, "X just released a multitasking xPad" - Good to hear, now I can skip the iPad). 
Secondly, the riddle I wish to unravel is why private comments aimed at a single person find instead their way into the chatter of the public town square. Has the need for privacy been abandoned?  If it is evolving we better understand why and how, because the public town square is changing and we cannot stay away from it - it is the new language we must learn to use correctly.

Please, comment with whatever insight or guesses you care to share (BTW, not just with me but with all my followers!).

Marco Messina

    Wednesday, September 15, 2010

    User Interfaces, Arrogance and Opportunity

    In the interest of full disclosure I'll admit to some personal and painful experience with User Interfaces (UI).  They probably colored my perspective to this day.
    The first UI we learn as humans is language which allows us to interface with mom and other humans. In the US in particular, most people learn the "language UI" only once - English.  As an immigrant from Italy in 1970 (before English had became the world's global language) I suffered the cost of confronting my UI (Italian) abruptly obsoleted and I had to waste a whole semester studying English as second language before I could start full speed with my real courses (not an inconsiderable penalty considering that I still completed a BA and MBA in 4 years).

    Looking back, then I chose to almost completely abandon using Italian in favor of English (the former I would not forget while the latter is still a work in progress). I distinctly remember that bargain: Pay a price to get something valuable for the rest of my life.  The alternatives were to go back to Italy or to limit my future to an Italian language neighborhood: both were easier, neither had ROI.

    The cost of UI changes
    I think all UI changes reflect the same ROI calculation I did back then. The fact that, despite all the push for Vista and Win7, XP still has a 70+ % market share, in my view, reflects that same calculus:  Why invest effort and incur the cost of disruption (personal or organizational or both) to change to a UI that does not have a compelling, demonstrable unquestionable advantage?  70% so far say NO.

    Furthermore, to follow Microsoft into the promised land we'd have to trash perfectly viable PCs that just happen to have an engine insufficient for the new OS.  It is like GM offering you a car that carries no more people, goes no faster, saves no money and requires you to learn to drive with a joystick sitting backwards and looking at the road through a mirror - eventually you'll like it.

    Arrogance as a strategy
    Todays' announcement that the miraculously uncluttered, minimalist new-design Internet Explorer 9 (IE9) will not run on XP is the reflection of an arrogance we would not tolerate from automakers.  It's tantamount to GM announcing cars wider than the lanes in our roads, for awesome benefits to be sure, like improved cornering stability, or all passengers sitting in first raw, and replying to our objections with "build new roads" (a "let them eat cake" attitude comes to mind).

    In the days when most (low power) cell phones can sport an effective web browser, one has to wonder the necessity of dumping viable PCs just because they cannot run Win7 and IE9 - has anyone heard we are in a recession?  Yet the me-too desire for IE9 will prompt many to "eat cake": buy new expensive hardware with a new OS and IE9 to do no more than an iPhone or Android phone would do.  Arrogance may pay off after all.

    Opportunities abound
    Arrogance however always carries a price to be paid when the American public abruptly switches to alternate suppliers more responsive to their needs: see the experiences of GM and Toyota, Internet Explorer and Firefox/Chrome, Motorola and HTC/Nokia/et al., United/USAir and Sothwest/JetBlue, and so on.

    One would be tempted to add to the above list Microsoft and Linux/Ubuntu, but we cannot.  It may be a sea change in the making with Android (an Ubuntu skin), but is not yet here.  Why after 10 years of Linux has it not happened?  It's not the economy, stupid; it's the UI.  Yes, the UI.

    Linux in all its incarnations can run better than XP on old PCs (as on new cell phones) and can deliver equivalent or the exact same applications (through WINE) but pigheadedly keeps coming out requiring the user to adapt to a  new UI. If there were a benefit to that UI change users would do it, but since there isn't they just don't change - 70% market shares says so.

    Geeks and Linux fans spend much effort touting the greater elegance and whatever many other strengths, but seem to be totally oblivious to the fact that Toyota can pull customers away from GM and Ford ONLY BECAUSE THE UI IS THE SAME and the technical improvements/advantages require NO learning curve.

    In the business parlance of the day the saying goes: OUR (business/product) value proposition is...  That's great because it means we understand that a value proposition is key, but we should strive to phrase it in terms of THE BUYER, not in our terms.  Perhaps: FOR CUSTOMERS THAT WANT X we offer Y that does..  It would set the right frame of mind for OUR mind.

    So, in closing here is a thought for all of you innovators out there looking for ideas: Produce a Linux that looks and feels (the UI) identical to XP, so that "XP migrants" have NOTHING to learn, make it run like Ubuntu on old PCs (those obsoleted by Win7), with a minimalist looking IE9-style web browser that requires no new PC and OS (Firefox/Chrome?).

    Beware - The window of opportunity is closing fast. Android, a garden open to all, will soon deliver a uniform UI from cellphone-to-tablet and eventually to PCs (as Apple promises from pad-to-phone).  If a new option with an XP-UI appears, it can still capture the transition moment, and you can capture a market, else the UI consistency from phone-to-PC promised by Android will be the David's stone that slays the arrogant Goliath.

    Either way it will be the UI, not the power, not the features, not the economy, the UI.

    P.S. I loved my birth language UI, I changed it because of the ROI, but cannot forget the price I paid
    Marco Messina

    Friday, September 10, 2010

    The Magic Ten

    Sales are the only unquestionable proof that anyone on the planet values and wants what you make (or plan to  make).  Therefore it is the only proof that your business has any potential of being a viable,  even a successful venture for you and your investors.
    Of course your business may still fail for a thousand reasons some related to you (management skills), some beyond you (timing and economic cycle).  But if no one wants to buy, it is proof that there is no potential - change what you make or go invent something else.
    The trouble is that this sales "acid test" is almost never performed soon enough.  Innovators waste untold  resources on whimsical notions that  the world needs X because they thought so and without ever asking anyone if it is true, except perhaps for overly sympathetic family and friends.  The genetic make up of the inventor/innovator is to instinctively seek solutions to perceived problems, then develop total belief in the solution found, often with smug disregard for the opinion of the less innovative.  Unfortunately, those less innovative folks are the customers that should buy your product (BTW they probably innovate in their domain just as much, just do not appear so to you). Because their focus is elsewhere, almost always they will have different perceptions than you. BUT, if they do not like your offering, your product is crap: beautiful, genial, elegant perhaps, but business-wise it is still crap.

    Before investing a great deal of energy developing prototypes, let alone finished products, do yourself a great favor:
    1  Get out of your office or garage
    2  Look for 10, TEN, not two, TEN prospective buyers of your product
    3  Find a way to explain in 45 seconds: what you offer, and its value proposition 
    4  Continue to search until you have found ten that say they would buy whatever you intend to make
    5  After TEN people say they will buy at the price you envision, go prototype your product.
    6  Then go back to validate with your ten prospects if they would still buy it.
    7  If less then ten would, use the feedback to explore design modifications and
    8  go back to searching for prospective buyers until you are back to ten
    9  Repeat the loop for every prototype iteration
    10 If you have less than ten fans or buyers go back to look for more - Remember TEN

    Clearly this formula calls for good walking shoes and door knocking stamina far more than an MBA.  The latter in fact will give you countless excuses to stay in your office to over analyze your own questionable notions of reality until, eventually failure will lead you to forget the textbooks and fancy formulas codified years ago, then get good sneakers and go talk to customers about what they want NOW.
    It is a simple formula: TEN

    Oh, and you can bet heavily on this outcome:  If you can show your prospective angel investors that you have done this field market research, or better yet you have actually sold something to somebody, you'll be in a class apart from all the funding seekers they see - you will have the beginnings of a proof of market

    Marco Messina

    Sunday, August 29, 2010

    Planets, Aristarchos, Ptolemy, Copernicus and Entrepreneurship

    The power of discovery
    I just came across this interesting news of one more step forward in the discovery of earth-like planets elsewhere in our galaxy. The increasing frequency of news like this supports the idea that we are getting close to proving once more that our plane is not only "not the center" but is also not unique, in which case various "other life" considerations inevitably follow.

    The Greek philosopher Aristarchus of Samos had already figured the "not center" idea in 43 BC; he was ignored for 1500 years and even today is hardly given any credit.
    Aristotle and Ptolemy with the flawed but more intuitive idea of Geocentricism (earth at the center of the universe), and with a better "sale pitch" got and controlled mind-share for 1500 years.
    Copernicus and Galileo eventually sold Heliocentrism (sun at the center of the planets), a v2.0 of Aristarchus ideas, with better "showmanship" (drop balls from the Tower of Pisa and incarceration for heresy) to win the  mind-share race.

    Centrism and Entrepreneurship
    Humans would seem to have an instinct to imagine ourselves unique as much as permitted by ignorance, dogma and lack of facts. Possibly there is a survival value in brains intuitively "provincial" since it would limit the amount of data to be dealt with at any given moment: worry about immediate local threats (tigers), less about future and distant ones. With that trait, individually, we can intuitively and locally develop the notion that what we do is unique.  In reality however, we just have not looked for and found our competition.

    For innovators and entrepreneurs, the remedy of this blind spot is getting out (talk to customers, talk to others in the same industry) and looking (search the blogosphere, academic research and industry press). Investigation will make us discover "another planet" like us, our competition. Loss of the myth of our uniqueness will require a radical change, a new perspective just as human psychology was impacted by the Copernican revolution. Finding our competition will demand a far less self-congratulatory and more guarded state of mind (i.e.we found the tiger, now what?).

    Some more lessons from Aristarchus
    Just as it happened to old Aristarchus, as an entrepreneur and innovator you may well have the right answer to "the question", but the market may not be  ready for it (e.g. there is lots of that happening now in the new green energy business!).  Pursuit just the same.

    Recognize the possibility that the market will eventually accept your answer, but it may be in a version 2.0 advanced by a more compelling salesman.  The antidote is to strive to become a better salesman.  Meanwhile speak ( and twitt) loudly and consistently  "around" the established thinkers (the Aristotle and Ptolemy of your day).  Don't give up, the mind-share race is won one brain at a time.

    Strive to find a way to stay in the game that is not totally dependent on the disputed idea you are championing. Staying power (most often enabled by capital) is the answer to the challenge. If you go out of business pursuing only the unpopular idea you will not survive to the day when reality will prove you right beyond dispute.

    Marco Messina

    Wednesday, August 25, 2010

    Patents and Due Diligence

    I frequently run into investors that seem to find a great deal of confidence in the fact that the company the are doing due diligence on has an "issued" patent.  They seem to believe that once the PTO issues it we are in Safe Land.  I wish I could be that optimistic, instead I often find myself "raining on the parade" suggesting that there are still big questions to be addressed:

    Markets covered
    If the projected market is global, but the patent is only issued in the US, what will the cost be to cover other countries?  
    Is there still time to file abroad in desired markets? 
    The rest of the world works on the basis of "first to file", so if someone invented well after the US inventor, but filed first in the country in question, it would be quite hard (not impossible) and expensive to contest the foreign filing.

    Cost and means cost of enforcement
    The PTO issues a patent but does no enforcement. Protection and enforcement of the rights implicit in the patent are up to the inventor/holder: Does the holder have the means to enforce its rights?  No cash to pay for litigation is about good as no patent.
    If a company is granted a permanent irrevocable exclusive license to the patent by the inventor, the holder is the one that has to protect it through litigation, unless the right to prosecute infringers is granted along with the license, which normally isn't since the licensor is expected to protect the patent rights as consideration for the royalties received.  Does the holder have the ability, financial means and will to protect the patent rights? If not and the company does not either, it may have no means to prosecute infringers and in practice have no patent at all.

    How "real" is the patent?
    This is the question that seldom seems to be considered. In "Patents: what do they mean to you" I referenced the debacle of Research In Motion (RIM the maker of Blackberry) whose issued patent had one claim  invalidated years after being issued.

    Another interesting case is that of so called "bogus patents" as this "Must Read" case reported by 
    The notorious U.S. patent 6,411,947, a broad "method" for automatically classifying and responding to email inquiries known as the Firepond/Polaris patent, has finally been invalidated after 12 years on the books. (continue)
    The warning here is: if it looks to you to be too easy, too obvious to be patentable, have an expert check the details, not just validate that the patent is issued. If it does not quack like a duck, it may not be one regardless of the stamp put on by the PTO or it may be so only for a short while.

    Are patents useful?
    Of course they are.  They certify to a good degree the novelty of an idea if not to its economic value. By virtue of the prior art research done, they attest to the difficulty of finding competitors.  Competitors could well exist that have prior art but never bothered to file a patent and they could come out later as they did for RIM.

    Should inventors file them? Of course, but with the awareness that they grant no explicit protection. They only give one the right to spend money in litigation  to protect the rights implicit in the patent. 

    Should investor value them?  Certainly, but, in my view, subject to the above considerations and making sure that due diligence includes looking carefully under the hood.

    Marco Messina

    Thursday, August 5, 2010

    Business organization for your startup

    Thoughts from business experience.  For legal opinions, consult your attorney and tax accountant.

    Do not start as a sole proprietorship
    This is the only recommendation sure to have no dissenters. All else following is meant as a general guideline to use in questioning your attorney on the best course for your particular circumstance.

    The LLC - quick, easy, inexpensive
    Many would agree that on a minimal budget this is the best alternative to get limited liability protection cheaply and quickly.  Most states now have web sites where name availability may be checked and reserved, sample minimum articles of organization are provided, applications may downloaded and filed by mail.  If you are in business alone in most states you can be in business in a few weeks, for $100 or less, and have little else to worry besides doing business.  Your local SBDC or SCORE chapter will help you free of charge to get it done.

    A more complicated picture
    The picture of course gets complicated as soon as you propose to add partners and investors. These are my rules of thumb:

    Operating Agreement (OA)
    Also called Partners Agreement and other similar names, this not required to organize an LLC in many states, but it is required by common sense: If you have even a a single partner, spouse included, you owe it to yourself to have an OA that spells the rules of engagement: how key decisions are made: e.g. sale of the business, personal guarantee of loans, call for incremental investments from founders, approval of financial control processes, access to records, management compensation approvals, etc.
    Most importantly you should agree in writing to how you will part ways if needed (spouses included) - who can buy out whom when and how, how to value the business, etc. To promote fairness, strive to implement the old "parting the cookie" technique " (one cuts the cookie, the other picks which half).  It is much easier to agree when you are friends than when you will want to separate, probably because of irreconcilable differences   If in this negotiation process you learn something about your partner and your partnership dies and untimely death, you won't be the first - better early and with less pain now, before committing time and treasure, than later.

    Tax Liability
    In most cases, with proper elections filed with the IRS, your LLC will not require separate income tax filings and members report their share on Schedule C of their personal return. Advice from an accountant will cost little and ensure no bad surprises - make it mandatory.

    However, regardless of how taxes are filed, members will take the tax liability impact of the LLC's income or loss, so the Operating Agreement should include a requirement that cash be disbursed to cover the members' tax liability.  Otherwise you risk having a tax bill due with no cash to pay it.  Partners with very different financial postures may have very different perspectives, so agree in writing ahead of time.

    Complexity increases further as the number of members and investors increases. In particular, outside investors, angels and VCs, are likely to have a very different tax exposure, cash position, needs and objectives from the founders.  Of late many attorneys advertise that an LLC can be set to be govern and to function internally as a C corp with the "proper" Operating Agreement.  Perhaps so, but in my experience managing the different needs with amendments of the Operating Agreement will  become cumbersome, costly and beneficial only to the attorneys.

    Furthermore the flexibility of defining the Operating Agreement however one wants is a two-edged sword that impacts investors' due diligence workload and cost.  Corporations' governance is much determined by state statutes which local corporate lawyers know well.  LLCs with complex Operating Agreements require careful review because only what is written governs and what is written could be unusual or unexpected and whatever is missing may be litigated later. Many angel investors simply avoid this risk but investing only in a C corp.

    Switching to a C Corp.
    At some point, switching to a C corp organization may be a desirable option.  Professional advice from tax and corporate lawyers is mandatory.  Mistakes can have dire consequences.

    If you come to this point, be prepared to encounter a painful reconciliation of diverging interests of the owners.  This will be particularly so if along the way some "family and friends" investors extorted or were offered a "non-dilutable" clause or "unanimous approval" of funding decisions or changes in organization.  You may have % majority interest, but veto power trumps and is costly to remedy and there may not be statutes to help you out.  In any event this step will require time, and the less time you have the more leverage the competing interests will have against you - allow plenty of time.

    Starting as a C corp
    This option is of course preferable if you can afford it and particularly if you start with a business vision that includes angel investors, VCs, many shareholders, IPO, publicly trading stock, etc.  In this case you'll face significant differences relative to an LLC including:

    • Higher organization costs
    • State corporate filing requirements
    • Income tax filing requirements
    • Corporate governance statutes 
    Details on these points are beyond the scope of this post. However, with respect to tax liability management, in the early stages of your startup you may personally benefit from any tax losses by electing to have the corporation taxed as a partnership (S election). The election can be reversed (only once) later when you no longer benefit from that method of taxation or your corporate needs change (e.g. IPO).
    With regards to corporate governance, I have mentored many a budding entrepreneurs (mostly MBAs) much concerned with "preferred states of incorporation" (e.g. Delaware, Nevada, etc.). I am certain a case may be made and supported for their relative advantages. However I subscribe to KISS: In all states there are thousands of corporations that manage to do business successfully subject to their local statutes.  Relative differences among states become relevant primarily in cases of proxy fights and similar circumstances which are unlikely to occur with a startup (you better figure how to avoid them).  Instead, incorporating out of your state of primary operation is sure to require additional costs such as for multiple state filings, "domestication" into the state where your head office is located, retaining a registered agent, and more.  In my view, when your business makes it to be part of the S&P Index and you develop high concerns for proxy fights, you'll have the cash to relocate it then whatever state is desired.

    In the end all agree: avoid sole proprietorships.  Beyond that, be ready to adjust your corporate organization to match your budget requirements of your shareholders and investors.  

    Marco Messina

    Monday, July 5, 2010

    Invention, Innovation and Entrepreneurship

    Working with startups I have the good fortune of dealing regularly with highly motivated energetic and imaginative people who feel a drive to change their world. To some the world is the immediate vicinity, to others it is the whole globe, but in all cases they all see themselves destined to make a big difference. Most, not all, hope to be well compensated for their novel contribution and hard work. Even in this specialized group, however, invention, innovation and entrepreneurship are frequently confused. There are standard dictionary definitions of each readily available, but their frequent interplay complicates things. Let's look at how:

    Invention (Inv)
    An invention is an idea developed by a person, the inventor. To be recognized as such by the US PTO it requires 1. Novelty and 2.Non-obviousness to others skilled in the domain.  Note that there is no reference to usefulness, implementation, results, etc.

    Innovation (Inn)
    Is the process by which a useful outcome is obtained by a the implementation of either a new idea (an invention) or of an old idea in a new way or under new circumstances.  Note that invention is not  a requirement, but novelty of application, usefulness and most of all implementation are.

    Entrepreneurship (Ent)
    The activity of an entrepreneur: from its French root it implies starting something, particularly in business, taking risk for the outcome. Only initiative and risk taking a required, however common sense would also recommend a useful purpose that justifies the risk taking.  Neither invention nor innovation are required.  By this definition an entrepreneur could be one who opens a delicatessen selling the same products at the same prices and with the same level of service as the competition. So long as there is excess demand to be met the risk would be compensated by happy customers.  Growing from there would require innovation.

    Most founders of startups I run into have some of all of the above. They are risk takers (Ent), they act (Ent) to achieve a useful purpose or meet a need (Inn, Ent) and they do so in a novel way (Inn) sometimes starting from a new idea (Inv), sometimes from a novel reshuffling of an old one (Inn)

    With this in mind, some interesting businesses, inventions and entrepreneurs come to mind

    Vannevar Bush
    Bush in 1945 (yes '45) in an article "As We May Think" in The Atlantic Monthly conceptualized and defined the specifications of a personal information storage, retrieval and sharing machine, the Memex, remarkably similar to a today's  personal computing devices.  Note that he did so before the invention of transistors and ICs that made the digital age possible. Reading the referenced article, you may note that it all depended on photographic data compression.  Today's high density ICs still depend on the same principle, so Bush was correct in his extrapolation of the fundamental technology and only incomplete in the details of the ovolution. This example begs the question of how much do we recognize something as today's innovation only because of short memories.

    Zappos is frequently and justly touted as having developed a fanatic level of customer service. It is a correct assessment but only relative to on-line retailing. Anyone who dealt with Nordstrom in Seattle around 1970 (interestingly also a shoe retailer in its beginnings), would instantly recognize the same fanatic commitment to service that built their retailing empire. To wit a story reported by the Seattle papers of a sales clerk running out of Nordstrom to buy from a store next door something a customer wanted but not carried by Nordstrom. Without taking anything away from Zappos this example again begs the question of how much do we recognize something as today's innovation only because of short memories.

    Cloud Computing
    This new holly grail of the information age is a "whole new concept", invention and innovation only to those that began computing in the desktop PC age (the Computing Mesozoic).  Any remaining survivors, Homo Calculans, of the computing stone age (the Computing Paleozoic) will recall IBM's TSO (Time Sharing Option).  In its day a new concept, TSO promised, and largely delivered, ultra-flexible access to computing resources, centrally managed and backed up, capacity seemlessly reconfigured by the Wizards of Armonk to give us, Homo Calculans, ready access (through monitor-less teletype terminals) to the day's "Software Services" (SaS).  The services included pre-Visicalc/Supercalc/Lotus/Quattro/Excel simulation wonders and other similar wizardry.  Then the Federal Trade Commission mandated the end of SaS and a new age dawned. On the carcass of TSO Honeywell, CDC, Amdhal came to feed.  Eventually they succumbed to more nimble raptors: DEC, WANG, IBM-NASD, Prime, who in turn were hunted into extinction by the micro-raptors Apple, the CP/M herd, the Microsoft/Dell/Clones, IBM-PC/DOS and countless other breeds too small to note. And now the CellPhones and Pads are coming.  Few of the species were adaptable enough to come through the ages: IBM, HP and the endlessly adaptable software-jocks that live parasitic lives on any platform. In the end the logic at the foundation of TSO, like a dominant gene survived to see its day again.

    We call all this evolution Innovation and Invention for good reason: in all its forms it is always novelty with purpose.  The  true constant, the DNA of it all, is in the entrepreneurs who have that special gene for taking risks with the purpose of doing something useful, to meet a need.  That will not change.

    Marco Messina

    Wednesday, June 23, 2010

    Markets, Customers and Angels' Risk Aversion

    Famous entrepreneur and Stanford Technology Ventures Program lecturer,Steve Blank reports that business failure from technology failure (the business' technology encounters operational conditions under which it cannot perform as hoped) is about 10%. Business failure from misunderstood and miscalculated markets, market failure, is about 90%. Why?  I propose that the nature of the "entrepreneurial brain" has much to do with it.

    Entrepreneurs by nature are innovators, problem solvers: they perceive a need (more convenience, more speed, less cost, whatever) and instinctively start seeking a solution, a fix. That initiative and independent thinking is the power of entrepreneurs, but is also a curse. Asking  "what do others think" does not come as automatically. So, the entrepreneur finds a solution to "the problem", a problem possibly perceived by only one person, himself, and presumes it is a widespread need.  Then, enamored with the conceptual "solution" (s)he commits time, effort and treasure to create a prototype.  Sometime for lack of sufficient resources a detour is needed into fund raising to finance the idea now morphed into a business venture.  

    Eventually a product is ready for sale and the surprises start coming: customers are not as enthusiastic about it as hoped, they have difficulty using the product because of a million reasons, or they could benefit from using it, but other circumstances prevent its adoption (e.g. supply chain disruption, legacy systems, not invented here, etc.). In a few words our entrepreneur has invented a Bricklin or a Segway, an innovative design with definite benefits but overall unsuitable for the larger market originally targeted. The outcome is then outright failure or a walking zombie of a business.

    In product and software development there are long standing disciplines (use case analysis) to ensure that acceptable performance will be possible in specific instances of use.  Use case is a discipline that forces  asking questions, and more questions, and more questions.  The same discipline is needed with respect to markets and customers. Here are the questions to ask:

    What are your customers top problems?
    How much will they pay to solve them?
          Could they do nothing and get by?
    Does your product concept solve them?
          Do your prospective customers agree with you on this? [Your guess that they do is the issue we are trying to avoid!]
    Draw a day-in-the-life of a customer (the customer's use case) 
          before & after your product adoption
          what will the product improve
          what will the product hinder/change/complicate
    Draw the org chart of users & buyers
         are they the same?
         we must satisfy both, but buyers control
         who has a vested interest in favor or against adoption?
         who is the loser if adopted?
         can your customer afford to upset the loser?
    Are there enough buyers NOW to make it worthwhile?
    Can we scale our processes to match the market size?

    The only way to know for sure is for the founders to go out (out of the office, in the real world) and ask the customers.  Go out and ask are obvious, but would marketing consultants be able or even better at doing this research? Definitely NOT.  Consultants can go out with clipboards to get data and analyze it, but at this stage the critical component is intimate understanding of BOTH the customer and the product concept/prototype.  Only the founders-inventors can "feel" both sides of the equation and catalyze a workable solution based on the customers' responses.  If the consultants could do it, they would have been the inventors-founders.

    So, early on, even before prototypes, go out and ask your intended customers how your product will meet their needs and what issues it will cause and LISTEN. The product will almost inevitably be modified by this effort, but at much lower cost than building and rebuilding prototypes or final products. You may discover that your product is perfect at a perfect price with the expected benefits, etc.  Too bad that its adoption would kill another more important part of your customer business and therefore your customer would have to be mad to adopt your product.

    Validating your value proposition in person and directly with the customers (taking into account all vested interests involved)  may just reduce the probability of your business' market failure from 90% to something less. Any improvement will likely appease your angel investors' risk aversion.

    Marco Messina

    Saturday, June 19, 2010

    Did you just say THAT to an angel?

    One of my favourite Dale Carnegie quotes is: "If you want to gather honey, don't kick over the beehive."
    Just like bees, angels have adverse responses to certain stimuli. Keeping those in mind will make getting to their honey far more likely.  Following are some examples of statements (S) often made by "honey seekers" and the mental responses (R) they are likely to stimulate in the angels.  Depending on the mood of the moment, the responses may or may not be verbalized. Often, in front of a large audience, the "honey seeker" is better off if the response is just a silent smile.

    S   We have no competition
    R  Either you have not researched it, haven't found it, or are so deluded to not recognize it...
    R  If no one does it, perhaps it's because no one needs it

    S   We have made very conservative projections
    R  Sure.  So did the 1000's that came before you; and you are not even smart enough not to say it
    R  If you are conservative you are no entrepreneur, buddy, you better go work for the Census surveys

    S   We researched it so much, this is now a sure thing
    R The only sure things are death and taxes.  We do not like sure things.

    S   We are creating a market
    R Excellent! This is an answer in search of a problem, that will be a real quixotic adventure
    R Cool! If I wanted to create "futures" I'd be buying into a kindergarten or a primary school

    S   Our solution will become the standard
    R My goodness! We only have to stop the people who today are doing whatever by the current standard and force/train them to do it a new way. Along the way we only have to redesign all regulations, training programs, certifications, cajole all vested interests, etc. AND we make no money until it's done. Where is my checkbook.

    S   If we get 1% of .... to buy our product we'll make millions
    R Ah! Here comes the 1%er again.  If I could only have a dollar for only 1% of the 1%ers that presented plans I'd have the best performing fund at next years ACA Summit
    R  Sure buddy, and we are going to do it all with viral marketing too

    S   I am the only resource but I'll have key man insurance
    R I like that!  So for an early exit all I have to do is to pray for trucks to hit you.  This is so new a strategy, we could write a white paper for HBR
    R  We could optimize this plan by doubling the premium and make you open a branch office in Darfur

    S   We are co-managers
    R No way.  We want to know which throat to choke when things don't work.  Only one throat.
    R So, we are supposed to pay two to make decisions that one should be able to do?

    S   We only have to scale... 
    R But of course! The difference between your local taco stand and McDonald's is only scale.  Same for mom's kitchen and Campbell Soup or my kids' tree-house and the Sears tower. It's only scale.

    Lastly there are the responses that "seekers" give including an implied  "you dumb ass" commentary.  They are always a good bet for making angry bees out of angels:

    you have to understand...
    No buddy, I have the cash and do not have to do anything, you have to make me understand

    everybody knows...  
    Ah well, I must be the only idiot that doesn't.  I stand corrected.  Thank you so much for that clarification.

    as I said before...  
    Excuuuse us! We are either forgetful, slow or inattentive.  We'll do better next time... since you ain't getting any "honey" this time around.

      Much has been written about human communications since Dale Carnegie wrote his masterpiece, little of substance has been added. It remains one of the best  manuals around: you might read it again with your angels in mind.

      Marco Messina

      Saturday, June 12, 2010

      The Five Dimensions of Impactful Presentations

      In a world of people with ever diminishing patience it is not enough to be brief and to the point. You must find a way to engage your audience on more than one dimension at a time. Dr. Andrew Abela summarized it well a few years back.

      The Five Dimensions of Extreme Presentation

      A central hypothesis at the heart of this research is that the Extreme Presentation must address five dimensions. These are Logic, Rhetoric, Graphics, Politics and Metrics. The problem with most approaches to presentation design, as I see it, is that they tend to focus on only one or two of these dimensions. So the current focus on using storytelling to improve presentations, for example, while a welcome and powerful idea, is misleading unless it is thoroughly integrated into the other dimensions.

      Logic is about making sure that the problem is correctly defined and rigorously solved. Absolutely necessary, but not sufficient;
      Rhetoric is the storytelling dimension: your audience usually contains human beings, not machines, so they need to receive your information in ways that are appealing to humans;
      Graphics is the visual dimension;
      Politics is the recognition that "power and politics are part of life in organizations everywhere" (Charles Handy, Inside Organizations, p. 115) and therefore that the best recommendations in the world will go nowhere unless their implications for all relevant stakeholders are thought through and syndicated in advance as far as possible; and
      Metrics is the objective of the presentation and how you will measure its success.

      So, in the world of the Power Point presentations we use to pitch angel investors we better look at each slide  five times and strive to have our message strike a bull's eye and be consistent in at lest three out of five dimensions.  If not, rework the message.

      Marco Messina

      Tuesday, June 8, 2010

      Fishing for Angel Fish

      The scarcest resource of entrepreneurs is not money, is time.  Money, when you can get it, is just a means to increase available time by hiring outsiders to do for you whatever you are smart enough to delegate and manage.  Conversely, all the money in the world will achieve nothing more than the going rate of interest in a bank account (3%) unless one puts it to work with time and energy. SO, NEVER WASTE  TIME.

      One way I see many entrepreneurs wasting time is chasing funding from angel investors with propositions that do not come close to having any chance of success.  It is like going fishing for the wrong fish in the wrong pond with the wrong bait - most unlikely to make dinner tonight.

      So in the interest of better fishing let's study the angel fish.  It is easy because: 

      • these days most angel fish school in groups 
      • most states and regions have well advertised (web) ponds, 
      • the fish have the kindness to spell out in advance what bait they will strike
      Here is an example taken from "one billboard at a well known California pond":
            Tech Coast Angel members invest in southern California companies, only. We look for products and services that can achieve rapid adoption in very large markets. Some of our criteria: 

      • Scale: annual revenue potential of at least $50 million
      • Market: a compelling, well articulated strategy for capturing and defending a significant market share
      • Barriers to entry: patents or proprietary technology
      • Team: a strong, not necessarily complete, team
      • Exit strategy: some idea of who will eventually acquire your company
      • How we fit: a desire for advice and coaching
      • Valuation: you must fit within our risk/reward expectations
      At other ponds the billboards list:
      • specific industries (because the fish have expertise in them)
      • level of business development (no pre-revenue plans)
      So, figure out what business (bait) you have and decide if you stand a chance to catch angel fish.  If not, go fish for other species that bite on different bait, presumably the one you have. Here are examples:

      Friends and Family:  this species bites on you personally and your trust factor with them.  Returns are hoped for but often the motivation is to help you along with the world changing idea you shared with them.

      Banks: They still have money and do lend it if your business is the right bait for them. You'll need collateral and cash flow to have an chance. Beware of lines of credit that appear to be a strike, but you cannot count on for very long. 

      Factors and Receivable Discounters: They bite on (and take a good chunk of) invoices you carry as receivables from financially reliable customers (they bite on someone else credit). 

      There are many more, each specialized in different aspects and needs of your business.

      Back to that favorite species: the angel fish.  The words that carry value with them (shiners in the fishing parlance) include:
      Scalable: 1. the business can grow into a big business, 2. you and your team are capable to grow it
      Market size and dominance: "1% of the world" is probably meaningless, "80% of left handed investment bankers with an income over 500k" is a concept one can measure and relate to. Attractive markets have size and allow some level of dominance.
      Early Exit: a plan with an Exit is a requirement (remember: angel fish get to eat only at exit time). Early Exit is golden. More on this in a forthcoming post.
      Barrier to Entry: the stronger your position, the less spooky the fish will be
      Risk: This is the monster from the dark depths that scares angel fish away. They know it is part of the game, but they hate it. To manage their fear, show that you have identified fall back positions and fail safe conditions at every step; be able to simulate the cash flow projections accordingly. 
      BE BRIEF: this is the most impatient fish in the world 

      Happy fishing.  There is fish in that pond for the right bait. Do not waste time otherwise.

      Marco Messina

      Friday, June 4, 2010

      Brevity again... The One Page Term Sheet

      In my continuing search for KISS answers - Keep It Simple & Short, I read Basil Peters' proposal for a One Page Term Sheet. I've been following Basil's blog for years now and I think it's one of the best sources of experienced and clear thinking about angel investing. It will be a wonderful day when this becomes a best practice because it will set owners and investors much closer together at the start of a negotiation by establishing shared expectations. In a few words we will start from a known point and negotiate the variances required by the specific circumstances.

      As an investor do I believe all the terms in here ideal? I do not pretend to argue that point here. In time the industry (angel investors and funds) will refine it and the sooner the better.
      As an entrepreneur pitching your deal to angels, you can only hope they pitch back to you something this clear and straightforward. Now, read and hope.  If you have guts, present it as the guideline you positioned your company by and for: at a minimum you might just impress your angels as the first instance they encountered in which the "seller" appears to have made an effort to understand the "buyer" - what a concept.


      The 'One Page' Term Sheet for Angel Investors

      This is not a theory or academic exercise. This term sheet is in actual use today by angel funds in BC.
      This term sheet is based on exchangeable shares. This simplified term sheet is based on the underlying assumption that an effective, independent board is in place and that the board will make the best decisions for all shareholders. It also assumes the company is built on a fair and equitable structure.

      Term Sheet offered to the"Company"

      This Term Sheet has been prepared for angel investments made at an early stage by "the Angel Fund". The terms have been simplified to match the stage of investment and are offered for consideration and acceptance.

      Offer of Investment

      The Fund will purchase, together with any syndicated investors, (collectively the "Investors"), common shares (the "Shares") at a price of $* per Share. The total round for all Investors will be $* of which the Fund will invest $* to acquire a total of * Shares. So long as the Investors hold their Shares and until a liquidity event, they shall have the right to exchange them for the same kind and class of securities issued by the Company (the "New Securities") in any follow on financings should such New Securities have rights superior to the Shares. The Investment will be made pursuant to an Investment Agreement made between the Investors, the Company and certain of its principals (the "Principals"). The capital structure on closing will be as described in the attached Share Register.

      Board of Directors

      The Fund believes that early stage investments need strong mentoring and governance provided by a high quality, engaged Board. On the completion of the investment, the Board will be comprised as follows:
      • a total of five members, being the CEO, one nominee of the Fund and three nominees independent of management that the Company and the Fund agree on; and
      • each director must have made a meaningful investment in the Company.

      Share and Option Vesting

      The Fund believes that it is important that the Principals' interests align with the Investors. In this regard the parties agree that all stock options and all nominally priced previously issued shares will vest on the following basis:
      • 50% of the shares will vest daily and linearly over a three year period; and
      • the other 50% will not vest unless and until there is a sale of the Company.
      All share and option vesting will accelerate on a sale of the Company. An Escrow Agreement will be entered into to provide for the vesting.

      Liquidity Event

      To ensure that a return can be provided to all of the Company's shareholders when an opportunity presents itself to sell the Company, the Fund will require a "drag-along" right be added to the Company's constating documents to allow the holders of 51% of the issued shares of the Company to cause the sale of all of the shares of the Company.

      Reporting to Shareholders

      The company will send a CEO Update monthly to all shareholders. Financial statements are also available upon request.

      Investor Rights

      Investors have the right of first refusal to participate in future financings.
      Any changes to the capital structure, new shares, options or debt requires the approval of the majority of the investors in this round.


      The Company will pay the legal costs of the Fund not to exceed $6,500, plus taxes and disbursements thereon. The Company will keep confidential this Term Sheet and all discussions with the Fund for a period of two years.

      Binding Nature

      This Term Sheet will terminate on *[date], unless terminated earlier by the Fund. The Company will not seek alternate financing unless and until this Term Sheet has terminated or been terminated by the Fund. The confidentiality provisions will survive termination of this Term Sheet. Acknowledged and agreed to by the Company and by the Fund this * day of *, 200* by: [Signatures]


      Yes! That is all of it!
      Comments will be greatly appreciated.

      Marco Messina