Sunday, July 13, 2008

When I Started a SemWeb Company, Part Two

In Part One, I talked about identifying the problem I wanted to solve, expressing it in plain English (or plain language, for all non-English speakers), using open source as a head start, and getting the support of the open source community's leaders. Things were percolating nicely, but how was I paying the bills and who was going to join me? Read on...
Money is a many-faceted topic, so I'll take some care in how I cover this one. 
  • Paying the bills. There were two things in my favor - I had just finished up a well-paying contract with Digitas and I had some money in the bank. My wife also has a thriving recruiting practice, so combined, I had some reasonable (but not unlimited) runway to pursue this venture.
  • Funding the serious development that would eventually be required. I didn't want investors, I wanted customers. Essentially, I wanted my customers to fund my idea through their willingness to purchase the product. When bringing early stage technologies to market, there are customers that recognize there's a certain give and take in the sales and product development process and that's the kind of customer(s) I was looking for. My attitude was "If customers don't think my idea is good enough to fund, then my idea simply isn't good enough." Some people might think this is a harsh standard to meet, but the reality is that if customers don't believe in your product then investors won't (or shouldn't) either. I'm certain I could've persuaded investors to fund my idea. But imagine developing and marketing a product for six to twelve months and then having no customers, running out of money, and facing the prospect of either closing up shop or asking the investors for more money - neither of these is an attractive prospect. It was really unclear if my idea would succeed and if I took investment capital and never got a single customer, or if Human Element became an endless money pit, my credibility in the entrepreneurial and investment community would be badly damaged. Consequently, my ability to return to the community with a future venture idea would also be damaged. That's bad karma.
  • Even so, since I was planning to succeed, I was still actively speaking with angels and VCs. Come on, this is a business we're talking about and if investors come along and propose to add value in the form of funding, that's a conversation you need to have. In my opinion, anything less would be remiss and perhaps even management malpractice (unless you know with absolute certainty you won't need the money or you have a maniacal disregard for reality.) So it's a fact that I was working my networks and reaching out to people known for making investments, angel groups in the Boston area, and I was having informal talks with VCs in an effort establish awareness in that community, if I ever needed to go there.
  • I had (and have) a very structured view on how to build shareholder value. Every business person is an advocate for what their company offers (or at least they're supposed to be.) That means you're an advocate to customers, employees, partners, the media, and of course, investors. Investors are a tricky audience because dollars (sorry - Euros, Yuan, cigarettes...) define the value of a transaction (investment), and since we're trying to predict the future when starting a new venture, it can be difficult to identify reference points for this value. My approach is to break the process down into steps, or phases that might exist in a project management approach. Each discrete phase (which presumably uses up some cash) should add value to the venture. By using other ventures as analogs, it's possible to start building a framework that can anchor a discussion related to value. I'm planning a future post on this topic, so look for more on this later.
  • What's the exit plan? To this day, it kills me when people say they plan to go public (and this has happened within the past twelve months.) Even during the dot com boom, most successful companies were acquired - they didn't IPO. I think the ratio was around 4:1 (acquired:IPO). For those of us in the real world, acquisition vs. IPO isn't the question - the question is, from the outset, what potential acquirers can be identified, what specific gap in their portfolio will your venture fill, what markets will your company open for the acquirer, and what's that likely to be worth? Obviously "I don't know" won't cut it, but at least knowing the questions will help your credibility.
Milestone #4, being able to pay the bills and having some clear cut ideas about the role of money, accomplished.
Coming soon: Recruiting a CTO, and making some painful realizations.

1 comment:

Greg Boutin said...

Nice post, David.

I look forward to seeing how things unveil, and what benefit you target with your venture. Especially interested in seeing how you go about finding a CTO, since I've been in the same boat and found it pretty challenging.

Keep up the good work, and let me know if I can help with anything.

Greg