Random Musings:

Social Networking: Tools, Maps, and Saturation

Numerous individuals and groups are trying to make sense of social networking and there seems to be no clear conclusions as yet. For example, if you are not in sales or marketing (yes, we are all in sales and marketing), what are the benefits of social networking sites such as LinkedIn?  Are Facebook, Twitter, and the like useful business tools? What about social bookmarking tools such as delicious, digg, and technorati?

MassHighTech has published an article indicating that VCs are refusing to fund new web 2.0 startups (a much broader category than social networking sites):

However, there’s no question the pool of online social media users is growing. A Pew Research Center report released earlier this month on “adults and social networking services” pegged the share of adult Internet users who keep a profile on an online social network at 35 percent and growing. In a set of predictions released this week, Forrester Research analysts said 85 percent of U.S. online consumers will be using social web content by the end of the year.

But [General Catalyst Partners managing director Larry Bohn ] said the smart money now isn’t in drawing users, who are flocking to the established social-web giants. Now, good investments against the social web are business-to-business plays that allow companies to tap into new customer bases that the major online players have already aggregated, he said.

Against this backdrop of market saturation and evolving business models, how does one make personal sense of the all-too-many social networking tools out there? As a first step, perhaps, tech consultant Dennis McDonald has create a map of his tool space that is both informative and exemplary. A larger version is here. Some tools are listed as "account deleted," several facebook groups, for example. Dennis has not indicated why he finds some tools more useful than others. Dennis?

12-Fold Way To Venture Capital Funding - version 3.4

(updated 10-25-07) I have created a brief presentation on raising money from Venture Capital firms and from Angel groups. The intended audience is technology- based product companies, both hardware and software, raising their first professional money. This version has several edits, improvements.

The 12 steps or issues elaborated in the presentation are these:

1. People and Board with the “Right Stuff”
2. The Elusive 10X Advantage
3. Service Providers On Board
4. Intellectual Property
5. Productization Roadmap
6. Market Entry Strategy
7. Market Validation
8. Business Plan
9. Funding Strategy
10. Research VCs [and Angels]
11. Investor Pitches - Plural
12. Prepared for Due Diligence

This presentation can be downloaded here [in Adobe Acrobat PDF format].

Don't Miss "Modern Major Googler"

Don't miss privacy watchdog and activist Lauren Weinstein's Gilbert and Sullivan parody, ""I Am the Very Model of a Modern Major Googler" with sing along lyrics.

World Without Borders? PWC CEO Survey

PWC has released is 10th Annual Global CEO Survey [registration may be required]:
Was:
Within borders
Is:
Across borders
Will be:
Without borders?

Being able to anticipate many different scenarios is one of the keys to success on a global scale:

As a consequence of complex technology, multiple regulatory regimes and a trend towards geopolitical tensions, risk is becoming more complex. This requires that executives be extremely attuned to establishing control and risk management mechanisms and that they possess the foresight needed to anticipate many different risk scenarios.

To be successful in this rapidly changing global environment, CEOs thought four characteristics were key:

• Possess vision – Exploiting the potential of ever-expanding markets and harnessing the power of technology and innovation requires vision. Global executives must possess the vision required to redefine their business models. They must also be able to inspire, motivate and empower their people to fulfill that vision.

• Demonstrate agility – The successful global executive will be agile enough to react to rapidly changing business conditions and to collaborate in support of new business models.

• Become global citizens – In the global marketplace, parochial or territorial thinking will not suffice. Global business leaders must embrace diversity, understand and be able to reconcile cultural differences, and contribute in meaningful ways to the communities in which they do business.

• Show courage – Important at any time, courage is even more necessary in an environment defined by uncertainty and increased risk. The courageous business leader boldly embraces new opportunities, responds to new risks and takes on new responsibilities. Such a leader is prepared to make tough decisions to ensure that the needs of sometimes competing stakeholders are fairly and equitably met. 

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Strategy Kinetics, and its network of affiliated consultants, can help CEOs anticipate alternative futures, manage in the face of uncertainty and complexity, reduce risk, and develop and implement strategies that are responsive to rapidly changing conditions. Email us to find out how.

IP Strategies - 4 - Value Checklist

[Nothing in this article is or should be construed as the giving of legal advice and/or the practice of the law.]

So you think you have patents that might be valuable if licensed and/or litigated. Don't rush out to celebrate.

Value is contextual; it depends. Value depends on numerous factors, of which these are just a few:

• Do you have clear, unambiguous ownership of the patents? Was it developed on the job or while at a university? Did someone contribute to the patent who was not named an inventor?
• Are the patents likely to stand up in court or are they likely to be held invalid? A patent attorney can be most helpful here.
• Do the patents cover products or services offered by the patent holder, which is to ask, is the patent holder an operating company that's actually using the patents?
• Do the claims (statements that define the inventions) address systems or methods in use by others?
• Did the inventors, owners participate in any standards setting processes?
• Do the claims pertain to a big industry, segment, product group, etc.?
• Can you show using publicly available information that one or more parties infringes one or more claims? It's difficult for lay persons to make this determination with out the help of a qualified patent attorney, preferably one who has depth knowledge of the industry, technology, etc.

Even if you have the right answers to these and related questions, the value may ultimately--some would say only-- be determined in a court of law.

Be aware that many US patents are not valuable at all, especially software patents. In this regard, see the writings of Greg Aharonian, who provides a lively usefully opinionated newsletter on patent validity and a broad range of other patent-related topics.

IP Strategies - 3 - Licensing & Assertion

[Nothing in this article is or should be construed as the giving of legal advice and/or the practice of the law.]

A broad range of strategies are available to patent owners to realize value from assets that are not strategic to the company or that cover inventions the company declines to bring to market. These include licensing and/or funding litigation, putting the patent portfolio up for auction, litigation through a law firm that is willing to work on a contingent fee basis, and licensing or sale to one of the patent licensing and assertion companies.

Here are a few examples of such firms.

• Acacia. One of the better known and I believe the only publicly traded company among this group is Acacia Research Corp (ACTG) whose business includes acquiring patent portfolios and the licensing the patents to relevant parties. In some cases, Acacia has used litigation as a tool to enforce patents. Consequently, most take them seriously.

• Altitude Capital Partners. ACP is a hedge fund based in New York that specializes in funding patent licensing and related litigation. They currently have at least 15 different portfolios, principally in high tech.

• Intellectual Ventures. Founded by Nathan Myhrvold (former CTO at Microsoft),  Intellectual Ventures creates and/or acquires patent portfolios which are then licensed to third parties.
  

• Rembrandt Fund. Led by Dr. Paul Schneck, the Rembrandt Fund also acquires, licenses, and asserts when necessary patents that have significant commercial value.

IP Strategies - 2 - Triage

[Nothing in this article is or should be construed as the giving of legal advice and/or the practice of the law.]

One of the points made by the Rembrandts book is that companies may own valid patents that are no longer useful to them. For example, maybe the discontinued a product line and have no plans to resurrect anything similar. Maybe some of the engineers created innovations that may not be useful to the company.  Nevertheless, in some circumstances subsets of a larger patent portfolio may have value that owners can realize.

These no-longer-useful patents can be licensed to others who are practicing the inventions. If the potential financial rewards and financial resources are sufficiently attractive, the company can consider litigation, especially when the potential licensee is being recalcitrant.

Alternatively, companies such as Ocean Tomo provide a patent auction service to help patent owners unlock the value of their IP. It's unclear whether this approach provides the best return on patents, especially when a portfolio may apply to large markets and large participants. Nonetheless, Ocean Tomo and similar companies deserve credit for helping to organize and shape a market.

In addition to undertaking litigation to enforce patents, IP owners may turn to patent licensing and assertion firms or to certain law firms who undertake patent litigation on a contingency fee basis. If the case for infringement is strong, if the patents are of the highest quality, and if the parties believed to be infringing have deep enough pockets, the contingency firms may ask for a third of the proceeds if successful. Since there are a multitude of factors, financial arrangements differ from firm to firm and case to case.

I'll address patent licensing and assertion firms in the next installment.

IP Strategies

[Nothing in this article is or should be construed as the giving of legal advice and/or the practice of the law.]

Back in 1999, the book Rembrandts in the Attic was one contributor  to increasing awareness that Intellectual Property considerations should be an important part of most company's business strategies. IP generally refers to patents, trademarks, copyrights, and trade secrets, but Rembrandt authors (and numerous others) focused on patents and patent strategies. In addition to promoting a tool for patent analysis, the authors describe how in certain instances companies can create patents that block their competitors, anticipate future technology developments, and create a stronger foundation for defensibility.

For example, a growing patent portfolio is a valuable resource when competitors show up demanding that the company take a license to the competitors patents and pay royalties. A company approached in this manner can counter-sue, offer to cross-license, and usually avoid payment (and collection) of royalties. For large technology-based companies, cross-licensing is a useful strategy that can be practiced with all but their most serious competitors.

But what about small companies? Inventors? Companies with patents pertaining to products they have abandoned? Good topics for the next installment.

Guy Kawasaki's Blog

Guy Kawasaki, a managing director of Garage Technology Ventures, has a blog devoted to diverse topics including technology, entrepreneurship, and business issues. Worth a look.

101 Dumbest Moments In Business

Business 2.0 magazine has a list of the 101 dumbest moments in business during 2005. Snippets:

Organizational Culture Promotes Innovation

The Australian business magazine BRW has an article by Simon Lloyd stressing the importance of an organizational culture that encourages experiments and forgives mistakes. Snippets:

...Enlightened senior management promotes a culture in which employees are allowed to make mistakes in their pursuit of innovation. This attitude must be communicated most strongly from the chief executive.

The operational development manager at the communications provider Ericsson Australia, John Snooks, says his company has enthusiastically embraced this concept. "One should never be too critical or dogmatic. We set expectations with our key performance indicators but you certainly should not stifle ambition by rejecting some of the smaller [ideas], because sometimes that is the only way many of your people can contribute. How to get the message across, how to invite the input, how to get the ideas and the talent bubbling up are crucial."

 

WSJ Tribute To Peter Druker

The WSJ Online has an extensive tribute to the late management consultant Peter Drucker here [Subscription required, I believe]. In addition to articles of praise, the tribute also includes, among several other of Drucker's pieces, the full version of the Five Deadly Business Sins article.

Failing Your Way To Success - More Quotes

Earlier I pointed to Paige Arnof-Fenn's article on success and failure. I happen to come across some more quotes that reinforce her message.

Failing Your Way To Success

As readers know, I'm a big fan of Paige Arnof-Fenn, founder and CEO of strategic marketing firm Mavens & Moguls. Entrepreneur.com has published an Arnof-Fenn article, "Failing Your Way to Success: Don't let a failed startup kill your entrepreneurial dreams." Couldn't have said it any better. Snippets:

You can't separate the successes from the failures--it's all part of the same journey. Optimism can be learned; choose happiness and see how it feels the next time you get down. It may be hard at first but I guarantee you'll enjoy the journey a lot more trying it this way. By carrying around a lot of bitterness and anger, you'll never lead a full life. Forgive, forget and move on. This quote from E.B. White should give you the courage to at least try it: "I wake up every morning determined both to change the world and have one hell of a good time. Sometimes this makes planning the day a little difficult."

 

Goodby Peter Drucker

Peter Drucker has died at the age of 95.  One of the few management consultants worth listening to, whose thoughts and views were usually far from the current fads. His article on the 5 deadly business sins has been a personal favorite.

His NYTimes obit provides an appreciation and history.

Taking VC Investments

I tend not to believe in coincidences. Something different seems to be in the air, so to speak. I'm not sure why now.

I've noticed in the past couple of days blogicles that address the advantages but mainly the disadvantages of taking investments from VCs. Don Dodge's posting is one example. Paul Graham's Venture Capital Squeeze article is another. Graham's article should be required reading for entrepreneurs. Snippets:

ConferenceThe Venture Capital Process and Angel Financing

Differentiating between Angel financing and Venture Capital

Angelo Santinelli, North Bridge, Chuck Powell, Haynes & Boone, David Verilli, Hub Angels

Carles Powell

Angels bridging to VC & corporate investors

What's an Angel?

Angels High Net Worth Individual - SEC Rule 501 (Reg D)

7 of 10 investments made within 50 miles of investor's home/office

9 of 10 investments are devoted to small, mostly startup firms with fewer than 20 employees

Higher acceptance ratio

Angel groups - Hub Angels - looking for investments that don't need a lot of total capital. Need to have a sufficient portion of the company.

Half for VC firm, half for founders, employees.

24 months ago Hub angels doing preferred. Now doing 1 common and 2 bridge note deals

Entrepreneurs now getting more leverage

Venture Capital and Emerging Companies - European VC Funding

Alistair Bird,

European Venture Capital is thriving

Deal Terms -

Dividend Rights - preferential cumulative dividends. Company will not be allowed to pay dividends to other shares.

An important element of the payback to

VCs have participation rights except in legal jurisdictions which prohibit it.

Dividend rights may increase annually, which may be a clumsy way of forcing an early exit.

in the UK, dividends only payable out of distributable profits. No so elsewhere.

Financial assistance.

prohibition on on giving financial assistance for the acquisition of its own shares

mostly affects debt financing as it prevents the giving of security an guarantees

financial assistance does not have to be given to the person providing the financing

Can "whitewash", but he directors must be confident that the company will survive for 12 months

Richard Corley, A Canadian VC Market and Deal Terms

Canadian VC market - info CVCA

CA GDP 10% of US Market.
$1.8B CDN invested last year
Investments concentrated in Ontario - 50%, rest Quebec, British Columbia

Canadians experienced a minibubble 99,00

Somewhat preponderance of telecom investments in CA.

Trends in investment track US, capital raising trends tend to lag US slightly.

Individuals currently account for 70% of capital raised by VC funds in Canada

Growing internationalization of CA venture investing.

Deal terms:

Canadian experience is general consistent with East Coast experience

Canadian venture investors are more likely to request upfront fees, tranching of investments, and valuation ratchets

 

 

 

 

Venture Capital and Emerging Companies

Blogging the Techlaw / Nutter conference on Venture Capital and Emerging Companies Friday (the 21st).

Typical VC Deal Terms, Richard Kimball, Nutter, Alistair Bird, Simmons & Simmons, Richard Corley, Blake, Cassels & Graydon

Richard Kimball

Preferred stock, 1:1 conversation ratio to common typical for early deals

Liquidation preferences: pay preferred investor their preference amount which includes dividends plus any some multiplier 1x, 2x, later rounds.

15% to 20% of have multiples greater than 1

3/4 of deals seen recently have participating preferred terms:

preference amount plus participation given the conversion ration to common

capped participating preferred.  usually a multiple of purchase price, 2x, 3x

incidence of participating preferred higher on west coast

Dividends: on east coast half have accruing dividends, on west 10%.

West coast terms tend to be more entrepreneur friendly than East coast terms

Anti-dilution protection

    A weighted average formula takes into account he number of shares issued relative to the number of shares outstanding and the difference between the prince the preferred stock was issued at and the price paid in the dilutive financing.

a ratchet formula only takes into account the price

less than 20% of deals in the US include full ratchet anti-dilution. somewhat more on East coast than West Coast.

East Coast financing 70% include redemption rights.

On west coast only 1/3rd of deals have redemption rights.

creates opportunity to renegotiate deal

pay to play provision.

punishes investor for failing to invest in later rounds

2 kinds of punishments

Shadow preferred

Direct conversion into common. Increasingly used.

Other terms
Board and/or Observer rights
Option pool on pre-money basis-no dilution for preferreds
Protective provisions - can't take certain actions without approval
Information rights - audited financials
Registration rights - public offering
Preemptive rights - maintain prorata share
Right of first refusal and co-sale - on shares that founders hold
Founder restriction agreements
Key man and D&O insurance

 

 

 

 

 

Venture Capital and Emerging Companies

Blogging the Techlaw / Nutter conference on Venture Capital and Emerging Companies Friday (the 21st).

Checking the Pulse of the Venture Capital Industry, Bryan Pearce, E&Y

Good news:
    Fund raising and investments by VCs on pace to meet or exceed 2004 levels
    Valuations are continuing upward

And some challenges:
    Few VC firms around
    Follow-on rounds are increasingly reliant upon "insiders only"

Fund raising environment
    New funds are getting somewhat larger - should help sustain follow-on financing
    67% of deals are B and late rounds
    83% of dollars directed to B and later rounds
    shorter length of time between later rounds

Sector allocations relatively unchanged

Majority of funds closed > $100M, sweet spot, $250M to $500M

Products and Services, Energy, Materials getting increased interest

$1M median seed, $5M median A round

Steady climb of valuations, 50% increase in 3 years.

IT investing and product and services firms declined in absolute numbers.

1% companies exited by IPO, 7% M&A, 5% failed-2004 numbers

Amount paid in M&As on pace to surpass 2004. cumulative deal value $23B 2004, 21B 2005 Y2Date

IPOs raising slightly less money prior to going public

Premoney valuations of companies doing IPOs this year is down this year $166m from $224M in 2004

What are we likely to see in the future?

• The focus on capital efficiency will continue
• The better VCs will continue to monitor the "Exit" environment and "reverse engineer" into the amount that can be invested and still earn an acceptable return
• Portfolio companies will become increasingly global at ever-earlier stages in their development
• Some VCs will look at ways to do (more) direct deals in emerging markets including China and India, and to be more proactive in assisting their US/ Domestic Portfolio Companies to better penetrate foreign markets
• The scope of technologies/industry sectors where VCs will invest will broaden to solve the "unmet needs" of the new millennium including energy, advanced materials
• M&A will continue to important in all sectors

 

 

 

Gurus of Entrepreneurship Offer advice to startups

Dan Farber writes:

At the Churchill Club last night, Garage Technology Ventures Managing Director Bill Reichert led a discussion with a panel of notable startup veterans: Kamran Elahian, Steve Kirsch, Dan'l Lewin and Heidi Roizen.

Here are a few highlights of the interview, which is available as both an MP3 download and as podcast that you can have downloaded to your system and/or MP3 player automatically (see ZDNet's podcasts: How to tune in).

I resonate with this comment from Karam Elahian, especially the point about humor:

A startup is not picnic. Any time you go to b-school, you see those beautiful hockey sticks...all of that is nonsense.

Life in a startup is full of ups and downs; if you accept that at the beginning, you manage everything based on that.

Make sure always to bring a lot of people with a fantastic sense of humor.