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Thursday, October 30, 2008

Burn rate and cashflow analysis


I cannot remember how many times I have been looking at cash flow projections and P&L's, running the daily, weekly, monthly burn rate figures in my mind, and seeing the runway( I don't like the term, but is apt, if you run out off it you crash and burn) disappear, this post below gives you a method of gauging where you sit, on the survival matrix, in your own mind and your investors.


The Survival Matrix:




As Brad Stone and Claire Cain Miller talked about in the New York Times piece about startups slimming down to survive, we are seeing many companies looking at their cash balances and burn rates and deciding to cut burn to increase runway. We've done an exercise with our own portfolio that I wanted to share with all of you. I am calling it the survival matrix.
First we create a table of our entire portfolio and chart current cash balance, burn rate, and runway (cash/burn). We leave out the profitable companies from this analysis unless we think the downturn will cause them to start burning cash. Here's a look at a theoretical runway table:


We then do a scatter plot of burn rate versus runway with runway in months on the x-axis. It looks like this:





We then do a scatter plot of burn rate versus runway with runway in months on the x-axis. It looks like this:









When you do that, you'll get to four quadrants.
Where you want your company to be is in the upper right quadrant, which I call "the comfort zone". The comfort zone is a low burn rate combined with a long runway.
The upper left quadrant is not a bad place to be as well. I call that the "too small to fail" quadrant. While your runway is not long, your burn rate is so small that your investors can fund your company for a while without any new money showing up to join the party.
The lower right quadrant is also not a bad place to be. I call that the "betting on revenue" quadrant. These are the companies that are carrying high burn rates but also have long runways. They are betting on revenues to start coming in and lower their burn rates over time. One thing about this quadrant though, you don't stay here forever. Your runway will come down and you'll either go into one of the upper quadrants because your burn has come down, or you will go into the lower left quadrant.
The lower left quadrant is the "danger zone" - high burn combined with short runway. You don't want to be there.
We've done this analysis on our portfolio recently and we came away from the exercise feeling very good about where things stand. We'll keep doing this every couple months as one of several "macro screens" we do on our overall portfolio health.
If you are an entrepreneur, you should know where your company fits on the survival matrix and if you are a VC, then you probably are already doing this kind of analysis on your portfolio as well.
GW

Wednesday, October 15, 2008

Some good Blogs by CEO'S

I have listed some blogs here for your entertainment, all C-level ..have read...these guys are good in there own right, and there blogs are worth a read...

1. Jonathan Schwartz (President & CEO, Sun Microsystems)
2. Craig Newmark (CEO, Craig’s List)
3. Mark Cuban (Owner, Dallas Mavericks)
4. Ross Mayfield (CEO, Socialtext)
5. Matt Blumberg (CEO, Return Path)
6. Alan Meckler (CEO, Jupiter Media)
7. Kevin Lynch (Chief Software Architect, Adobe)
8. Robin Hopper (CEO, Founder - iUpload)
9. Jason Calacanis (CEO, Weblogs)
10. John Dragoon (CMO, Novell)


Regards
Gordon

Friday, October 03, 2008

Why Venture Capitalists don't call back (sometimes)


Why Venture Capitalists don't call back and what you should do about it.



How many times have you had the "we like your" offering, pitch or business from a VC and you never hear back? I have heard of Founders who have waited for 6 weeks or more for a call back, and are still waiting, now this is not a bash the VC post, just some tips on how to deal with the situation.

Lesson 1: Do not wait, after your pitch you ask when will I hear from you, if you don't hear move on, do not wait longer the two weeks.

Lesson 2: Do not stop pitching until you have the money, deals are not deals to you see the money.

Lesson 3: Ask "what are the next steps, and what is the timescale"

Lesson 4: As a more mature ,wise and rich CEO, said to me "the squeaky wheel gets the oil" Keep pushing, take every opportunity that you can to pitch your company.

Lesson 5: Not all VC companies are the same, so treat each one with respect and understand they know more than you.



I have worked with many VC'S the only thing that is important to the VC is the next deal they are funding, always go to the hungry , smart VC's first and pitch to there interest. The tow drivers for the VC community is Fear and Greed, fear they miss a good deal and Greed when they get one.


I have also posted an article by Brad Feld on how he deals with the this subject in his company, to be fair.

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Why Am I Passing?


Every day I tell at least one entrepreneur that I am passing on investment in their company. Some times I tell 10. I don't know what the most in one day is, but it's probably more than 25. I try to respond to all emails so a lot of these are in the "never were appropriate to pursue" category, but at least one each day is someone that I've actually engaged with beyond a cold email that was randomly sent to me.
While I try to give a short explanation - which often is that the company is not in an area that I'm interested in - it gets harder when I've actually spent some time looking at the company, like the idea and the people, and find it relevant to one of the investment themes we have active at the time.
Over the years - I've come up with a set of filters to quickly turn down deals. This is an important process as I want to limit the time I spent investigating companies that I don't investment in. Rather - I want to maximize my time working with my existing portfolio companies and quickly / deeply evaluating new companies that have a high chance of us funding them.
My first pass filter has three parts to it. The top level filter is "is this in a theme that I'm currently interested in." If yes, then I try to determine whether or not I think the people involved can create a huge company. If yes, then I often at least spend some time going deeper.
Assume something falls in the "yes - this is interesting / relevant to my current investment themes and yes - I'm at least interested in the people." Before I spent a lot my time (and their time) I try to figure out where this lives in the context of all the other companies we are looking at investing in.
This is where it gets fuzzy for the entrepreneur. You don't know the other active companies that we are working on. We do. Since all of my partners and I work across all of our deals, we all have good knowledge of the depth of our current pipeline. As a result, I can ask myself the question "is this deal potentially in the top five things we are currently looking at."
If not, I usually pass right away. We'll only make a half dozen new investments or so a year and we are always looking at many more than six companies that we think are potentially fantastic investments. As a result, if something is merely good (or even great) in our mind, it's not going to ultimately make the cut, so it doesn't make sense to spend time on it.
This is one of the benefit of having a fund our size. While we aren't a slave to a specific annual deal pacing, we've learned through the lessons of the bubble the value of having time diversity in our investing activity. To be hugely successful, we don't have to do every great deal we see. In fact, we don't have to do every fantastic deal we see.
Now - just because you get through the first pass filter doesn't mean we'll do the investment. The cumulative number of "top five deals" we are looking at in any given year might be 50 to 100. We are going to do five or six of them. So we are going to spent real time with a lot of companies that we won't invest in. This doesn't mean they aren't great companies or aren't great investments - they just aren't "for us, right now."
We always try to be respectful of the entrepreneurs and pass as soon as we hit the "this isn't going to happen" point. There are different triggers for each company and it's not predictable. I imagine this can be frustrating for an entrepreneur because it feels like you are making process with us when we suddenly say "we are passing", but I'd like to think it's an efficient way for you since we unambiguously take ourselves out of the hunt when we realize we aren't going to get there. Ultimately, this is better for you since you don't have to consume a bunch more time with us on a low priority outcome.

By Brad Feld

Thursday, October 02, 2008

Why you need a business plan



Many entrepreneurs are under the impression that with enough enthusiasm and persuasiveness they can start and run a successful small business. This is a contributing factor for more than half of small businesses failing in the first year of operation. There’s a reason that most successful startups- and a number of established firms- undertake this exercise. A business plan provides a number of benefits to the prospecting or newly formed startup, and here are five:

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Banks need it- Try walking into a bank and asking for a loan without a credit check or collateral and see what happens. You’ll be laughed right out the of the front door. Businesses are no different. In today’s credit market, banks are becoming increasingly stingy about lending as risk of default grows. It is your responsibility to provide in-depth, well researched data to ease this concern if you expect them to provide funding.
You need to know your market segment- Grand plans to outsell Amazon.com are fine and dandy, but the truth is that you will need to start small. If you are entering an industry that has growth potential, there are probably already a number of competitors present who are thinking the same thing. You need to know where your business will fit in the competitive landscape, as well as how you want to be perceived. Will you be a low-cost leader? Offering premium products or services? Know where you’ll be carving out a piece of the market will help you build a long-term strategy.
It’s your instruction manual- Every piece of information you need to sell your company to the outside world is in that document. Sales forecasts, target market size, startup cost estimates, short- and long-term strategies- these are all found in the business plan. It will serve as a constant reminder of what you’re doing and why.
It will keep your ego in check- If you’re like most entrepreneurs, there are a thousand ideas running through your head about how to improve your business. These ideas are often muddled when undertaken too early or in addition to other work. Having a plan for strategic implementation, along with descriptions of how and why they are listed in a particular order, will prevent you from biting off more than you can chew. Yes, they are all good ideas. And yes, randomly picking one to implement is a terrible idea.
You might want to retire someday- A blueprint for a business is a necessity for a sale. It documents the business and allows you to communicate the essence of your operation to the intresed aquirer. While a business plan seems like a lot of work (who has time to write thirty pages?), it is one of the most strategically important decisions you can make as a business owner. Whether you’ve just bought your first domain name or have been in business for 20 years, having a document that defined the scope of your venture is an invaluable tool. It will keep you focused on your priorities, help your employees understand how to become more efficient, and provide outside contributors with an understanding of your needs.
by Jason Diperstein

Slainte

Gordon

Wednesday, October 01, 2008

The Pricing trap, how much is your product worth ?


The Pricing game, is one of the hardest tasks a company developing a new entrant into a market, if you set it to low, you are stuck there, if you set it too high you won't develop a market or even worse the customer will buy until they find a cheaper alternative and move there custom. This article by Will from the Go big network will give you an in site into his thought process.



The Truth about Pricing


By Will Schroder
Any Entrepreneur that’s ever tried to bring a new product to market has had to deal with one frustrating fact – no one knows what to charge for it! No matter how well you think you can predict the market or how much research you’ve done, until people start paying for your product you’re still just guessing.Even then, when people are actually forking over their hard earned cash for your product, you still don’t know if you’ve optimized for the best possible price to generate the greatest number of sales. Fortunately there are some simple strategies you can employ to quickly arrive at a happy medium and give yourself a little piece of mind.

The Binary Nature of Pricing
The first pass you’ll want to take at pricing is to eliminate all of the people that weren’t going to pay you to begin with. What may shock you is that when it comes to a consumer’s perception of pricing, it’s not always the actual amount that scares people; it’s whether or not they have to pay at all. Pricing is more or less binary for consumers – they are either going to pay or they won’t – the actual price is incidental.Having launched ten companies myself, all in different industries ranging from automotive to financial services to television casting, I’ve found that in each case you get a group of consumers that are willing to pay just about any reasonable price for the product, and a group of consumers that won’t ever pay a penny.There’s something that goes off in a customer’s head when they have to pull out their wallet. Up until that point the value you were providing may have gone relatively un-noticed. But when the customer has to break out their credit card and start typing in those 16 magical numbers, they think twice about the value of your product. Instead of developing your pricing to lure the group of people that just aren’t willing to pay for your product, focus on maximizing the yield of the customer who will pay for your product. It’s a lot easier to get someone to pay 10% more for your product than it is to reduce the price of your product and get more people to pay for it.


The “Freemium” Model
Next you’ll want to figure out how to separate the paying customers from the non-paying customers, without alienating either.
Leave it to the overzealous Internet nerds like me to invent a word like “Freemium” to explain a basic price gateway model. Freemium is a word used to describe giving a portion of your product away for free in order to attract interest, then charging the most passionate customers for premium benefits. I’m not entirely sure, but I think this model was pioneered by Baskin Robbins every time they handed me a free sample of chocolate ice cream in order to convince me to buy an entire cone. These days the freemium model appears when I want to sample a song on iTunes but have to pay to download the whole song onto my iPod.The beauty of the freemium model is that allows you to test two pricing strategies simultaneously. You get to see how many customers would be interested in your product for nothing at all to gauge the overall interest in your product. It then allows you to learn exactly what about your product people are most interested in paying money for.
Try every Possible Price
Once you’ve separated the paying customers from the non-paying customers, you still need to settle on the right price to charge them. There’s one simple answer here: try every possible price.I’ll give you an example. At Swapalease.com, a site that allows people who want to get out of a car lease to connect with people who wanted to get into a car lease, we charged people to post their car leases on-line. The problem was, we didn’t know how much to charge them, so we tried every possible price.Our early estimates figured we would probably get around $24.95 per posting on the site. We constantly tried new pricing strategies to figure out what would be the right price that consumers would accept. Wouldn’t you know that after six months of testing we found out the number was over $100 per post!The only thing that kept us from simply making four times as much per sale was our willingness to test the sensitivity of price. Had we gone with our gut instincts we would have vastly undervalued the product and left a whole lot of money on the table.
It Pays to Try Everything
The only thing you can rely on when picking the price of your product is having to change it – a lot.
If you can develop a system to test as many possible price points with as many consumers as possible, you can hopefully uncover that hidden gem that is your perfect price. Until then, keep trying something new. It’s the only surefire way to win.
Slainte
Gordon