Thursday, July 19, 2007

Venture Capital - late vs. early stage

An interesting article in the San Jose Mercury News by Mark Boslet discusses the higher valuations of venture capital deals – Venture capital funding, valuations rise.” (links to PDF file of the article on the Saints Capital website).

Some thoughts on the article to consider:

1. The investors that compose the continuum of private equity, ranging from LBOs to traditional venture capital to angel networks, are growing individually, and as a result, are creeping into each other’s territory. Look at the investment parameters of many “Private Equity” companies and you’ll see a growing number targeting later-stage companies (not the traditional LBO/MBO private equity model of 10 years ago), creating competition for the market. The article states that “too much money [is] chasing too few late-stage deals.” The result is the increased valuations.

2. Angel networks are becoming more and more sophisticated - what used to be the territory of the traditional VC companies. “Angels” used to mean people like your Uncle Bill who did well in the market before retiring and could afford to throw $10K your way. Now angel groups are targeting investments up to the $2 mln range (and higher in some cases). Even organizations like the Angel Capital Association now exist that did not 5 years ago.

The article also states that early-stage companies are forced to suffer. I disagree to some extent.

Firstly, good companies with good ideas, good products, and good managers will get funded. The market works. There may be fewer investments and funding events at the early stage, but perhaps that is better to better information availability about markets, products, and strategies.

Secondly, the wave of VC capital that was thrown at Web 1.0 companies was often spent on outrageous marketing campaigns (i.e. $1 mln for Super Bowl ads) to build brand recognition.

Take a moment to consider where we are with Web 2.0 and marketing:

• Long-tail marketing
• Viral Marketing
• Blogging
• User-generated content
• Google Ads

I don’t have any hard statistics to back this, but I suspect that marketing costs for start-ups are relatively lower as measured by capital than they were 7 years ago. With decreased capital costs for marketing, a significant chunk of the demand for early-stage VC capital infusion diminishes. Start-ups can focus resources on technology and product development and launch their products to market by effectively utilizing a Web 2.0 marketing strategy.


Tuesday, July 17, 2007

Definition: Entrepreneurship

Over the past month at a couple of local events, I’ve heard speakers offer two different definitions of Entrepreneurship:

1. “Leveraging resources to get things done”
2. “Prudent risk-taking.”

The first definition was offered by Christopher Keene of Active Grid Software at a SVASE lunch event last month that I’ve referenced in previous posts.

The second was provided today by Sean Murphy of SKMurphy, Inc. at a Technology Venture Corporation (TVC) event in Menlo Park. (If you are an entrepreneur, I absolutely suggest that you check out TVC and their FREE services!)

What is striking about these definitions of entrepreneurship?

Both definitions are verbs. In grammar school, we are all taught the basic definition of noun to be “a person, place, or thing.” But entrepreneurship as defined by Christopher Keene and Sean Murphy is an action.

This leads to a more philosophical discussion of entrepreneurship and what it is – a state of mind, an ever-evolving process of innovation, initiating new results, proactively acting on a business idea. Any of these definitions are arguably valid, and perhaps one of the reasons that entrepreneurship is such a challenging course of action is the subjectivity that plays into defining it.


Tuesday, July 10, 2007

Sales Incentive Programs

I am currently working with Altos Research, a real-time real estate information service based in Mountain View, CA, in a part-time role. Currently, the sales force consists of the CEO, me, and well, that’s it. My role with Altos is to develop the overall sales strategy and long term organization.

We were discussing the longer term issue of sales territories as the company grows, deliberating over much revenue per sales rep should be the base of a territory, and then looking at how to compensate salespeople. Altos is a service with low customer attrition/turnover – probably less than 5% of the customers that sign up as paying customers cancel their service subscription, with an equal percentage that will likely upgrade their service plans, thus increasing the revenue per customer. A 95%+ retention rate! One of the reasons for this low attrition rate is the incredible level of personal attention and service that we have been able to provide to each customer. A key objective in the long term strategy is to replicate this high level of service as the company grows.

Our discussion turned to a philosophical conversation on how much to focus a bonus/commission structure for future sales representatives on new customer acquisition vs. growing a given territory base.

The key factor to remember with sales people is this – whatever compensation program that you establish for your salespeople is exactly what you will get. If your compensation program rewards new customer acquisition, then you’ll get new customers. But if you do not have a dedicated customer support team – and most start-ups rely on their sales reps to double as customer service reps - you’ll also have to deal with a higher attrition rate as your overall level of customer service will decline.

Salespeople are inherently selfish people, and I mean that in a good way. They often view themselves as the free agents in your company that are seeking to maximize their personal return – that’s why they work on commission/bonus and that’s why they are willing to take lower base salaries as a percentage of compensation than anyone else in a company. So, if your sales programs are focused more on new customer acquisition, then you absolute number of new customers will certainly increase. But at what cost? There will be a trade-off that will be evident in a higher churn rate. If your market has a finite number of potential customers, a high churn will impact the long-term growth of your company. Unless to you able to expand into new markets, you’re sales reps will eventually reach the end of their call list, and going back to prior customers that have dropped your service in the past may be a far more challenging sale.

Finally, it is important to take a look at you customer acquisition costs versus customer retention costs. If your acquisition costs are high relative to your retention costs, and your service is one that provides the ability to constantly upsell and upgrade your current customers, a sales program that drives this behavior in your sales force is probably a better option.