Sunday, August 31, 2008

An Entrepreneur's Lessons Learned

It’s been about a year since I closed up my consulting shop – Economic Information Services. The company provided business consulting services, focusing on Central Asia and Ukraine. Basically, our job was to develop local projects in these regions and find investment capital for them from international sources.

I occasionally find myself comparing work with my current company with my previous venture. Over the last couple of weeks, I’ve been recording retrospective thoughts about how I’d do things differently, and wanted to document them so my readers might pick up a useful tip or two. So here goes…

Understand the concept of “search”

Clients find you when they have a question. One aspect to my business about which I was certain – I knew as much or more than anyone about how business in these parts of the world was done. I attended conferences and events talking to companies considering overseas projects and partners. But I never put myself in a position to display my market knowledge to any of these people until I was engaged in a conversation with them.

I chose to build a traditional website (a.k.a. “a completely worthless use of time and resources”) and spent about $2000 to develop and launch an online marketing brochure that no one read, visited, or could find. Any time that I wanted to update the site’s content, I sent the new content to my web developer, waited a few days (or weeks) for the update, then paid an invoice for anywhere from $250-$500. Not too bright.

I set up Google Ads for key terms such as “Kazakhstan economy” and “Kazakhstan investment.” After 3-4 months of $300+ billing, I saw absolutely no ROI. This doesn’t mean Google Ads doesn’t work. It means that I didn’t know how to use the application effectively. I didn’t use Google Analytics to track incoming clicks. I never thought to research what keywords people searched. I hoped, and thus wasted about $1500 on this failed effort without ever understanding what I was doing wrong.

Had I built my website around a blog, I could have updated the site daily with new content - articles, commentary, observations, essays, and on-the-ground observations from my business travel there. Content, content, content. Given the relative obscurity of companies focusing in this part of the world, my company’s search result rankings could have been among the top in Google.

I failed to embrace search, and as such, I was the one searching for clients instead of the clients searching for me.

Skip marketing. Proceed with selling.

Forgive me Father, for I have sinned. I spent $6000 to host a cocktail hour at an investment conference organized by the Embassy of Kazakhstan.

I thought that this was the way to build a brand – show strength, success, and deep pockets. Hosting a cocktail party is a great way to waste $6000. You can’t possibly talk to everyone that attends. Inevitably, uninvited guests will show to poach free food. The important people that you want to talk to already have a line of people also waiting to talk to them. But you leave the event feeling like you made progress because people know who you are now. Fact is, they don’t even remember that you were there, let alone were responsible for the shrimp cocktail and bruschetta that they downed all night.

Small consulting companies don’t have time to build a brand. The clock is ticking – find clients that are willing to pay for your services.

Charge for services earlier in the client relationship

I was a busy guy. I was up at 5:00 AM nearly every day to talk to our local office in Kazakhstan about what happened that day or what projects they uncovered. I would spend my day translating business plans for local projects; setting up meetings with business organizations, investment promotion agencies, and government contacts for upcoming travel; and providing research to US companies I’d met at conferences and seminars that were interested to learn more about the region and business opportunities.

But I never asked for the business. When someone asked if I “could find out this and that,” I never told them the price or sent an invoice. I put myself in a middle-man situation – representing projects for local clients that couldn’t pay, and talking to potential investors that didn’t want to pay. I did sign some contracts and make some money, but some self-assurace could have improved the revenue flow substantially.

One of the most challenging aspects to consulting is converting a non-paying contact to a paying client. While you need to establish confidence with the client early in the relationship’s development, you also need to be firm about the way that you make money with the client. If they can’t understand it early in the relationship, then they never will.

It’s hard for firms to find good people to do good work. I was both and never leveraged this opportunity to develop clients for myself.

Consulting is not scaleable

I occasionally contacted a friend of mine, an entrepreneur in the technology sector that successfully exited a company that he started. He’d often give me some general pointers on developing my business that were helpful, but I ignored the most important advice he gave. Early on, he looked at my website and asked me if there was something I could do to make the company more scalable - maybe offer some sort of service or product through my website. At the time, I said to myself – “doesn’t he know that I’m in the consulting business?”

Looking back, he knew exactly that I was in the consulting business, and that’s why he asked if there was a way to scale somehow.

Given the depth and breadth of my market information, there was an opportunity to develop a simple project database or a series of industry overview reports. Had I understood the concept of search, those looking for “investment projects in Kazakhstan” or “telecommunications Kazakhstan” would have found my company and possibly purchased access to the reports or project database. At a minimum, setting up a more functional website would have help with client lead development. These aren’t products that would tally much per month in revenue, but in could have provided some minor cash flow, and could have given me a way to qualified leads for myself.

See how this is all related? I do. Now.

Convert Visitors to Leads

Related to the previous point, I could have developed a clear value-proposition on my company website – such as offering a free report by industry (which I developed for a conference and never used otherwise), and perhaps I could have grabbed some contact information from those directly interested in business opportunities in this part of the world. Giving away a market report isn’t going to get you a six-month consulting contract, but at least it would have enabled me get in touch, begin the process, and most importantly, expand my network of contacts.

Developing this process also enables a clear ROI for marketing and sales efforts, to understand more on what gets you clients and what doesn’t.

Accounting Good, No Accounting Bad

Keep better accounting records. Like most entrepreneurs, the mind-numbing activity of tracking receipts and expenses every month lacked the glamour that I sought in running my business. My solution? Ignore it. And at the end of every year, I scrambled to organize my receipts, enter my expenses into Quickbooks (okay, so my wife did all the Quickbooks work….), and crank out some semblance of a balance sheet for my accountant. No methodology for understanding how and why I spent money, and how to determine its return.

When the audit came around from the IRS, I scrambled to prepare (and thankfully passed). When it came time to apply for a home mortgage last month, I was nearly dead in the water. (We’re still working out the details of the loan, but it’s looking positive...)

Know when to quit.

I know - not something you hear often.

Write down your dropout clause at the same time as your business plan. You owe it to yourself and your family to avoid the double-down philosophy of the Atlantic City gambler. Be responsible. Objectively find the point in your venture when you know you’ll stop, and stick to it. I know that there are successful entrepreneurs out there that have cashed in their 401k savings (yes, I considered it), maxed out credit cards, tapped friends and family for loans, and gone to other extreme measures to overcome a dearth of failures. Remember that you only hear about the successful ones. BusinessWeek and Wired don’t write articles about the other 99% that are still paying off their debts from failures past.

Two years into my venture, I reached a decision point brought about by financial constraints (read: “running out of money”). These two years included several trips to Kazakhstan (with a six-month stint to get things going there), meetings, bids on government contracts, meetings with government officials, conferences in Washington D.C., meetings with local project owners, subs-contractor submissions through beltway bandits, meetings with contractors, and a few meetings. (Did I mention the number of meetings that I had?) This activity resulted in a couple of small, sporadic contracts, but nothing that provided long-term financial stability.

An angel investor who believed in me and my company, decided to front the cash for another six months of operations. During that period, we won a sizable local project sponsored by the Kazakhstan government. “Yippee!” I thought. When that project was finally finished about a year later, I was faced with the same financial constraints. We couldn’t find new projects because we were tied up with the first one, local market dynamics didn’t change much, and our ill-conceived method of client development described in detail above left us without the next income source. It was then that I decided to close the doors.

Usually, you’ll hear from successful entrepreneurs that the mistakes were the most beneficial to their long term growth. That’s sort of true. It’s not the mistakes that offer the opportunity for growth, but the acknowledgement and deconstruction of mistakes.

There’s a difference between believing in something, and knowing it. (I once believed in the Easter Bunny...) Blind faith is important – you must always believe in yourself or your idea. Being blind to the obvious signs that your venture isn’t working is downright foolish.

I believe in myself, and that’s why I decided to close the shop. Good entrepreneurs know that there’s more than one good idea. Let the failures work for you, not against you.


Sunday, August 17, 2008

Venture Capital Trends, Q1 (2008)

Over the last couple of weeks, I've been intending to comment on the recent report released by VCExperts released in June regarding trends in venture funding in Q1, 2008. The graph below illustrates some of the key data from the report. The labels of A, B, etc. refer to the Series Round of Financing.

While recent trends in Series A-D financing have moved around a bit and returned to the same approximate levels from 2006, it's clear that the number of Series E+ fundings are rising over the past year. This may be manifesting a couple of market factors, including the current market constraint of two major VC-funded exit strategies - acquistions and IPOs.

Given the overall volatility of the stock market, perhaps potential suitors are sitting on the sidelines and taking an inward focus to developing operational strength and cash flow rather than seek growth through acquisition. Stock market volatility also appears to affect the number of IPOs filings, with only 13 IPOs filed in Q2, 2008 compared with 56 filed in Q2, 2007 (sourced from the Hoovers IPO Scorecard). Renaissance Capital's IPO Index is showing a -5.2% return over the past 1-year period, with year-to-date returns at -17.8%. It's just not a great time for IPO exits if you're a VC-funded company. (Of course, the DJIA is at about -10% YTD and the NASDAQ is about even so far YTD...)

In December 2007, a National Venture Capital Association (NVCA) press release reflected some bullish sentiments by venture capitalists, with "59 percent of the venture capitalists are predicting further IPO market recovery." I found this optimism particularly interesting given the counterview outlook illustrated by the USF Venture Capital Confidence Index. The most recent update released on July 9, indicates that VC confidence has fallen to an all-time low since establishing the index in 2004. Wish these VCs could make up their mind....

One factor in this trending may be the ongoing movement of venture capital. Data from PWCMoneyTree provides sufficient evidence that venture capital is falling into later stage investments over the long run, as discussed in an article back in March.

I'm guessing the truth is somewhere in between...


Monday, August 11, 2008

Reviewing LinkedIn's Valuation

After writing my weekend post about LinkedIn’s $1 bln valuation ("Locked in on Linked In"), I did a bit of reading about how some others viewed the matter. (I wanted to come to my own conclusion without being influenced too much by others who already wrote about the topic…)

Michael Arrington wrote a nice article back in June about social network valuations, using the “average Internet advertising spend per person in the country they live in.” Arrington mentions the same problem I alluded to in my article – not too many data points from which to base valuations in the social networking industry (Facebook’s at $15 billion, MySpace at $580 mln and Bebo at $850 mln by acquisition). He doesn’t come to any conclusions as far as viability of the current valuations, but the metrics and his responses to commentary make for an interesting read.

Many postings announcing the $53 mln Bain Capital investment mention rumors of how LinkedIn was striving for a $1 bln valuation, seemingly to justify its targeted user base of higher-than-average income user base that can be used to generate higher-than-average advertising revenue. Caroline McCarthy mentioned this back in May on CNET, as did Arrington in his May 5 posting.

Overall, the initial reaction out there is that the validity of the valuation remains to be seen, but the unique nature of LinkedIn’s user network appears to have some merit according to the first wave of observers. Of course, there were those with a hearty defense of the Facebook valuation when it hit $15 bln last year as Jonathan Richards wrote about in October.


Saturday, August 9, 2008

Locking in on LinkedIn

I read about the recent $53 mln Bain Capital investment to LinkedIn and I was prepared to write an article again questioning the valuation of another social/business networking site. Like many, I'm not particularly enamoured with the current $15 billion valuation of Facebook, so my initial reaction to the $1.035 billion valuation of LinkedIn was - "here we go again..."

Because LinkedIn is a private company, their financials and revenue sources aren't available. I did some scouting on the site and they make money in a few ways:

  1. Advertising via their Large Budget and LinkedIn Direct Ads to provide targeted advertising to its members.
  2. Subscriptions to Premium Services that allow the user to directly contact people out of their network with "InMail" and send "Requests for Introduction" emails. These services range from $20-$200/month.
  3. Perhaps some others such as data analytics based on membership statistics and activity (though this is only my conjecture...).

Johnathan Richards wrote an article following the June 2008 venture investment and estimates LinkIn revenues to be around $80-100 million, with "about a quarter" of the revenues coming from subscription services. At first, I was a bit surprised to read that subscription fees could be so high, until I considered the number of recruiters that have contacted me via LinkedIn, as well as my own activity. (I personally subscribed to their $20/month plan when searching for a job a while back, and was able to link up with a great recruiter at Russell Stephens as a direct result of an InMail.)

With the current $1 billion valuation based on revenues of $100 mln, that's 10x revenue valuation, without any knowledge of their profit margins. The News Corp acquisition of MySpace for $580 million back in 2005 supplies some relativity to the $1 bln valution. Though a social site, not a business site, MySpace does parallel LinkedIn in terms of its ability to focus on a large market segment, it's networking component, and the fact that the business world has placed a valuation on it. Since the acquisition, MySpace has reportedly been a boon to the New Corp's Fox Interactive Media Group. (According to the most recent 8K report from June 2008, News Corp reports that Fox Interactive Media grew revenues 57% and increased "operating profits five-fold on strength of advertising and search revenue growth at MySpace.") Two years after the aquisition, things seem to be looking rosy for New Corp according Murdoch in this Wired Magazine article.

Considering the virtual aspect to LinkedIn's product and the scalability of subscription services, I suspect that their profit margins are healthy and growing as LinkedIn acheives a greater lock-in effect with users - becoming the main destination site for business networking. The caveat to acheiving this lock-in effect will be the quality of service and networking effects. However, by providing the ability to remove connections and requiring a subscription for the ability to directly contacts individuals outside of one's network, LinkedIn drastically removes the diluation and spam factor to their networking functions. Additionally, LinkedIn boasts (as they should) that their audience has an average household income of $109,000, about 2.5x's the median US household income of $48,200 according to the 2007 US Census (though I'd like to know the median LinkedIn income to see how much top executives on LinkedIn skews this average figure).

Looking LinkedIn's development, they've taken a deliberate and apparently successful approach so far - develop a user base, find a way to quickly monetize activity with premium subscription services, and then analyze the user base to leverage it for targeted advertisers. From this perspective, LinkedIn is now completing the foundation of its business with the Series A, B, C financing of about $30 mln, while this most recent $53 mln should be intended to move the company into a mature state with specific long-term goals for continued rapid growth.

The most compelling part of LinkedIn's situation is its $1 bln valuation based on $100 mln in revenue. It's high, but justifiable given the apparent success of others in the networking space, and the unique niche of its business and professional membership base. Like everyone, I'm interested to see how quickly it can convert the valuation to practice, or to see if it can utilize its valuation to grow by:

  1. Acquisition of higher-end job sites such as or
  2. Targeted content partnerships such as their recent NY Times agreement
  3. Integration of specific industry content and membership groups such as BAFT, VCExperts, or others to serve as a clearinghouse of industry information for its users.

So here I am at the article's end, completely reversing my initial reaction to the valuation - seems to be okay after all...