Soaring on Ridgelift

Being “too early”

The hardest money you will ever raise is the money you need to get going.

Sadly, the "venture" in venture capital has gone – at least for now. I've written in the past about the growing trend among Silicon Valley VCs to want to fund later stage companies. These later stage companies offer the perception that risk has been taken off the table and so make for "better" investments.

If you are a true startup – a founder or two, a good business idea and the guts to start a company from the ground up, you face a huge challenge to get money to start the company.

I've seen this first hand over the last couple of months as two of my friends have struggled to raise money despite being multiple-repeat entrepreneurs with great track records. Time after time, from VCs and Angel investors alike, they've heard the same comment:

    "You are too early!"

Perhaps it's a reaction to a looming recession, a largely closed exit market (both significant M&A and IPO) or the overhang of a portfolio of later stage companies, but there's precious little appetite for early-stage risk.

The pressure of deploying larger venture funds coupled with the longer time to reach a liquidity event (now between 6-7 years for a new company) has driven a lot of investors away from early stage companies. Why take all the early stage risk when you can generate a (smaller) return by investing in a later stage company?

These dynamics place a premium on establishing proof points for your business BEFORE setting out to raise money. Build a prototype, get really detailed customer and market feedback, and earmark the people who are going to be the critical hires. If you can, bootstrap the business until you get growth and traction – then if you need money for expansion it will be easier to raise.

Above all, stay the course. This week, after almost a year of bootstrapping his business and getting endless "you are too early" comments, one of my friends got a great term sheet for a very significant financing. What had changed? In terms of the strategy, not much… But there were a ton of proof points on the table for all to see.

Eating your own dog food

One of the quickest ways to improve your product or service is to use it yourself. Not just try it out, but live your life with it – make use of it in your own business to the point where you are critically dependent on your own stuff.

Why? Because if you do, your engineers and marketing people will be the first ones exposed to mistakes or fiascos that could be devastating to your customers.

I've been a firm believer in the mantra of "Eat your own dog food before offering it to your customers" for years. At Cisco, the engineers and associated marketing folks sat behind alpha level software – new releases of the Cisco IOS were tested internally long before they saw the light of (public) day. Not surprisingly, the features that we depended on for our day to day business were always in the best shape and seldom caused problems. The features we used least (or didn't have internally) were always the problem children as they saw extensive lab testing, not real world exposure.

I was reminded of this manta over the weekend as I grappled with the failure of iTunes to sync my iPhone with my Outlook calendar. This problem dawned on me late last week as I was trying to schedule a meeting with a friend and realized that there were serious numbers of missing appointments on my calendar.

A search session over the weekend revealed that I wasn't the only one having the problem – I tried all the "fixes" that were described on the Apple support notes and those on numerous blogs. Then the penny dropped… iTunes had upgraded itself (yes, I know I had to click the button to do it – I'm culpable too) a couple of weeks ago from 7.5 to 7.6.

Regressing back to 7.5 (including restoring my old iTunes library from January 18^th – the day of the "upgrade") fixed my problem and now I'm happily syncing again – not only that but the sync takes a couple of minutes instead of half an hour!

I have to believe that Apple's engineers are good ones and that they both care and test their product… But I'll bet there are few folks over at Apple that live behind a PC running Windows where their life depends on Outlook AND have an iPhone. If they did, my experience with non-syncing iPhone calendars would have been caught before 7.6 made it out into the wild.

So, the morale of the story is clear – make sure you eat your own dog food. Your customers will thank you and you will be amazed at what you find (and fix!) first!

MSFT + YHOO = Gift for GOOG?

As expected, the papers and blogs are full of speculation about the impact of Microsoft acquiring Yahoo!

Two articles caught my attention in today's NY Times. The first – "Yahoo Deal Is Big, but Is It the Next Big Thing?" makes the point that perhaps Microsoft is still focused on yesterday's war rather than looking to the next. The second article – "Yahoo Sale Could be Bad for Minnows" speculates about the impact on startup companies as two prospective acquirers merge into one.

What surprises me is how little discussion there is about the impact and potential opportunity this creates for Google!

Acquisitions are hard – even the small ones. I've had a lot of experience with M&A over the years and I'm left with several observations:

• Only 1 in 3 acquisitions work out and give you the results anticipated when you made the acquisition offer.
• The bigger the acquisition, the harder it becomes (and it's not a linear function of size – it gets exponentially harder).
• Strategy and culture synergies are critical. Without them, merging two companies is like mixing oil and water.
• M&A distracts the management teams of both companies. The bigger the merger, the more the distraction.

Merging Microsoft and Yahoo will be a very difficult process and will totally consume the senior management attention of both companies.

What an opportunity this creates for Google! Think of it – your two major competitors are suddenly consumed with each other. Their management teams are focused inward on making the merger successful and have to contend with what to keep and what to let go. All you have to do is focus on winning in the market! Just what you were doing before but now your two major competitors are sitting on the sidelines trying to get their act together.

I saw the impact that this can have when I was at Cisco; Wellfleet and Synoptics announced their merger to create Bay Networks. That merger gave Cisco a golden opportunity to go out and win in the market while our two competitors were distracted. With John Chambers' guidance, we did just that.

Will we look back in a couple of years and say that this merger helped Microsoft win or that it helped Google rise to an even more dominant position in the market?

Time will tell.

While the merger reduces the number of potential acquirers by one and so might impact M&A valuations, it could spur an acquisition fest by Google and other companies impacted by the MSFT/YHOO merger.

It's a lot easier to go out and acquire a large number of smaller companies than it is to merge with one big giant. Google has an opportunity to go and cherry pick the smaller (but growing) startups while the two elephants dance.

This is going to be very interesting to watch!!!!