I’ve got to know Ben Casnocha well over the past few years. He’s a remarkable kid – and I say “kid” respectfully even though he recently turned 18. Ben visited me and Amy a few weeks ago and we had a great time – one of the things we talked about were the colleges that Ben has been accepted to and his plan to take a “gap year” (a year between high school and college) to go travel around the world. He just launched a new blog called Ben’s Gap Year Travel Adventures – I expect this will be a fascinating and incredibly educational blog. Europe is up first in June and July.
A close friend of mine is spending a year traveling around with world with his wife and 11 year old daughter. They are in China right now and he’s been sending me missives from the front lines of his trip. Most of what I read these days about China is either highly political, technology-oriented, or about the venture capital industry’s fascination with China. My friend’s emails have been decidedly different (while he’s a successful technology entrepreneur, his trip is about a personal adventure that his family has embarked upon.) I confirmed with him that I could blog some of his rants – enjoy.
China is wild – definitely glad I came so I never have to come back.
It is so polluted in the air that I feel like I’m sucking on an exhaust pipe while in a middle of a sand storm. Beijing gets these sand storms off the gobi since all the forests have been cut down and everything is covered in a layer of dust that just won’t go away – add in coal burning power plants, no emissions on cars and 15 million people and you simply can’t breathe. So after 4 days in the capital we went to Xi’an (the ancient capital now 5.4 million people) and it’s just the same – you can’t tell if it’s day or night – it’s almost comical, but sad.
Prices are at both extremes – for western brand stuff in legitimate stores its 40% more than the states – everywhere else it’s cheaper (and there is no shame in selling whatever brand will make them money). I think communism works well for the Chinese – there are so many people if they had too much freedom I’m sure there would be greater civil unrest.
Internet access has been fine – Skyping everyone without problems and it’s cheap. Every now and then I can’t get a Yahoo new article on China to load – but if I’m persistent I can get it. The English China Press newspaper is like reading Soviet era propaganda – it’s just funny their view on world events.
People aren’t as friendly as in other countries we visited – lots of shoving and pushing – not many smiles – everywhere you go it’s packed with people. Most tourists are Chinese – funny I would have never guessed. China produces 20% of the worlds cigarettes and consumes 30% – they probably just don’t care with all the other stuff in the air.
We all have sore throats and are dying for some fresh air and blue skies. The sites are amazing – actually all the tourist locations we’ve visited so far are very clean and well run. we saw one old lady have all her trinkets taken away from her by a soldier after she sold us a kite in front of a historic statue (she almost cried – I think the kite we bought cost us 75 cents – about 3 dollars of goods was taken from her – I wanted to go up and give her some cash but the guard was watching). Most people fall into the category of have nots but talking to one of our guides at the Imperial Palace in Beijing – he said that young people will take an entire month’s salary just to buy the new Motorola Razr phone or Nike shoes.
Hey 1.3 billion people can do a lot of stuff – but you’ve got to take care of 1.3 billion people and that’s not gonna be easy – I don’t think China has it in the bag to dominate the global economy in 50 years – plus they might have a peasant revolt in the meantime…
I finally got around to downloading my Boston Marathon data from my Garmin 301. I thought the GPS based data was extremely interesting, especially when compared to the official course elevation map. Following is the official elevation map:
Following is the map from my GPS post race:
Notice all the hills that get smoothed out in the official map, especially between miles 15 and 23.
Since it’s a Saturday morning, I thought I’d cover a topic in our Letter of Intent series that my wife Amy would never agree to. Signing a letter of intent starts a serious and expensive process – for both the buyer and seller – as you both work to consumate a deal. As a result, you should expect that a buyer will insist on a no shop provision similar to the one that we discussed in our term sheet series. In the case of an acquisition, no shop provisions are almost always unilateral, especially if you are dealing with an acquisitive buyer.
As the seller you should be able to negotiate the length of time into a reasonable zone (45 to 60 days). If the buyer is asking for more than 60 days, you should push back hard as it’s never in a seller’s interest to be locked up, especially for an extended period of time. In addition, most deals should be able to be closed within 60 days from signing of the LOI, so having a reasonable deadline forces everyone to be focused on the actual goal (e.g. closing the deal.)
Since most no shops will be unilateral – the buyer has the right but not the obligation to cancel the no shop if they decide to go forward with the deal – this time window is particularly important since the seller is likely to be tied up for the length of the no shop even if the deal doesn’t proceed. Rather than fight the no shop, we’ve found it more effective to carve out specific events – most notably financings (at the minimum financings done by the existing syndicate) to keep some pressure on the buyer.
I haven’t been out to see a movie in a while (I don’t know why – Amy and I love movies at the theater.) Last night we saw Thank You For Smoking. It was brilliant.
I thought the Christopher Buckley book Thank You for Smoking was an absolute riot when it came out. The movie is based on the book and does a superb job of telling the same story while updating it a little. Aaron Eckhart was phenomenal as the main character (a cigarette lobbyist) and William H. Macy continues to be the sleeper actor of the universe for his portrayal of the Vermont senator who wants to put poison labels on cigarettes.
The one liners were awesome. Following are a few better ones to give you a taste.
At 92 minutes in length, it also nicely broke the mold of movies that are 25 minutes too long.
Roger Fillion has a very instructive article in this week’s Rocky Mountain News about the closing of the Colorado Institute of Technology. I remember when CIT was launched in 1999 with great fanfare by Colorado Governor Bill Owens with the vision of creating “the next Caltech or MIT.” I remember feeling that while the vision was huge – it was nonsensical and not particularly well informed about what created the underlying and sustainable basis for something like Caltech or MIT.
Roger’s sidebar on “Looking back at CIT” has a very focused set of quotes that puts it all in historical context.
Now, Colorado has always had a vibrant technology and entrepreneurial community, but the idea that in 1999 that there was “absolutely consistent awareness across the world today that Denver is becoming the next Silicon Valley” made no sense to me at the time, nor does it in hindsight. Having spent a lot of time and been involved in creating a lot of companies in both places, Denver has never been on the path of becoming the next Silicon Valley (in fact, Boulder is probably a more vibrant entrepreneurial ecosystem than Denver – so at the minimum it should be Boulder / Denver, although there’s still no real similarity to Silicon Valley.)
Rather than try to be “the next Silicon Valley” or “the next MIT”, it seems a lot more sensible for Colorado to focus on its unique characteristics, embrace its differences, and take advantage of that dynamic. Having been in a few meetings of a group of technology executives and entrepreneurs discussing Colorado and technology for Bill Ritter’s gubernatorial campaign, I’ve seen the same thinking come up – “how can we be more like Silicon Valley.” I’ve been consistent in my strong opinion that that is simply the wrong goal.
Education is at the core of creating a great, long term, entrepreneurial environment. While a few people in Colorado – such as Jared Polis – are doing great things, our state government and business leaders should look at the failure of CIT as a major wake up call that we are simply not doing “enough”, or “the right things”, or “managing them effectively.” I wasn’t involved in CIT – so it’s hard to be specifically critical – as I’ve spent most of my Colorado-based entrepreneurial / education activity working with CU Boulder Deming Center for Entrepreneurship and the CU Denver Bard Center for Entrepreneurship, but I’d hypothesize that if the companies that invested energy and money into CIT had channeled the same energy and money into these two institutions, there would have been a better outcome.
Industry needs to make a fundamental, long term investment in education in Colorado, as does the state and local government, rather than try to create “the next great thing” in times of abundance (such as in 1999.) We need to take a 25 – 50 year view – this is not a short term game. Unfortunately many of the people and companies that were involved in CIT appear to have had a short term time horizon and when things stumbled weren’t able or willing to invest for the long term.
When you are asked “Hi – it’s been fun to date. Will you marry me?” you usually don’t expect the person asking the question to say “Oh – and it’ll only happen if my mother says it is ok.” (although I expect this happens occasionally, especially if the person asking hasn’t had enough therapy.)
Buyers are like this and will normally include certain conditions to closing in the LOI. These can be generic phrases such as “Subject to Board approval by Acquirer,” “Subject to the Company not having a material adverse change,” or “Subject to due diligence and agreement on definitive documents.” They can also be phrases that are specific to the situation of the seller such as “Subject to the Company settling outstanding copyright litigation,” or “Subject to Company liquidating its foreign subsidiaries.” We generally don’t get too concerned about this provision, because any of these “outs” are very easy to trigger should the buyer decide that they don’t want to do the deal.
Instead of worrying about whether or not the provision is part of the LOI, we tend to focus on the details of the conditions to close, as this is another data point about the attitude of the buyer. If the list of conditions is long and complex, you likely have a suitor with very particular tastes. In this case, it’s worth pushing back early on a few of these conditions to close, especially the more constraining ones, to learn about what your negotiation process is going to be like.
As the seller, you should expect that once you’ve agreed to specific conditions to close, you’ll be held to them. It’s worth aggressively addressing them early in the due diligence process so you don’t get hung up by something unexpected when you try to “liquidate a foreign subsidiary”, especially if you’ve never done this before.
Today must be an Onion day. I don’t read The Onion anymore – I rely on my vast network of friends to send me relevant stuff. The other day Matt Blumberg sent me a very disturbing article about Robot Hazing that a Fraternity at MIT was accused of. As a member of the fraternity that one of the founders and CEO of iRobot lived at, I can assure you that we took robot hazing very seriously whenever we heard about it, frowned down on it, and did everything we could to stand up for the rights of the robots involved.
As my body recovers from my recent marathon, my brain turns back to Letters of Intent. Jason and I left you hanging for a while in our Letter of Intent series – we plan to tromp to the finish line in the next few weeks.
In an effort to mix metaphors, while Jack Bauer tries to always look out for other people at CTU (except for say – in Ryan Chappelle’s case), it’s not always true that management is playing the same role in an acquisition. In public company acquisitions, you often hear about egregious cases of senior management looking out for themselves (and their board members helping them line their pockets) at the expense of shareholders. This can also happen in acquisitions of private companies, where the buyer knows he needs the senior executives to stick around and is willing to pay something extra for it. Of course, the opposite can happen as well, where the consideration in an acquisition is slim and the investors try to grab all the nickels for themselves, leaving management with little to nothing.
Since management’s (and the board’s) responsibility is to all shareholders, it’s important for management (and the board) to have the proper perspective on their individual circumstances in the context of the specific deal that is occurring. Whenever I’m on the board of a company that is a seller, I prefer to defer the detailed discussion about individual compensation until after the LOI is signed and the management of the buyer and the seller have time to do diligence on each other, build a working relationship, and understand logical roles. Spending too much time up front negotiating management packages often results in a lot of very early deal fatigue, typically makes buyers uncomfortable with the motivation of the management team for the seller, and can often create a huge wedge between management and the other shareholders on the sellers side. We aren’t suggesting that management and employees “should not be taken care of appropriately” in a transaction – rather – there won’t be an opportunity to take care of folks appropriately if you don’t actually get to the transaction, and this is an area that often causes a lot of unnecessary stress if addressed too early in the negotiation.
While we don’t recommend negotiating the employment agreements too early in the process, we also don’t recommend leaving them to the very end of the process. Many buyers do this so they can exert as much pressure as possible on the key employees of the seller – i.e. – everyone is ready to get the deal done, the only thing hanging it up is the employment agreements. Ironically, many sellers view the situation exactly the opposite way – i.e. now that the deal is basically done, we can ask for a bunch of extra stuff from the buyer. Neither of these positions is very effective – both usually result in unnecessary tension at the end of the deal process and occasionally create a real rift between buyer and seller post transaction.
As with most things in a negotiation (and in life), balance is important. When it comes to employee matters, there’s nothing wrong with a solid negotiation – just make sure that it happens in the context of a deal, or you’ll likely never actually get the deal done.