They joy of having an “IT guy” (aka Ross) around is that he willingly expresses his opinion whenever given the chance.  Since he plays around with even more stuff than I do, one of the ways I learn to is listen to him rant and rave about things he’s played with.  A few weeks ago, it was his lousy experience with the iTunes Music Store for video.  That post generated some useful comments – especially around DRM.  Ross fired off another rant – this time a positive one about his experience with CinemaNow – along with a general response to the comments on the previous post.  Again – I’ve lightly edited to fix spelling and grammar, but left the IT guy essence intact.  Ross follows…

First, I’ll respond to some of the comments on why I support DRM. Let me be clear, I support DRM in concept – that concept being that you should be able to purchase something and use it anywhere you want. Your iPod, your smartphone, your TV, your computer, whatever. You should not be able to share that file with anyone else, period. That’s how DRM should work, and if it did work that way no one would really have any reason to complain. However, DRM does not work that way, which is why all current DRM technologies are flawed. Fred Wilson put it well saying that it’s all about “dial tone” – you pay your monthly fee to get your pipe of media and that’s it. The rest should be transparent.

The other comments that stuck with me were about the about the quality of music on iTunes and that while I’m savvy enough to have a serious media room setup that I didn’t know going in that this would suck. On the first point let me clarify that I think the quality of music purchased through iTunes is excellent. It could be better, but it is good enough for my iPod and good enough for most people’s uses. What I mean by good enough is that most consumers will notice zero difference between an iTunes file and a ripped MP3. Most consumers just don’t care and they don’t have the ears that I have (and I was a music major in college so I have pretty tough ears.)  Regarding knowing going in that this would suck – I should have known.  I figured it would, but I fell victim to a sudden bout of optimism and I wanted to go into it without any preconceived notions.

Ok – enough old stuff – let’s get to my point for this week. Yesterday Melanie and I were out of movies. We’d sent back our Netflix movies earlier in the week and were expecting more to show up on Saturday. For the first time Netflix failed us and we had nothing new to watch. Being lazy (c’mon – give me a break – I’m an IT guy) I didn’t want to drive to Blockbuster so this gave me the perfect opportunity to try out CinemaNow to watch a movie. While Melanie was, uh, less than thrilled about this idea (after our iTunes mess) but she agreed to give it a try. I ran to my PC and started setting up a new account.

Setting up a new account was.  Within two minutes I was ready to purchase a movie. We started looking through them and found the first problem, a very limited selection. We eventually settled on Junebug (which was not a comedy despite the claim that it was – but it was very good.) I proceeded to purchase it ($3.99 seemed steep to me) and download it. My home theater is built around a HP z545 Media Center PC connected to my HD projector (720p) and then connected to my high end Onkyo receiver for 7.1 surround sound. This was going to be the real test – could we watch a movie, downloaded over the net on this system, and have it look great?

After purchasing the movie it started to download. After this began I got a count down timer letting me know that the movie would be ready to watch in 30 seconds.  That’s smart – progressive downloading – we weren’t expecting that – so we let it download the entire movie while we got ready.

Ok, so now it’s time to watch. It’s downloaded, I’m ready to go, Melanie’s ready (as are our dogs) so let’s hit play. Guess what – it didn’t play! It needs to download some security update for Windows Media Player. I’m thinking, “damn it, not this again!” 10 seconds later the download is done and it’s starting to play. Not only does it work, but it looks outstanding – very close to DVD quality.  During the entire movie I didn’t see a single compression artifact, the video didn’t skip, and the sound was perfect (but it was NOT Dolby Digital 5.1 – something had to fall short.)

Overall, I was delighted.  CinemaNow has this figured out and knows how to deliver something of real value to the consumer – congrats guys, you’ve won a customer. Now, get the price down or offer an unlimited or capped subscription and I’m 100% there and dropping Netflix. Oh, and add some more movies while you’re at it (studios listen up, this is how consumers will get movies in the future.)

I can’t seem to get away from the “what structure should I use to set up my business” questions.  Here’s another one that I recently got.

I am trying to help an entrepreneur set up a distributorship to take US made products (tools) to a large market in asia with a huge need. Start up costs are under $1 million (5-10 angels and insiders), with proceeds going to pay for initial inventory take downs, field sales and support, and minimal opex. We do not foresee a future liquidity event for return of capital but rather generation of cash consistent with a distributorship. Question: what is the best equity structure for this company?

Given my recent post on S-Corp’s vs. LLC’s I’d lean toward an S-Corp (assuming all the investors are US-based), but given the recent change in Section 265 of DCGL, I’d be very comfortable with an LLC.  In either case, avoid a C-Corp and the risk of double taxation given that the company will likely be paying out dividends to its shareholders.

I stumbled over a post on the re:invention Marketing blog (a toolbox for & about enterprising women) about BusinessWeek’s recent article on tech entrepreneurs under the age of 30.  Kirsten Osolind points out that of the 16 “cutting edge entrepreneurs under 30” that were highlighted, none were women (ok – two were women – Sandy Jan and Elaine Wherry – of Meebo.)  I forwarded this to Lucy Sanders, the CEO of National Center for Women & Information Technology – and she logically responded “well Brad – blog about it.”  Interestingly, the ratio (2:16 or 12.5%) is about the same ratio of high school girls to boys that take the AP Computer Science test.

The line of the day at a board meeting yesterday was from the VP Engineering concerning a customer deployment.  “The customer acknowledged the issue was on their side – it was a problem between the chair and the keyboard.”

Check Point and Sourcefire announced the cancellation of their deal on Thursday.  This was a very nice deal for Sourcefire and its investors, as Check Point was paying $225 million for the company.  Sourcefire had raised a total of about $33 million so the early investors, including Sierra Ventures, probably made about 15x, NEA which was a round 2 investor probably made about 10x, and Sequoia – which was a round 3 investor, probably made about 3x.

As I sit here pondering this on a Saturday morning, I’m baffled, appalled, and offended by our government’s actions in killing this deal.  I remember having similar reactions when the government was investigating the $5.5 billion acquisition of Verio (a Colorado-based ISP / hosting company) by NTT in 2000.  While I wasn’t an investor in Verio, I knew many of the people there, including several of the key investors, and couldn’t fathom why our government would get in the way of the deal. Thankfully, the Clinton administration finally greenlighted the deal and one of the huge pre-bubble crash Colorado deals got done – just in time.

I’m baffled because of the open source aspect of the situation. Sourcefire’s core products are built on top of Snort, which was created by Sourcefire’s founder Martin Roesch.  While Sourcefire has undoubtably created a significant amount of proprietary (i.e. non-open-source) code in their products, Snort is still an extremely popular and growing open source product and community.  Dear Mr. Government – this means that anyone – including the really bad nasties – can download Snort and take a look at it.  While they can’t take a look at Sourcefire’s products, as long as Sourcefire has any meaningful Snort-based code as part of their system, the thing you proport to be concerned about is irrelevant.

I’m appalled because it makes no sense to me that the US government would stand in the way of the acquisition of a US security software company by an Israeli software company.  Check Point is a well-known, publicly traded (on NASDAQ) and broadly deployed “international company” – they have a huge US presence, employ large numbers of US citizens, and – well – operate in the global software / IT marketplace.  Check Point was funded in the mid 1990’s by two prominent US VC firms – Venrock and USVP (in fact, Ray Rothrock of Venrock and Irwin Federman of USVP still sit on Check Point’s board.)  This type of protectionism is just gross to me and is potentially damaging to the venture business as foreign companies (such as those in Israel, China, and India) are natural buyers of many US-based startups, including those that have significant business with the US government.  If an Israeli-based company can’t buy a US-based security startup, why would the US government let a China-based company do this?  As a VC or an entrepreneur, if you take this out to it’s logical conclusion, you get unhappy really fast.

I’m offended because – as a jewish American and an investor in high tech companies – the notion that our government is willing to block the sale of an entrepreneurial company to an Israeli company because the Israeli company is a threat to US security makes me want to vomit.  This is the same government that recently decided to share civilian nuclear technology with India.  Now, I’m not tied up in the politics of it all, nor do I want to be, but when I step back and look at it from an entrepreneurial perspective, and think about all of the Israeli security technologies that have made their way into US products (and – in a number of cases – become meaningful US-based companies), I just feel like someone in Washington needs a major history lesson.

While Check Point and Sourcefire have put a good face on the situation, I’ve got to believe there are some very unhappy people in Maryland and on Sand Hill Road today.

David, we missed you.

My good friend Matt Blumberg (CEO of Return Path) and his lovely wife Mariquita (aka “NY Marathon 2005 Support Crew Co-Leader”) love to travel around the world.  Rather than subject us to long videos of their trip, they conveniently put their amazing photographs up on the web with extensive commentary.

Their most recent trip was to India.  This was Matt and Mariquita’s first trip there so the photos include an extensive history lesson.  It appears to be a little warmer than their trip in 2002 to Antarctica.

Beautiful stuff guys.  Welcome home.

Jason and I have mentioned accredited investors several times in various postings on this blog.  However, after I received the following question, I realized we had never talked about why non-accredited investors are an issue for a company.  The question I received follows:

Do you have any stories or insight into the dangers of non-accredited investors? I’m currently attempting to work out a messy deal where some of the original (and potentially very unhappy) investors come in all flavors – sophisticated and accredited, unsophisticated and accredited, sophisticated and unaccredited, and of course, unsophisticated and unaccredited.  I’d love to see a post on the subject in your blog, should you have the insight and interest.

For those of you that don’t know what an accredited investor is, the SEC provides a very clear definition.  In general, unaccredited investors can pose a number of problems.  You’ll have to ask your lawyer for the nitty gritty, but we’ll cover the three major points in this post. 

First, have you done a proper private placement?  One has to jump through many more hoops to sell securities to unaccredited investors.  Many times, what appears to have been done correctly, later turns out to have been done poorly or incorrectly.  This is particularly troubling because at any time, these unaccredited investors have the right to rescind their investment in the company.  This is a ticking time bomb that can explode, especially if the company is underperforming.  It’s a very dangerous thing to have investors around that can unravel a deal with 20/20 hindsight.  Let’s assume, however that your lawyers got it right, which leads us to the next issue.

What happens on an acquisition?  Regardless if the placement was done correctly to the unaccredited investors, an acquisition of the company could pose big problems.  Take the case where a private company acquires the company for stock.  Handling the unaccredited investors can be extremely difficult.  The unaccredited investors need a purchase representative to trade their stock for the acquiring company stock, or the stock needs to be registered or subject to fairness hearings.  Alternatively, the buyer will insist that they don’t want unaccredited investors holding stock in their company, in which case the seller needs to come up with cash to buy out the unaccredited investors. We’ve seen cases where the buyer completely refused to deal with the unaccredited investors and the accredited investors on the seller’s side had to invest new cash in the company to buy out the unaccredited investors.  Public company acquisitions can present similar problems if the stock being issued in the acquisition is not registered.  Basically, your garden variety mess.

Finally by nature, unaccredited investors are generally unsophisticated.  This might be the most concerning issue of having unaccredited investors into your company.  By nature, they are less experienced in these types of investments and have less money to invest than others.  What you normally get are more skittish investors whose emotions rise and fall with every piece of good or bad news from the company.  When things turn bad, “unsophisticated investors” – who often didn’t realize that they could lose 100% of their investor – become irrational or hostile, in an already difficult situation for the company (i.e. the company is failing.)

Now – just because an investor is accredited doesn’t mean he is sophisticated.  The basic message is always the same – know who your investors are and what their past behavior has been like, especially in difficult circumstances.  However, especially in early stage companies, try to insure that all of your investors are accredited and – if some aren’t – that your lawyer has done a proper private placement to eliminate any issues associated with the actual financing.

I do a lot of short phone calls and meetings.  I try to organize them around “random days” where I spend the majority of the day meeting and talking to people where I don’t have a specific agenda.  Often – they have a specific agenda (which is good).  However, many have no idea how to communicate their agenda – or what they want to accomplish – in either an efficient or effective manner.

I have my assistant schedule these calls for 30 minutes each.  Some take 5 minutes, which gives me time to do other stuff (email, other phone calls); some take 29 minutes.  I’ve learned over the years that there is rarely a reason for a meeting / call to go longer than 30 minutes unless there’s a clear pre-set agenda so – rather than struggle with bigger time windows, I simply stop after 30 minutes and – if it needs to go longer, figure out another time (this rarely happens.)  Interestingly, I’ve tried to get this down to 15 minutes and have not been able to get into a full day rhythm with this – there’s something magical about the 30 minute window (at least for me.)

I had a full day today – 10 scheduled calls, a lunch, and a bunch of random calls and email before I headed out to the airport.  As I was driving to the airport after an ineffective call (due to the lack of good cell coverage on E-470), I was pondering several of the calls I’d had earlier in the day.  One was good (where good is defined as useful to both parties); one was not so good (not so good = not useful to at least one of the parties involved.) 

My post lunch call was the good one.  I had an enjoyable lunch catching up with Jonathan Weber of New West Network and was running a few minutes late.  At 1pm, I got a call and told the person that I was scheduled to talk to that I was running a few minutes late, I apologized, and asked if it would be ok if I called him back at 1:15.  As I was dialing him at 1:15, I noticed that he had just emailed me a WebEx invite.  I clicked on it as he was answering and joined the meeting.  I apologized again for running late, told him I had until 1:30, and suggested we get right into it.  We hadn’t ever talked before and had been introduced a week earlier by a mutual friend.  He reminded me who introduced us, told me he could do the presentation in five minutes, and we could spend the balance talking.  He then told me his goals for the call (simple and well articulated) and dove into the presentation.  He was true to his word and around 1:21 (yes – I looked) we talked about what he’d presented to me.  I asked a few questions and gave him what I hope was useful and encouraging feedback.  At 1:29, he told me that he appreciated the time and would be in touch.  I hung up impressed, interested, and knew I’d be responsive if he ever asks for anything.  I was also appreciative that he was gracious about me being late – I was the one that caused the time to be extra-compressed, yet he was still able to accomplish his goal.

I churned through some additional stuff and then had the not so good call later in the afternoon.  Again, my assistant had scheduled it for 30 minutes, which the other party knew.  I hopped on the conference call at the appointed time.  As with the earlier call, I had been introduced to these folks by a friend (a different one), although I was less clear on what they were up to since it had been a few weeks and I couldn’t quickly look up their web site (they didn’t seem to have one yet – at least not an obvious one.)  We spent a few wasted minutes on pleasantries and then one of them started talking.  After five minutes of listening to a high level description about something that I didn’t understand that had something to do with the company they were working on which was as yet undefined, I interrupted and asked him what his goal for the call was.  After an unnecessarily long explanation, I determined that they were approaching me as a potential investor.  I then asked him to try to be more direct about what his business did, what stage they were at, what they had accomplished, and what big opportunity they were going after.  I listened – with a few questions – for another 10 minutes and still didn’t really understand what they were trying to do.  I decided to change my approach and understand how far along they were.  It became clear that they were very early, had a big vision, but were working hard to get a demonstration system up while looking for short term money (e.g. “within the next 30 days”) to fund them through the creation of the demo.  By the time we got here, 25 minutes had passed.  I communicated that while the general thing they were talking about was something I could become interested in (e.g. it was a software company, not an China-based manufacturer of drill bits), I wasn’t interested in trying to get more engaged at this point based on (a) their geography (I really only want to do very early stage stuff that is close to home), (b) my lack of understanding of what they were going after (e.g. they didn’t “get me” in the first meeting), and (c) their timetable (I wasn’t interested enough to engage at a level now where I could help with a financing in the next 30 days.)  I did offer to reconnect when their demo was ready, take a look, and try to understand better what they were up to.  We then spent the next five minutes in the awkward dance where they were trying to find something to “get me really excited” while I was trying to politely end the call, having made my decision that I didn’t want to spend any more time on this now.  We eventually untangled ourselves and said polite goodbyes.  Hopefully they’ll drop me a note when they have a demo and we’ll take another shot.

Now – the not so good phone call wasn’t “horrible”, it just wasn’t effective.  I don’t mind the couple of minutes of chit chat at the beginning, but it’s real time being wasted for no particular reason.  Since we don’t yet have a relationship, we’re not “catching up” on anything.  I’m often on the receiving end of the request for time, so this becomes the other person’s first impression time with me.  Why waste it with idle banter?  Instead, use the first 60 seconds to get my attention, remind me how we got connected, and tell me what you want to accomplish with the call.  We could have then gotten – in 5 minutes – to the same place we got in 25 minutes. It’s the same at the end of the call – let’s wrap it up, figure out what the proverbial “next steps” are, and get on with it.