If you like listening to me to talk (hi mom) or are interested in search, Eric Olson has his second VentureWeek podcast titled “Search” up. This one only had two Dave’s on it (compared to three on the first one). David Hornik (August Capital), Dave McClure (SimplyHired.com), and Jeff Clavier (SoftTech VC) provided some useful content while I tried to ignore the idea that it was 11:30 at night on the east coast and time for me to go to bed.
Ross (and everyone else that has one) appears to love their Nano’s but they have this little annoying “scratching problem.” I’m trying to encourage Ross to stop playing with his Nano long enough to play with something new, but so far I’ve failed. He has, however, found a solution to that scratching thing.
As you all know I recently got an iPod Nano. As you also probably know from my review the iPod Nano has had some rather bad screen scratching issues. After getting some feedback from users on the invisibleSHIELD line of protectors I decided that I’d give them a try. I’m very glad that I did.
While other protectors look cool (some with cartoon characters on them) this one seemed to get better reviews. I assumed it would work like many of the other “stick-on” protectors where you peel the film off and have to be careful to stick it on without any air bubbles. I wrong (and pleasantly surprised). While it’s very hard to apply it, once you get it on it is well worth the effort. Take a look at the videos demonstrating the material – it’s actually the same material that is used for clear bras on cars.
Once you get it on the Nano (it took me about 30 minutes) you have to let it dry overnight so the glue sets. Once it’s dry, it’s virtually invisible. It does make the Nano a little less smooth – which really is a good thing since it was hard to use the jog wheel when it was that slick anyway. I’ve shown it to several friends and no one could tell the protector was on it until I pointed it out. If you have, or are planning to get, a Nano (or any other iPod for that matter) get one of these to go with it.
Dear Ross – ok – I’m protected – now give me something new and exciting to play with.
While it’d never play out the way it did in today’s TSA / Patriot Act world, the next time someone says “you’ll never be able to do that”, simply refer them to David Cowan’s magnificant story of his trip to Athens in 1991. I remember David telling me the story in – well – 1991 – and it holds up well 14 years later. Back when you could be “the last person on a flight” and still make the flight, Amy was constantly annoyed at me when we travelled together. Whenever I cut it too close, I simply reminded her of David’s story. Now I can simply point her to his blog post.
My partner Heidi pointed out that the analogy (or is it a metaphor – I can never remember – another one of my brain quirks) that I used in my Letter of Intent: Structure – Asset vs. Stock post could have been better. An asset (or “artichoke” deal) is actually like eating the artichoke heart and leaving the leaves untouched since the heart is the good part and the leaves have thorns.
The recurring theme of the power of word-of-mouth marketing came several times for me yesterday. My day started out with an email from Raj Bhargava, the CEO of StillSecure, that pointed to an unsolicited positive review of StillSecure’s StrataGuard product on an end-user’s blog. Later in the morning, I had a meeting with a new consumer product company with a cool invention that was created by a friend / neighbor. They had built 25 prototypes and had 24 of the 25 users of the prototypes rave about the product. At the end of the day I had a meeting with a $400k two person software company that is trying to figure out how to accelerate their growth.
I had the word-of-mouth theme in my head from the StillSecure product review post. In my first meeting, I listened as the entrepreneurs told me they needed a $2 million financing to do the first production run of the product (1,000 units) done, get a marketing guy hired, do “marketing”, build channel relationships, and see if things worked. If they did, they either needed $0m of additional financing or $8m of additional financing, depending on how they rolled out the next wave of marketing.
In the second meeting, the founder told me that of all the marketing approaches he tried (trade shows, print ads, cold call of industry lists), the only one that was working effectively was Google AdSense. In this meeting, he suggested that he was going to try a bunch of new (and the same) things. When I probed, I found out that his existing customers are ecstatic with the product, the company has plenty of leads, but he can’t figure out how to motivate the leads to quickly turn into customers.
In both cases, I kept hearing the word “marketing” used generically. I despise the word “marketing” – it’s often the weakest link in a startup company. “Marketing” is vague and non-specific, often poorly executed and measured, and usually a huge waste of money relative to the output. Oh – and while there are plenty of “tried and true” approaches (that any marketing consulting would be happy to charge you plenty of money to explain to you) – the effective approaches have been evolving a lot lately, especially as user-generated content becomes ubiquitious.
Several years ago, I suggested to my portfolio companies that they fire their VP of Marketing and hire a VP of Demand Generation (it could be the same person if the VP of Marketing was willing to accept a quota and meaningful, measurable variable compensation.) Hopefully, this VP of Demand Generation understands the incredible power of having your customers so happy with your product that they’ll talk about it online. To see an example of this, FeedBurner has been doing a great job of highlighting this with their Publisher Buzz blog where they link to posts from “people who kind of dig FeedBurner.”
I suggested to both companies that I met with that they stop talking about “marketing” and instead focus on getting their existing customers to tell the world about their product through blogs, references, online interviews, and at cocktail parties (these are both products that the target customer will ultimately start talking to a friend about over a drink).
Try something – for 24 hours, substitute the phrase “lead generation” for “marketing” in every conversation you have and see what happens.
While price is usually first issue on every seller’s mind, structure should be second. While there only two types of deals (asset deal vs. stock deal), there are numerous structural issues surrounding each deal. Rather than trying to address all the different issues, Jason and I decided to start by discussing the basics of an asset deal and a stock deal.
In general, all sellers want to do stock deals and all buyers want to do asset deals. Just to increase the confusion level, a stock deal can be done for cash and an asset deal can be done for stock – don’t confuse the type of deal with the actual consideration received (if you start getting confused, simply think of an asset deal as a “artichoke deal” and a stock deal as a “strawberry deal.”)
Sarcastic venture capitalists on the seller side will refer to an artichoke deal as a situation “when buying a company is not really buying a company” (kind of like eating the artichoke leaves but leaving the artichoke heart untouched.) Buyers will request this structure, with the idea that they will only buy the particular assets that they want out of a company, leave certain liabilities (read: “warts”) behind, and live happily ever after. If you engage lawyers and accountants in this discussion, they’ll ramble on about something regarding taxes, accounting, and liabilities, but our experience is that most of time the acquirer is just looking to buy the crown jewels, explicitly limit their liabilities, and craft a simpler deal for themselves at the expense of the seller. We notice that asset deals are more popular in shaky economic times, as acquirers are trying to avoid creditor issues and successor liability. One saw very few asset deals (in proportion) in the late 1990’s, but in early 2000 artichokes became much more popular and there is still a significant hang over today.
While asset deals are “ok” for a seller, the fundamental problem for the seller is that the “company” hasn’t actually been sold! The assets have left the company (and are now owned by the buyer), but there is still a shell corporation with contracts, liabilities, potentially employees, and tax forms to file. Even if the company is relatively clean from a corporate hygiene perspective, it may take several years (depending on tax, capital structure and jurisdictional concerns) to wind down the company. During this time, the officers and directors of the company are still on the hook and the company presumably has few assets to operate the business (since they were sold to the buyer).
In the case of a strawberry deal, the acquirer is buying the entire company. Once the acquisition is closed, the seller’s company disappears into the corporate structure of the buyer and there is nothing left (except possibly some t-shirts that found their way into the hands of spouses and the company sign that used to be on the door (oops – did I say that?) just before the deal closed.) There is nothing to wind down and the historical company is well – history.
So is an asset deal “bad” or is it just a “hassle”? It depends. It can be really bad if the seller has multiple subsidiaries, numerous contracts, employees with severance commitments, disgruntled shareholders, or is close to insolvent. In this case, the officers and directors may be taking on fraudulent conveyance liability by consummating an asset deal. It’s merely a hassle if the company is in relatively good shape, is very small, or has few shareholders to consider. Of course, if any of these things are true, then the obvious rhetorical question is “why doesn’t the acquirer just buy the whole company via a stock deal?”
In our experience, we see stock deals the vast majority of the time. Often the first draft of the LOI is an asset deal, but as sellers that is the first point we raise and we are generally successful ending up with strawberries except in extreme circumstances whereby the company is in dire straits. Many buyers go down a path to discuss all the protection they get from an asset deal – this is generally nonsense as a stock deal can be configured to provide functionally equivalent protection for the buyer with a lot less hassle for the seller. In addition, asset deals are no longer the protection they used to be with regards to successor liability in a transaction – courts are much more eager to find that a company who purchase substantial assets of another company to be a “successor in interest” with respect to liabilities of the seller.
The structure of the deal is also tied closely to the tax issues surrounding a deal and – once you start trying to optimize for structure and tax – you end up defining the type of consideration (stock or cash) the seller can receive. It can get complicated very quickly and pretty soon you can feel like you are climbing up a staircase in an Escher drawing (or running the Manhattan part of the New York Marathon – each time you turn you expect to get to go downhill and see the end, but instead you continue to wind uphill forever – even when you’ve turned 180 degrees and are running the other direction.) We’ll dig into tax and consideration is other posts – just realize that they are all linked together and usually ultimately impact price which is – after all – what the seller usually cares most about.
Have you ever wondered how the splits between selling shareholders in a secondary offering get negotiated? Tom Evslin covers it flawlessly in Chapter 7 of his blook Hackoff.com: An Historic Murder Mystery Set in the Internet Bubble and Rubble. I’m loving Tom’s blook (which will eventually be a real book) you can pre-order hackoff.com at Amazon (Tom promises that it will be a signed copy).
If you are only interested in how the secondary works – hop online and read Chapter 7 – Episode 1, 2, and 3. Alternatively, if you are interested in a potential view of how – if you buy DSL from SBC, they will someday, if they can, charge you or Google extra if you want to Google over that DSL connection – then take a look at Tom’s blog.
The man knows of what he speaks. Tom – good stuff all around.
Today the Houston Chronicle went live with FeedBurner’s feed management service.
When I invested in FeedBurner, one of my premises was that traditional media would rapidly adopt RSS for content distribution and – as part of this adoption – would aggressively look to outsource part (or all) of the feed management activities to a company (e.g. FeedBurner) that had built out a broad series of feed management tools and services. I had real conviction about this (as did Dick Costolo and the FeedBurner team) so I didn’t bother calling anyone that I knew in traditional media – given how early things were with regard to the adoption of RSS, most of the people I knew would have said “tell me what RSS is again?”
A potential investor was less convinced and talked to a number of his traditional media friends. They all said – unambiguously – “no way – we’d never outsource that – what that RSS thing is.” Of course, a year later, all the folks that this potential investor had talked to has outsourced their feed management to FeedBurner.
This is a classic challenge in the VC “due diligence” process. All VCs (including me) want validation that the product, service, or technology will be adopted by the market targeted by the entrepreneur. However, in very early markets, this is extremely difficult to validate and more often than not you end up with “potential customer bipolar disorder” – either customers say (as in this case) “no way – not interesting” or – alternatively – they say “definitely – I’d love that” but leave off the key phrase “if it was free.” Obviously, bad decisions can be made if one places an inappropriate weight on this variable.
In an early market, I’ve decided that this validation isn’t important to me. I don’t blindly invest – I think hard about it – but I recognize that whatever market data I collect could easily be a complete head fake. As a result, I look for analogous situations in older markets (especially ones that I have experience with), use my instincts, and think hard about how things might play out. I recognize – a priori – that I could be wrong and I’m willing to take that chance.
In FeedBurner’s case, I was right. FeedBurner has already built up an incredible customer base of traditional media companies who are outsourcing their feed management to FeedBurner. Look for more announcements coming soon – the Houston Chronicle is simply a good example of how deep into mainstream media (the Houston Chronicle is a top 10 newspaper and is part of Hearst Corp) this can go.
Several weeks ago, Postini announced a new product called PTIN Access – enabling enterprises, solution providers, and OEMs to have access to the Postini Threat Identification Network. PTIN is Postini’s real-time sender behavior analysis for email threat prevention and is the core for Postini’s remarkable email security service (which I like to refer to as “magic” as this is what it’s like to go from a spam-filled inbox to no-spam at a flip of a switch.)
Today, Postini announced that Return Path will use data from PTIN to support the Return Path Bonded Sender email accreditation service. While whitelist and blacklist services have existed for a long time, they don’t work very well anymore in today’s spam filled world. As a result, legitimate emailers get blocked (or categorized) as spam regularly and – in an effort to deal with this via whitelists – spammers exploit these lists and bad stuff gets through. There’s a tough balance here as directory harvest attacks, phishing attacks, virus, and ever more sophisticated spam approaches increase the pressure on email security providers, resulting in “tighter filters”, which then blocks legit email, and on and on it goes.
Return Path has been at the forefront of the email deliverability issue. Postini has been at the forefront of the email security / anti-spam issue. I’ve been involved in a number of investments around email over the past 10 years and know – as well as most – how the level of complexity around email has increased as it has become pervasive in our lives. It’s completely logical and exciting to me that Postini and Return Path would work together to help separate good email from bad email.