Posts from 2010

On Sunday night I sat down at the dinner table after my family headed upstairs and I spent three hours cleaning out my email inbox. When I started I had over 1200 unread non-spam emails. Three hours later I had the number down to 800 and I was wiped out. I went to bed and decided to declare email bankruptcy.

From early April to the first week of May, the number of unread emails in my inbox grew from a manageable hundred to an unmanageable thousand. There wasn't one event that precipitated this situation, it was a number of situations. This happens to me fairly regularly.

Here's how I declare email bankruptcy: I have a list of about thirty people who I email with regularly and who are my most important email relationships. I use two web services, Gist and Etacts, to tell me who these people are. Both are useful. I then do gmail searches on their names and make sure that I have no unread and unarchived emails from them. It would be great if one or both of these services could auto-generate a gmail search on all thirty addresses for me. It would be even better if gmail had this feature built into the service.

Once I have made sure I've read and answered all emails from my thirty most important email relationships, I select all and hit archive. It is a tremendously satisfying feeling.

I am sorry if you sent me an email in the past five weeks and I did not respond. There are over 800 emails like that and so you are not alone. If it is important that I see your email, please email me again.

Longtime readers know that I struggle with email. I hate it but I cannot operate without it. I have gotten hundreds of suggestions on how to become more efficient with email and I have adopted many of them. But the more efficient I get with email, the more of it that comes in. 

My friend Stu Roseman is hacking together yet another web service to make email easier and I was testing it last week. He was seeing my email flow because of that and at one point he sent me an email which said "I am in awe that you can handle this amount of mail."

I am not in awe, I am in pain. And it is a pain that never goes away. That's email and that's why I am yet again bankrupt.

Today and for the next two weeks, we are going to talk about budgeting on MBA Mondays. Since the budgeting process works differently in companies of various sizes, we are going to focus on three company sizes; 10 people, 75 people, and 150 people. Today we will talk about the 10 person company scenario.

As I said in a previous post, I have been working with Matt Blumberg and Jack Sinclair, CEO and COO/CFO of our portfolio company Return Path on these budgeting posts. I have been involved with Return Path for ten years now and I've watched Matt and Jack run excellent budgeting processes and so we are getting the benefit of their work and learning in these posts.

Last week we talked about projections. It is important to run a projections process before you turn to budgeting. Think of budgeting as a refinement of the projections process where the goal is to predict what is going to happen in a particular calendar year.

I believe that budgeting should be done on a yearly basis. If you want to start budgeting and you are in the middle of the year, that is fine. Just budget for the rest of the year and then do your first full year budget in the late fall.

The late fall is budgeting time. October and November are the best months to do it. If you have a board, you should be able to present your budget for the next year to the full board in December so they can approve it before the year starts. If you don't have a board, then you should be able to lock into a budget with your team in December.

The budgeting process starts with a financial model. If you have done projections, then you should have a financial model already built. If haven't done projections, then go back to the projections post, follow the directions, and do some projections. Then come back and read this post.

The first step in budgeting is to review the key business metrics and lock them down based on what is realistic for the next year. Be very realistic. A good budget is a conservative budget. In a ten person company, the budgeting process can be done by a couple of the senior managers, typically the CEO and the most financially savvy of the other team members. These two people can run the process all by themselves without any input from the rest of the team. That will change quickly as the company grows, but in a very small company you do not need to involve the entire team in budgeting.

If the company is pre-revenue as many 10 person companies are, then the focus will be on hiring and people costs. And the budgeting process will largely be about spending and how many people the company can hire and how much money the company can spend and how long its cash will last before needing another round of funding.

If the company has revenues, they will not likely be large yet at 10 people, so the revenue forecast will be a bit tricky. In the first few years of revenue generation, the revenue model changes a lot and the drivers of it change too. I would encourage everyone to be conservative about revenue budgeting early in a company's life. Most budgets are missed because revenue does not come in as planned.

Make sure to include a cash line item in your budget. Most budgets are done as profit and loss statements which is how they should be done. But you should back into a cash projection based on the profit and loss numbers and include that line item in your budget. If this is new material to you, go back to my posts on profit and loss, balance sheet, and cash flow to see how these three statements work together.

Once the budget has been locked down and approved by the board and/or by the senior team, you should share the budget with your entire company. Some executives don't like to share the entire line by line budget with the team and I can understand that. Some executives don't like to show a cash line that runs out with the team and I also understand that. But you should at least show the key business metrics and some of the most important line items in the budget with the entire company. This will be their roadmap for the next year and it is important that they understand it if they are going to be expected to help you deliver it. 

All that said, I favor being as transparent as you can possibly be with your company. It is hard to hide information from the company. The important information leaks out eventually and if and when it does, you won't be there to provide context. So the more information you provide, the better off you will be.

Once you have a budget, you need to measure yourself against it. Each month report the actual numbers versus the budget and track how you are doing against each key business metric and line item in the budget. At some point during the year, you may want to do a reforecast. We will talk about that exercise in a few weeks.

Next week we will talk about how this process changes as you grow to 75 people. It a very different process at that point.

A little over a week ago, I posted that I am looking for a "killer multi-function printer" and asked for advice. I received a fair bit of advice, 120 comments so far. This post is an attempt to sum up the advice and then I'll tell you what I decided to purchase.

The following multi-function printers were most frequently mentioned in the comments:

1 - Canon Pixma Family – there are so many Pixma printers to choose from it makes your head spin. Five of Amazon's 10 most popular multi-function printers are Pixma models.

2 – Brother MFC Family – very popular choice among the readers of this blog.

3 – HP OfficeJet Pro 8500 – the most controversial printer among the readers. Quite a few of you have had bad experiences with HP printers. But HP was the only manufacturer that bothered to leave a comment. Big props to HP for that.

4 – Lexmark – mentioned by several with strong references.

5- Epson Artisan and Epson Workforce – not mentioned by many, but the ones who did love their Epson printer.

It seems like Canon, Brother, and HP are the "big three" of multi-function printers. They have the most models and they were most frequently mentioned in the comments. But I got negative comments about each of them from multiple people. And to be honest, it was confusing deciding which of their products was right for us.

So I made up a list of the top products from the big three and added several from Lexmark and Epson to it and went looking at online reviews. This one from consumersearch was helpful and got me seriously thinking about the Epson Workforce.

I then went into the Amazon reviews for each product and looked at specific areas that matter a lot to me (like pull and push scanning over the network). The size of the printer is also a critical issue for me.

In the end after I did all of this work, we came out in favor of the Epson printers. We like both the Workforce and the Artisan. This review from About.com tilted the balance and we are going with the Epson Artisan.

One thing that came out loud and clear in the comments is that a dedicated scanner is also a good idea. And the one that pretty much everyone recommended is the Fujitsu Scansnap S1500. You can get it for Windows or Mac. We are getting the Mac version for our family.

So that's it. I hope you all found this follow-up post helpful. I sure found all your comments helpful in my search for the best printer for our family.

Video: Patent Absurdity – Dokumentarfilm (28:54)

I found this on Brad Feld's blog this morning. It shows why software patents and business method patents are a problem for the innovation economy.

Yesterday the stock market dropped almost 1,000 points intraday before rebounding late in the day. Does this matter to the world of entrepreneurship and startups? Yes and No.

I’m no expert in the stock market but I read a bunch of experts blogs. I liked this from Steve Place:

High Frequency Trading broke, then saved the market

This will probably be the most controversial thing I’ll say. Quant firms have been keeping the market in a fairly low volatility state as they seek mean reversion and arbitrage strategies. By doing this they provide liquidity in the market for institutional players and funds. Their risk models are based on statistical distributions, behavioral finance, and other voodoo. When these models go out of wack, they can exacerbate the situation– that did occur in 2008 when liquidity dropped out of the system.

However, I feel that program trading (eventually) provided the liquidity for the snapback of this rally. If it weren’t for quants betting on extreme mean reversion, we would have held a much deeper selloff comparable to 1987. What evidence do I have of this? The sheer snapback of the price in such a short amount of time. It certainly wasn’t fundamental traders who all of a sudden found “value” in the market with a trailing P/E. The only sort of quick analysis that provides that kind of price action are done by non-humans at quantitative firms, and they saved the market from something much, much worse.

What Steve is saying is that computer driven trading drove the plunge and then drove the rebound. It was not human trading stocks that caused the price action. It was machines that had been programmed by humans.

There’s a lot of talk about machine to machine interaction coming into our lives. Yesterday afternoon at 2:45pm, we saw what that looks like. For the people who make their living trading in these markets, it was a sick feeling in their stomaches. For the rest of us, I don’t think this is too much of a big deal.

However, there are some big issues in the capital markets right now. From the bottom last April to the top a few weeks ago, the S&P 500 was up about 70% in a year. It was close to getting back to its pre meltdown high. Maybe the markets came back to far too fast. Its not like we are past all of our problems.

Money is cheap, too cheap. You can’t get a yield anywhere. As my friend Howard points out, junk bonds trade at 8%. Money is going to get more expensive soon. And that will not be good for the stock markets.

And then there’s the coming regulation of banks and brokers, which will likely put pressure on the stock markets. 

So what does matter to the world of entrepreneurs and startups is that stock markets may not have much more room to go up. I’ve been thinking that we are in for a long period of low public equity returns. I have no idea when that will happen but the macro environment just doesn’t look that great to me.

That doesn’t mean that you can’t make money with your startup and it doesn’t mean that you can’t make money in venture capital. The returns in startup land come mostly from taking nothing and turning it into something. If you take hard work, sweat equity, and a few million bucks of startup capital and turn that into a business producing $5mm a year of cash flow, then that is value creation of the old fashioned kind and it will work in any market environment.

But it also means to me that we should not be banking our business on the IPO exit. The public markets are a fickle thing. And it looks like machines are running that show now. I’m more optimistic about institutions turning to the private markets where capital is still traded by humans. I believe the secondary market where institutional private capital comes into the cap tables of startups and provides liquidity to founders, angels, and early stage investors is the next big thing for liquidity in the startup business and I am pleased to see that market continue to develop nicely.

So I don’t think the “crash of 2:45pm” as our friends from StockTwits are calling it matters much to those of us working in the world of startups, but it may be indicative of things to come (as markets tend to be) and it is worth figuring that part out.

The WSJ has a story this morning that FCC Chairman Julius Genachowski has decided to move forward with an effort to "regulate broadband Internet." Many people, including readers of this blog, think regulating the Internet is bad for business. I don't and here is why.

The FCC is already on record that they have a very lightweight regulatory framework in mind for the Internet. In 2005, the FCC proposed four very simple rules:

• Consumers are entitled to access the lawful Internet content of their choice. 

• Consumers are entitled to run applications and use services of their  choice, subject to the needs of law enforcement. 

• Consumers are entitled to connect their choice of legal devices that do not harm the network.  

• Consumers are entitled to competition among network providers, application and service providers, and content providers.

In late 2009, Chairman Genachowski proposed two more rules:

• Non-discrimination: ISPs must not discriminate against any content or applications;

• Transparency: ISPs must disclose all their policies to customers.

The six principles are the sum of net neutrality regulation. That is it. This is what Chairman Genachowski intends to push forward on.

But of course, the telcos and cable companies don't want to be subject to these rules and they have been fighting them tooth and nail for years. They complain that they won't be able to invest in their networks. They say that business interests don't support these rules.

Well first and foremost, let me say that I am in business too. And I very much support these rules. And without these rules, investors like me who invest in the "open internet" will not be able to invest anymore. So you can choose between telcos saying they won't be able to invest under one set of rules vs VCs who say they won't be able to invest under another set of rules.

But if you look at history, you can see that telcos have invested very heavily in their networks while under the threat of net neutrality regulation or even in instances when they were under direct net neutrality regulation. The argument is specious and their actions have show that.

But if you look at VCs, you see another story. Look at the mobile Internet from the late 90s until the advent of the app store. Many VCs such as our firm would not invest in the mobile Internet when it was controlled by carriers who set the rules, picked winners, and used predatory tactics to control their networks. Once Apple opened things up with the iPhone and the app store, many firms changed their approach, including our firm. And if you look at the hundreds, maybe thousands, of mobile Internet firms that were VC funded in the first decade of the mobile Internet, when the business was controlled by the carriers, you will see an enormous failure rate and certainly negative returns for the entire sector. Contrast that with the current environment and the difference is striking.

So a lightweight regulatory framework for the Internet is good for business, particularly the businesses that are getting funded today. And it is not bad for the carriers' businesses. There is no mention of pricing in the six principles. The carriers will be able to charge whatever they feel is necessary to finance their network buildouts. But what they will not be able to do is charge on both sides of the network, where they could stifle innovation at the edge. The bottom line is we want the carriers to be able to make money, invest in their networks, and build the broadband internet. But we do not want them to be able to control it and turn it into the kind of Internet that existed in the mobile environment in the past decade.

That is what this fight is all about. And so I would encourage all you business leaders working and investing in the open Internet to stand up and say that net neutrality is pro-business. Because if you don't, the FCC could lose this fight and we'll be in a much worse place. 

StackOverflow announced yesterday that our firm Union Square Ventures led a $6mm round of financing in their company yesterday. My partner Brad is joining Stack's board and he will post about this investment on usv.com sometime this week. 

However, given Kid Mercury's persistent advocacy of niche communities here at AVC, I thought I'd make a couple remarks.

Stack makes StackExchange, a hosted software solution for creating niche communities. It is the software that powers the super popular StackOverflow community for programmers and also communities like ServerFault (for sys admins), SuperUser (for tech enthusiasts), MathOverflow (for math geeks), and many more.

These communities are all about helping each other out. You want to know the magnitude of graham's number? Well then head over to MathOverflow and ask the question and get some help. You want to know about LVM Mirroring vs Raid 1? Then head over to ServerFault and ask the question and get some help.

We think this is a powerful new take on the broadly popular Q&A model on the web. You can go to Yahoo! Answers, Mahalo, or Quora and ask any question. But our bet is vertical communities will make better Q&A sites in the long run as people aggregate around what they know and what they need to know.

So if you have a niche community that is vibrant and in need of a Q&A solution, then look for StackExchange 2.0 which is coming soon. 

I'm headed down to Washington DC today to meet with a number of people in the administration, congress, and the FCC to talk about the internet, information technology, innovation, and the startup economy. I'm looking forward to the trip. I woke up early this morning thinking about our nutty regulatory framework for the Internet.

In the telecom reform act of 1996, there is an important distinction made between telecommunications services and information services. And that distinction is now playing out in the net neutrality debate. The FCC's desire to push forward its National Broadband Plan has run into legal issues around its ability to regulate the Internet which is classified as an "information service." For you legal scholars out there, one is regulated in TItle I and the other is regulated on TItle II of the Telecom Reform Act. And so the big debate is whether the FCC should reclassify the Internet as a telecomm service and regulate it under the same framework as voice services.

I am not going to wade into this fairly technical legal debate. Frankly it is beyond me. 

But I will observe that we are headed toward an era where everything will be delivered over the Internet. I moved into a new home last week and we are currently getting our voice, video, and data all over the Internet. We get our voice from a cloud-based voice provider called OnSip. We are using Boxee to present video we get over the open web. And we get our data from the Internet too, of course.

To illustrate why this is such a better setup, I need only to tell you about my ongoing Time Warner Cable nightmare. Over three weeks ago, I started calling TWC to tell them that I was moving, that I wanted to keep my account, and that I wanted to move my cable boxes with countless hours of recorded video on them. Each phone call ended with someone giving me a different story about why my move request was complicated and a promise to fix the problem. I ran out of time, moved the set top boxes, connected them to the cable that had been installed in my new home by TWC and everything was working fine for 24 hours. But then TWC figured out that I had moved myself and turned off my account. We no longer have cable service and they are coming this week to confiscate our set top boxes with all of our recorded video on them. And what can I do about it? Nothing.

Never again will I put myself and my family under the hostage of a monopoly that is hostile to its customers and their needs. I will certainly get a new TWC account right now because frankly I cannot currently get a bunch of video services that our family enjoys over the open web. But I've built the infrastructure to get video over the open web and I plan to work hard to move our family and their viewing habits onto that infrastructure as soon as the video content companies make their programming available over the open web. I will pay whatever price the video content companies charge to get their programming delivered free of a monopoly distribution system. It is going to happen and I plan to be on the bleeding edge of this movement.

Now that I've gotten that off of my chest, I'll return to the point about voice, video, and data. They are converging onto the open internet. You can easily get them all delivered to you free of any regulated carrier or cable company. You can get them delivered as an "information service." But that doesn't mean that they aren't telecomm services. It's all the same thing. They are all bits coming into your home or office (or car) over a wire or increasingly wireless spectrum.

And so we need a regulatory framework that reflects where we are going not where we were twenty years ago. Honestly, this debate should not be about the FCC's ability to regulate the internet under some arcane definition that was set up a long time ago. We need Congress to rewrite the laws of the land that regulate our communications systems of this century, not the last one.

I'll end with a quote from Google's brief they filed recently in support of the FCC's efforts:

Word 

In last week's MBA Mondays, I introduced the topic that we'll be focused on for the next month or so; projections, budgeting, and forecasting. In that post, I described projecting as a "what if" exercise that is done at a higher level of abstraction than the budgeting and forecasting exercises. I said this about projections:

These are a set of numbers, both financial and operational, that you
make about your business for various purposes, including raising
capital. They are aspirational and are often done with a "what could
be" perspective.

Since projections are not budgets and are much more "big picture" exercises, it is important to use a scenario driven approach to them. I generally like three scenarios; best case, base case, and worst case. But you could do as many scenarios as you like. It's not the results that matter so much, it's the process and the learning that comes from the projections exercise.

If you build your projections with a detailed set of assumptions and if you can assign probabilities to each assumption, you could easily do a monte carlo simulation in which literally thousands, or tens of thousands, of scenarios are run and the outcomes are charted on a bell curve. I don't recommend doing projections this way, but my point is simply that the number of scenarios is not important, it's the process by which you determine the key drivers of the business, the assumptions about them, and the probabilities associated with them.

A few weeks ago on MBA Mondays we talked about key business metrics. It is very important to identify your key business metrics before you do projections. These key business metrics will drive your projections and your assumptions about how these metrics will develop over time will determine how your scenarios play out.

Let's get specific here. I'll assume we are operating a software business and we are selling the software as a service over the internet using a freemium model. Everyone can use a lightweight version of the software for free, but to get the fully featured version the user must pay $9.95 per month. So here are some of the key business metrics you might use in projecting the business; productivity of the engineering team, feature release cycle, current outstanding known software bugs, total users, new free users per month, conversion rate from free to paid, marketing dollars invested per new free user, marketing dollars invested per new paid user; customer support incidents per day; cost to close a customer support incident. These are just examples of key business metrics you can use. Every business will have a different set.

The next step is to lay all of these metrics out in a spreadsheet and make assumptions about them. As I said, I like three assumptions, best case, base case, and worst case. Best case is not the best it could ever be but best you think it will ever be. Base case is what you genuinely expect it to be. And worst case should be the worst it could ever be. Worst case is really important. This is your nightmare scenario.

You then calculate your costs and revenues as a function of these metrics. There are some expenses that will not vary bases on the assumptions. Rent is a good example of that in the short term. But over time, rent will move up if you need to hire like crazy. I would go out at least three years in a projections exercise. Some people like to go out five years. I've even seen ten year projections. I don't think any technology driven business can project out ten years. I am not even sure about five years. I believe three years is ideal.

Getting the assumptions right and building up to a full blown projected profit and loss statement is an iterative process. You will not get it right the first time. But if you build the spreadsheet correctly the iterating process is not too painful. Do not do this exercise all by yourself. It should be done by a team of people. If you are a one person company right now, then show the results to friends, advisors, potential investors. Get feedback on your key business metrics, assumptions, and results. Think about the results. Do they make sense? Are they achievable?

In last week's comment thread we got into a conversation about "top down" vs "bottom up" analysis. Top down is when you say "the market size is $1bn, we can get 10% of it, so we'll be a $100mm business."  I think top driven analysis is not very rigorous and likely to produce bad answers .The kind of projection work I've been talking about in this post is "bottom up" and is based on what can actually be achieved. However, it is often best to take the results of a bottom up analysis and do a reality check using a top down analysis.

So when your best case scenario has your business at $100mm in revenues in year three, do yourself a favor and do a top down reality check on that. No matter how rigorous the projections process is, if the results are not believable then the whole exercise will have been wasted.

Most entrepreneurs do projections as part of a financing process. And it is a good idea to have projections for your business when you go out to raise money. But I would advise entrepreneurs to do projections for themselves too. It is a good idea to have some idea of what you are building to. Make sure it is not a waste of time for you and the team your recruit to join you.

It is true that most great tech businesses, possibly all businesses, are initially built to "scratch an itch." But once you get past the "I built this because I wanted it" and when you find yourself hiring people, raising capital, renting space, it's time to think about what you are doing as a business and having solid projections and a few scenarios is a really good way to do that.