Tuesday, April 18, 2006

Concept to Company Update - Great Event

Tonight, VLAB and Hummer Winblad hosted a wonderful panel at Stanford Business School titled Concept to Company: Strategies for Swimming with the Sharks.

This year's Concept-to-Company event focused on the business formation of Cittio, a network management software company founded in 2001 and funded by Hummer Winblad last year. Ann Winblad moderated the panel, Jamie Lerner, Cittio's CEO served as the keynote speaker, and the panelists included Sandeep Johri, Oblix's founding CEO and currently HP Software's VP Strategy and Business Planning, Deborah Magid, IBM Software's Director of Strategy, and Elisabeth Rainge, IDC's Network Management analyst.

The evening's conversation centered on how start-ups best can enter mature markets dominated by incumbents. Network management is a $5+bn software market owned by IBM, HP, BMC, and CA. Jamie set out to answer how best to archetype an offering innovation, sales and delivery model, and marketing message that resonates with buyers in a market long controlled by larger vendors.

Jamie's advice centered on when to raise VC money, how to pick your VC partner, how to pitch VCs, how to sell against giants, and how to handle incumbents' FUD.

When To Raise VC Money
Jamie believes in bootstrapping companies. While I believe this is not a requirement, Jamie believes start-ups are best served by eliminating key market, customer, and product risks prior to soliciting venture firms. Jamie calls his strategy the "just add water approach;" walk in to meetings having validated a big market, shipped a solid product, sold paying customers, operated a well managed business, and hired a good team. He believes entrepreneurs should validate the following five hypotheses:
  • Demand - select a large, established market to operate in and prove the innovation
  • Product - develop a complete and working product
  • Customers - referenceable accounts, good logos, and revenues
  • Profitability - prove efficiency, discipline, and frugality
  • Team - key players in place to grow
It is worth noting that Jamie met all five criteria before he looked for funding. Quite simply put, he focused on providing easy to use, easy to deploy, easy to install, and simply priced products into a market long burdened by bloated products that poorly served the customer. The pain proved to be so great that he sold Gymboree and First Republic on full enterprise deals before he hired a single employee.


How to Pitch VCs
Jamie suggested the following structure for good pitches:
  • 10 slides
    • be crisp, clear, and articulate about the market need, offering innovation, and sales and delivery model
  • 5 year GAAP pro formas
    • commit to the intellectual exercise of building, with the management team, and model that lays out in detail the business model and key assumptions that drive the model
  • Demo
  • Raise amount and use of proceeds
  • Be comfortable talking extemporaneously about the business
  • Practice and iterate

Not All VCs are Created Equal

Jamie suggests that entrepreneurs select VC firms that match the following criteria:
  • Domain expertise - mentorship, advice, market knowledge, relationships, strategy, been there/done that
  • Relationship - mutual trust and respect, genuine friendship, gut instinct positive
  • Everyone rows - access to all members of the investing firm
  • Patience - recognition that there is no deadline for success and that the best plans may take longer than originally forecast
  • BOD - work hard to ensure a productive BOD dynamic and use VC BOD members to recruit value-added independents
  • Remember that you need the BOD and VCs when things go wrong and having experienced VC investors and strong relationships will be critical in navigating the storms
Selling Against the Big Guys
In order to sell against giants, Jamie laid out the following suggestions
  • He joked that selling against incumbents is more like jetskiing with whales than like swimming with sharks
  • Focus on competing with bloated products that are overly complex to install, overly complex to price, and where the cost of sale requires very large deal sizes
  • Sell into a market frustrated, scarred, and damaged by the incumbent vendors - lots of shelfware and history of failed implementations
  • Pick markets where the incumbents illustrate a history of incompetence evidenced by frequent CEO changes, failed mega acquisitions, failed customer projects, etc
  • Don't bloody your nose - sell where they cannot afford to compete (mid market or via delivery models they cannot afford to mimic). Don't take them head on - nip at their heels
  • Sell deal sizes their sales teams, cost of sales, and quota models cannot support
  • Leverage start-ups strengths
    • Speed, agility, service
    • Executive sponsorship
    • Pricing flexibility
    • Attention and support
  • Fight FUD and vendor viability attacks
    • Sell your business fundamentals when they question your viability and staying power
    • Walk the customer through the clear demand for the product, customer references and case studies, profitability or revenue run rate, and quality of the team
Jamie and the panel did a great job and for those of you who could not make it, I hope the notes above provide some insights into Jamie's great advice and bases for his great success to date.

2 comments:

  1. Will:
    absolutely fantastic advice on competing against the big boys. I believe all entrepreneurs would benefit from reading Jamie's tips.

    Also, I wouldn't argue his points about when to raise capital from VCs as he describes the ideal series A investment quite well. However, I would suggest that the challenge is building a company meets these criteria on little or no OPM. Despite the rumors of easy money on SHR, it definitely is not an easy task even with a little bit of angel money.
    -Andrew

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  2. Jake Kaldenbaugh3:55 PM

    Will,
    Thank you for providing your notes. I meant to go to the event, but had other priorities. The plan is priceless. However, if I had to pick an area to disagree about, it would be that it sounds like Cittio was already a full-blown Series B or C when they went for funding. Jamie wasn't kidding when he talks about bootstrapping; I hope that translated into a healthy valuation!
    I think it's pretty clear that anyone who walks in with a plan that has all of the components he recommended would be funded in a VC heartbeat. I think the real skill is being funded if you're missing some of those key components.

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