Wednesday, March 29, 2006

Marketing Best Practices

Capital efficiency and return on invested capital are the hallmarks of successful companies. Venture capital is a milestone driven investment model and companies benefit, with respect to dilution, by being able to achieve milestones and value creation on as little capital as practical.

A major area of potential inefficiency and burn is marketing. This post passes on a few marketing performance indicators that are worth tracking to ensure return on the marketing dollar.
At scale, software companies spend 20-30% of revenues on sales and marketing, while start-ups, typically spend 50-60%+. Marketing, when done well, can be a critical driver of sales leads and growth. The goal must be to avoid being in a company where you feel like paraphrasing John Wannamaker, who famously observed, "I know I am wasting 50% of my marketing budget -- my trouble is that I don't know which 50%."

The goal of a start-up's marketing plan should be to drive leads into the sales process. Ultimately, management needs to track the cost per lead and the cost per close. My suggestions are to track the following
  • Programs
    • advertising (home page ads, newsletter sponsorships, banner sponsorships, search engine key words)
    • direct email
    • outbound telemarketing
    • events
  • Costs per program
    • ex $2,000 to sponsor a newsletter geared to the target demographic
  • Reach
    • ex newsletter reaches 12,000 readers
  • Expected response rates
    • ex .5%
  • Actual response rates
    • ex .75%
  • Costs/lead = cost per program/leads from program
    • expected cost per lead = $2,000/60 = $33.33
    • actual cost per lead = $2,000/90 = $22.22
  • Leads/quarter from all programs
  • Average cost per lead/quarter
    • Total programmatic spend/total leads generated
Metric-driven management helps a young company quickly triangulate on what is working and what is not. Tracking costs, response rates, and the contribution of marketing to the success of the business helps make marketing more scientific and its contributions more tangible to the overall goal of reaching the next milestone as efficiently as possible.

Wednesday, March 22, 2006

Looking for a job in VC

In the last month, I have had the good fortune to speak to numerous graduate students regarding finding a job in venture capital. While much has been said about the process already, it appears the demand for guidance is undiminished. This post summarizes some of the advice I am giving people.

First, asking for how to get into VC is akin to asking how to get into medicine. Adam Smith famously stated that specialization is a function of market size. The VC market, while not as large as the health care industry, enjoys broad specialization and focus. As with medicine where one can be in internal medicine, orthopedics, pediatrics, etc, there are many flavors of funds with each flavor requiring and looking for different skill sets. VC firms differ by location, stage of investment, and industry focus. Later stage firms typically value financial analysis, deal structuring, and deal execution skills. Early stage firms typically value technology and market expertise combined with operating experience.

Second, the world is intensely competitive. To succeed you will need not only good fortune, but also a deep passion for the domain in which you operate. Accordingly, pick the stage, focus, and investment philosophy that maps to your skills and interests. There are simply too many smart people in the world who will run you over if you enter their market without the commensurate passion and commitment that comes from doing something you truly love.

Finally, if want to get into the early stage space, I believe the best path is the Zen approach. Ie. the harder you try the worse you will do and the more frustrated you will become. Focus not on getting into a VC firm right after graduate school, but instead on a market, company, and operating role that will provide the expertise, sets of relationships, and experiences that will prove valuable to a prospective VC firm employer. This is generally not a one year commitment but rather a multi-year investment that pays dividends in making you a more suitable candidate for hire and also provides the option value of discovering a joy for the operating side that may keep you in the executive ranks.

Thursday, March 16, 2006

Larry Sonsini

Last night, I attended an HBS dinner honoring Larry Sonsini as the Bay Area's 205 business person of the year.

In his acceptance speech, Larry reminisced on a 40 year career working with growth companies. Larry's career serves as witness to the many industry changing companies started here in the valley and to his role in advising many of them along the way. By decade he rattled off a list of clients - Bob Noyce, TJ Rogers, Steve Jobs, Larry Page, Jim Clark, etc - and the pioneering vcs - Arthur Rock, Tom Perkins, Don Valentine, etc - who funded them.

He closed with a comment on three traits the great entrepreneurs all share:

  • passion,
  • adaptability,
  • and not taking themselves too seriously.
Finally, he remains very bullish on the future of the valley. He took the audience back to the 1980s and to the fears that the Japanese would decimate the US tech industry. While he acknowledged challenges - education, burdensome regulation, etc - he remains confident that the next 40 years will be as bright if we continue to embrace change, reward innovation, promote meritocracy, and accept failure as a sign of trying something new.

Tuesday, March 14, 2006

Innovation Happens Elsewhere

I spent the last two days at pcforum 2006. Check out Technorati's tag page on the event for more detail. A highlight of the event for me was Bill Joy's talk. Bill discussed areas of opportunity. He commented on the threats endemic today from pandemics and of the drivers that led KPCB to raise a Pandemic and Bio Defense fund. Quick case in point - vaccination technology is still premised on 100 year old models based on using chicken eggs to grow vaccines. He also made a comment that I found very interesting, "Innovation Happens Elsewhere."

Bill's premise is that no company owns a monopoly on talent and innovation. As such, businesses need to be architected to leverage the innovation of others. Certainly the multiple benefits - cost, innovation, wealth - standards and open-systems have made possible speak to the value of building businesses that are premised on the axiom of distributed innovation. It turns out the quote comes from work done by Richard Gabriel, a distinguished engineer at Sun (Ron Goldman, Dick's co-author, pinged me to say the quote is from Bill and that they borrowed it from him. FYI). Dick Gabriel wrote a book titled Innovation Happens Elsewhere that focuses on open source software models. He has made the book freely available on his web site. I am certainly seeing the fruits of models based on the idea - open-source commerical derivatives, web 2.0 models that leverage 3rd party web services and components, and the rise and power of end-user content surpassing. As entrepreneurs design their businesses, it pays to think through how company and customers will leverage the undeniable fact that innovation will happen elsewhere.

Monday, March 13, 2006

Will Your Grandchildren See Dow 2,000,000?

Warren Buffet's recent letter to shareholder contains a few gems. In reading the letter, I am struck by his ability to simply and clearly articulate highly complex and challenging subjects - like insurance, derivatives, and signal rather than noise.

While the letter is full of interesting comments, one really struck me.

To paraphrase, from Dec 31 1899 to Dec 31 1999, the Dow Jones rose from 66 to 11,497. While a rise of 174x over the 100 years, the return to shareholders, a powerful illustration of the power of compound interest, was only 5.3%.

If we extrapolate the 5.3% rate of return over the next 100 years, the Dow Jones will close on Dec 31, 2099 at 2,011,011.23, or 11,497*(1.053)^100. The begging question is will the next 100 years see the same level of corporate wealth creation. Also, how many of you think the equity rate of return will not be higher than 5.3%? If the rate of return is 10%, for example, the Dow will hit 158,435,700 on Dec 31 2099.

Mr Buffet suggests that the replication of the past century's performance will be challenging. He argues that, "For investors as a whole, returns decrease as motion increases." His core premise and criticism is that shareholder wealth is a zero sum game. He argues that transactions (ie motion), transaction fees, and transaction agents (bankers, LBO funds, consultants) are transferring wealth from shareholders to service providers and threatening the future value of shareholder holdings. I suppose the key is to focus on true wealth creation rather than wealth transfer.

Thursday, March 09, 2006

Y Combinator

Today, I had the pleasure of attending Y Combinator's Winter Founders Program Angel Day.

Angel Day is a show-case events for the eight companies currently in the Y Combinator Program. Twice a year, the Y Combinator team selects 8-10 teams and provides them intense coaching, $6k in seed money per person, and the opportunity to build a company and product. While cynics may associate Y Combinator with the now pejorative synonym - incubator - I left struck by the incredible energy, creativity, and productivity of the current crop of companies. It is simply remarkable what 3-4 very smart and very dedicated engineers can build in 10 weeks. Read the NY Times article for more on the model. In brief, in return for the micro-seed investment, Y Combinator takes a ~6% stake in the company. The plan is to be very Darwinian - companies either take hold and flourish or go the way of all flesh. The Summer program is full but start thinking about applying for the winter program.

While I will not jump ahead of today's companies launch plans, a few public Y Incubator companies include Reddit, Textpayme, and

Thanks to Paul, Trevor, and Jessica for a great event.