Serendipitous Entrepreneurship

As I recently hit the second half of my 30s, I must admit that my views towards entrepreneurship have changed since I launched my first comapany at 22. Entrepreneurs like myself are probably the least “career focused” people on the planet. I long held the romantic notion that I’d just keep starting companies until I could no longer form a coherent sentence. I never took the long view – always focused on the venture at hand, even the specific issue of the moment. Lately, however, I’ve become more philosophical about start-ups, risk and the long-term entrepreneurial career.

1) 30 somethings start to feel and think about their “legacy.” Perhaps intertwined in this is, unfortunately, a heightened sense of ego. Many serial entrepreneurs like myself focus on making their next venture bigger and more meaningful than the previous. It’s hard not to look at recent successes and IPOs and ask oneself “why not me?” Still, I try to not only think about building large businesses but ones that solve problems with real impact on society, with teams and products that I’ll always be proud of.

2) The demands on time increase with age. When I started Handshake.com in 1998  the line between work and my social life was fuzzy at best. We were largely a group of recent Cornell grads who moved our all-nighters from Uris Library (sometimes!) to all-nighters building a web business.  My girlfriend (now wife) worked for free and we often wouldn't get home until 2 or 3 in the morning. Nowadays, with 2 kids and ambitions like non-profit work, involvement in my kid’s school and a desire to stay active, the juggle of time is increasingly complex. Even one’s mortality starts to creep in the brain.

3) For the first time, many have said to me, “the next years are your prime working years.” The unstated motive is that one should focus on earning enough for retirement, kid’s education and a place in Florida. By your mid-30s many peers have now been financially successful so even if you’ve done well, you’re likely not alone. In many cases, others seem to be working less hard and taking less risk. You can’t help but ask yourself “Am I the fool?” There are clearly easier, less stressful ways to make money, despite that they are far less fulfilling. 

That said, I couldn’t imagine doing anything else. Perhaps the problem with getting older is you think too much. Next time I won’t wait til I’m 22 to start my first venture!

The delta between academic lab projects and a commercial product is huge and often underestimated. Similarly, the challenge of moving from a science-based culture to a product/commercially minded one is equally daunting. I’ve found myself working this set of issues for almost a decade. Recently, I’ve learned that the problem is more acute in companies that have a biological component to the product.

In my web and hardware days, we hired “engineers.” In biotech and bio-diagnostics (like Novophage), a disproportionate percentage of job candidates call themselves “scientists.” This distinction is more than just a name, it suggests to me that there’s an inherent lab bias in the culture and training of today’s biotech community. The desire to think in an applied manner hasn’t permeated this community as strongly as the software or hardware communities. Some of this may stem from the state of maturation of biological sciences relative to other fields – perhaps it’s more like the web circa 1995.

I’ve also observed that bio-based companies tend to speak much more about platforms than products. This is an interesting paradox to me. I would have expected a focus on solving constrained problems given the sheer complexity and lack of understanding of biological processes.

As trite as it seems, I think the physical barrier of a separate lab impacts this mentality as well. In my previous ventures, our office was a giant open bullpen where marketing guys and coders were a few feet from each other. However, with a physical lab, you’re forced to separate those in the lab from those outside the lab. There are good reasons for having a separate lab (e.g. spilling pathogens in the conference room is not usually a good idea) but the barrier translates both physically and psychologically.

At Novophage, we’ve worked hard to address these issues by taking a somewhat unique approach to company building. We keep our burn lean by avoiding high salaries and buying used equipment. We’re building a mindset around short-term milestones that translate directly to market needs. We talk about products and specific value creation to a customer as opposed to general platform capabilities. That’s not say we neglect the ultimate long-term value of what we’re building, but rather our day-to-day activities are focused on specific goals. Just as I’ve done in previous ventures, we have daily huddles where everyone quickly shares what their goals are and relevant updates for the group.

Changing mindsets and cultures is not easy work, however, I think it’s critical for commercial success. For the first time in my career, I believe I am not simply trying to build a great new product, but also bring a different development philosophy to the field of biological tools. That’s pretty inspiring.

How do you figure out if there’s a market for your product? This is one of the hardest questions to answer and arguably, the most important. When we started Handshake.com in 1999, our diligence suggested that businesses, even the smallest mom and pops, were embracing the web. Nonetheless, we struggled to get businesses to use our online scheduling platform despite support from the largest online/offline Yellow Page company in the US. That experience taught me to be weary of “false market signals.”

Here are some False Market Signals I’ve seen:

General hype and market exuberance

We suffered this at Handshake, and perhaps the whole Internet economy did during the late 90s (and to some extent recently). Investors encourage you to spend to acquire customers, even if your cost of acquisition exceeds their value. Instead of really understanding the key drivers of your business, one lets macro trends dictate strategy. At Handshake, we started as a B2B company and ended up focusing on the consumer because the markets pushed us in this direction. We later reverted to being a B2B business, but it was too late.

If you make it, I’ll buy it

Whether selling to consumers or business customers, marketers often “hear” the answer they want. There’s often strong enthusiasm from prospective customers on new technologies, however, many enthusiastic entrepreneurs don’t push hard enough on economics. At Brontes, we asked a highly enthusiastic potential customer how many units he’d buy from us.  He excitedly said “maybe 3 or even 5.” (we thought he’d say 500!) The other challenge with these interactions is that customers often envision the dream product, and most initial offerings are far from perfect. Test customers to see if willingness to pay remains strong if you start stripping away certain features.

Technology problems vs. market opportunities

Perhaps one of the most common false market signals is when technologists talk about a problem that is real but does not translate to a commercial venture. The statement that was first made about the potential of Brontes’ 3D imaging technology was that “cameras are inherently limited because they only see in 2D.” While this was true, the market didn’t view this as a problem (we have been using 2D cameras for decades).  3D required some pretty fundamental changes in displays and imaging that even to this day have yet to be fully realized.

Be weary of the trap of false market signals. There are many and I’m sure I’ve missed many others … 

I’ve been like a kid in a candy store for the last twelve months. I’ve had the opportunity to meet with hundreds of entrepreneurs and learn about technologies from healthcare to cleantech to online marketing. It’s been totally inspiring. Throughout the process, I had a tinge of jealousy for the entrepreneurs. I had an unrequited passion for getting back on the company-building side. So, in the last few months I’ve jumped back in the game, running Novophage. (I remain an Advisory Board member to two great companies, ThinkNear and Ignighter, and as Founder Partner with Founder Collective.)

Having looked at a variety of professional options, I couldn’t resist the temptation to build the third start-up of my career. How did I choose?

Team Chemistry

I spent nearly a year advising Novophage.  I got to know the people – Mike, Brett and Tim.  We held brainstorm sessions, went on business development calls and drank beer together. I got a sense of what it would be like to work together. We learned each other’s personalities, warts and all. That made joining as CEO a natural progression and I’d encourage anyone thinking of taking a founder role to “date before getting married.”

Green chemistry

When we met, they were focusing on using their antimicrobial technology (powerful antiobiotic) for therapeutic applications. I wasn’t a “drug guy” nor was I convinced the market was worth the regulatory risk and capital required. Yet the parallels to my last business, Brontes were abundant. It was a great technical team with a core innovation, needing a market and problem to solve. Like Brontes, they had won major business plan competitions, but still had not yet identified the killer app. We worked through it and arrived at this concept of “green chemistry.” Essentially, we studied markets where bacteria is a problem and where we could reduce expensive and harmful chemicals with a more targeted and effective biological approach. We validated this with dozens of industry players (e.g. investors like Chevron and The Kraft Group).

Major areas of technological progress in the last 5 years

My biggest hesitation in joining Novophage is that I’ve spent nearly 12 years in software and hardware. The last biology class I took was in high school. To this day, I continue to learn about the differences between biology-focused businesses vs software ones (they’re not trivial). That said, over the past twelve months I became captivated by the technological progress in low-cost sequencing and biological engineering. While the social media revolution is transformative and everywhere in our lives, the revolution in our biological understanding is equally significant and mind-boggling.

Good platform

In the end, I concluded that to start an early-stage venture, it comes down to having a good platform. Entrepreneurs deal with enormous amounts of ambiguity and risk that takes time to mitigate. Therefore, the decision to jump in comes down to believing whether you have a mission you’re passionate about, a group of people you want to work with and a business thesis that is validated enough to make you comfortable.  The fundamental question comes down to … do I have a solid platform to navigate the choppy entrepreneurial waters? After that, it’s up to the entrepreneur (and some plain old luck) to make it happen. 

Entrepreneurs and investors in seemingly “less sexy” sectors like enterprise software, healthcare and cleantech complain that this is a tough market for start-ups. There’s an almost bipolar attitude in the ecosystem today- consumer-oriented web companies are hot in the private (and public) markets, while those in other fields struggle to raise capital despite credible teams and ideas. It’s a market dynamic that forces investors and entrepreneurs (like me) to constantly ask themselves, “am I on the right side of this?” Here are some potential observations and explanations…

You can’t incubate a biotech company in a Starbucks

Today’s web companies require amazingly little capital and equipment to prove out basic assumptions (or “knowables” as I describe in a previous post). I’m continually amazed at how a concept can be reduced to practice, brought to market and generate revenue in as little as 30 days. At Brontes (med tech) or Novophage (bio/cleantech), this process might take three years or more. Unlike a pure web-business, hardware and bio businesses require labs, expensive equipment and usually a larger team. Given the short attention span of entrepreneurs and investors alike, there is certainly a bias towards things that can be assessed quickly and cheaply.

Diligence is different

My experience raising capital for Brontes, Novophage and working with other “core tech” companies is that the diligence process is markedly different than for many seed/early stage web focused businesses. In a university spin-out for example, there are patents to examine, industry and technical references that can be called, and often a competitive landscape to evaluate. For a company liked LinkedIn in the early days, an investor spending hours surveying consumers is fruitless. In the end, it’s a bet based on the team and Conviction (as my colleague Eric Paley wrote in an earlier post).  

Quantifying risk in start-ups is impossible so perception dominates

It’s hard to calculate on a risk-adjusted basis, which is a better bet - a medical device or mobile app start-up. They each have a different risk profile and capital needs. You don’t hear about GE making acquisitions for talent (“acquihires”) like Facebook, but on the other hand, there’s usually less competition in more traditional industries. Since numerical quantification of risk in early-stage ventures is impossible, we default to perception. With the IPOs of LinkedIn and strong private markets for Facebook and Twitter, one’s perception is that web is the place to be (again). 

In the end, I think its best to follow one’s instinct instead of the herd. Align yourself with the best team possible, and for the most part, stick to your knitting. The most successful entrepreneurs and investors I’ve seen leverage what they’ve learned in each new endeavor. They try their best to only make new mistakes!

Timing is everything – especially when it comes to raising a round of capital. My Founder Collective colleague Eric Paley and I discuss (and debate) it often. Here are some observations having been an advisor to two recent TechStars companies and co-founder to three start-ups.

Be weary of the artificial timeline

Both Brontes and Novophage are classic university ventures. They started in labs, later received university and government funding (Deshpande Center, BU’s office of Tech Development). Both companies went on to win or place in the finals of highly regarded business plan competitions at Harvard, MIT, Duke, etc. It seemed opportune time to raise capital, but the businesses were still not ready.  While business plan competitions are excellent catalysts for founding teams, and useful for gathering feedback, they do not ensure that a business is ready to launch (even so for winners/finalists).

Any process that sets an artificial timeline – expiration of government or university funding, graduating from school, a business plan competition or the conclusion of an incubator program does not inherently mean it is time to raise money. All businesses need to incubate at their own pace. Early market pivots, prototype development and building the founding team should generally happen on the founder’s nickel.

Fundraising = acceleration not inertia

All too often entrepreneurs approach fundraising as the start of the venture.  This attitude often leads to disappointment. A business should be operating as a regular business – with the makings of a culture, meeting routine and infrastructure (Novophage had 6 gigs of in its Dropbox before fundraising)!

Capital is invested to accelerate a business that has initial momentum but has reached a point where only money can get the company to the next accretive, and risk-reducing, milestone. VCs use the terms “traction” flippantly but in essence what investors want to see is momentum before the fundraising.  At Brontes, we needed a clear market focus (dentistry) and industry advocates before we were really ready for a Series A raise.

But strike while the iron is hot …

Having said all this, timing truly is everything. The investment community is momentum driven, just like the stock market. You’ve got to have a nose for when the timing’s right. A strong signal from a VC often suggests its time to talk to many and leverage the interest to terms sheets. If your segment is “hot,” find those pre-disposed investing actively in the segment you’re in.

In the end, the sequencing of fundraising often has a significant bearing on the outcome of the process.

Universities are TechStars on steroids. Some of the most influential companies in the US can be traced back to university roots. (e.g. HP, Sun Microsystems, Bose, etc) As I wrote in my blog entitled Trolling for Technologies (and a good beer), I don’t suggest hanging out at the student union hoping that a good technology will drop like manna from above. That said, universities are increasingly paying attention to entrepreneurship (they know who the big donors are!). Many have appointed individuals to focus on bringing an entrepreneurial vibe across the campus. For example, David Lerner (at Columbia) or John Jaquette (at Cornell) are among the many great entrepreneurial torch-bearers that can help shorten the path to identify promising researchers and technologies within a university.

Once you’ve identified a technology that you’re considering licensing from a university, here are my suggestions for the negotiation with the licensing office:

Start with the option

The delta between a lab technology and a commercial product is huge. Given that, spend the time upfront to scope out the business plan and timeline. Start by simply optioning the technology. Options are cheap and generally quick. Also, most deals require the company to re-pay previous IP expenditures by the university (which can be pricey). By taking the option, you put off that expense until you’re certain the venture is a go.

Be informed

Talk to other ventures, as well as VCs, who have recently licensed technology from that particular university (and others). Track key terms – field of use, cash, equity, and royalty payments. This will give you context for what to expect and what a good/bad deal looks like. License only the IP for the fields you need.

Use the inventors and VCs … wisely

Licensing offices want to keep their faculty happy. Make sure the professor or key inventor is on board and encouraging the licensing office to get the deal done. This may be your single biggest point of leverage. The venture guys can provide a bit of leverage since they often won’t fund without the license. The bottom line is to align interests with the licensing office – they need to understand that you’re a start-up and the goal isn’t to squeeze every penny before the business is even launched.

Cash or equity – the age-old debate

There are two sides here – pre-financing equity is cheap in that it will likely be heavily diluted. In the short run, cash is the company’s air supply. On the other hand, cash can be raised but equity maxes out at 100%. I’ve tended to prefer cash deals because I’ve often found that licensing offices seek unrealistic amounts of equity. However, if your cost of capital is high and the office is asking for a reasonable equity %, you may want to consider an equity deal.

The key is to make the licensor trade off cash for equity, and vice versa. I’ve seen too many deals where entrepreneurs pay exorbitant cash, equity and royalty payments that will only hinder the company long-term, which is bad both for the university and entrepreneur.

University research is often the catalyst, but not the basis of a business. Pay accordingly.

As I wrap up 2010, my first year on an entrepreneurial walkabout, I’ve learned a ton about entrepreneurship and myself. I must admit I’ve enjoyed the journey much more than expected (despite the negative income stream). In addition to meeting fascinating entrepreneurs for Founder Collective, I’ve also been fortunate to become Chairman of one company (Novophage) and an active advisor to a couple of exciting projects.

Here are some thoughts following nine months as an “itinerant entrepreneur” …

1 – Personal brands matter

When I finally left Brontes, I probably had a few thousand contacts in my CSV file. 80% or so were related to the dental industry (yup, pretty geeky) in which I had spent the past 8 years. I practically had to rebuild my brand and network from scratch. It’s been a great exercise but I’ve learned that the next time around I’ll work hard to remain visible to VCs, attend technology conferences, meet with other entrepreneurs, etc. It’s possible to stay relevant even while running a business, and in fact, in some ways it’s an even more powerful platform from which to brand oneself.

 2 – The marathon before the marathon

Going from a napkin concept to a funded, focused enterprise with a handful of good people developing a 1.0 is not a quick exercise. Every business is different but I think a year of “incubation” is commonplace – time is needed to build the team, talk to prospective customers, sketch out a product and raise money. Given the time it takes to launch a business, one needs to think hard about joining an early-stage venture with some pre-existing inertia (I certainly do). The power of some existing IP, a few people rallied around a goal, etc. can help shorten the incubation period and reduce the entrepreneur’s risk.

3 – Breaking up is hard to do

I’ve come very close to going “all in” on a couple of projects – in fact, I’ve killed three projects that I had spent months working on. Once you spend months validating and building out a concept, it’s hard to say “this one just isn’t there.” Still, I’ve learned over and over again, if you have doubts about a venture even after a significant investment of time, it’s best to walk away. It’s emotionally draining and at times can strain relationships. Still, it’s much better to cut it off before taking other people’s money.

4 – It’s true about Serendipity (Reference to my blog title, not the Cusack flick)

Some of the most powerful connections I’ve made, and the most interesting people I’ve met in 2010 were totally random. Paradoxically, the meetings I was least excited about or the informal cocktail party chats have led me down some of the most interesting paths. This element of randomness gets me excited to wake up each morning knowing that the next big thing could come in from anywhere at anytime.

Happy 2011 everyone – may it be full of serendipity!

A question I often think about is when to take outside money. It can be tricky. Taking other people’s money, no matter from whom it comes, entails a set of risks and responsibilities. Furthermore, once you take money, your venture is “on the clock.” That said, ultimately you need to fuel the tank to accelerate the business, hire top talent and be legitimized in the eyes of prospective customers and partners.

So, the question becomes how to decide when to pull the trigger and raise seed money?

Before taking anyone else’s money, I like to identify the short term “knowables.” In other words, what key pieces of information can be understood in a matter of weeks or months with effort, without too much capital, and in most cases without leaving one’s primary employment. I think typical start-ups have a handful of knowables – say 3-6 key ones that can validate the business hypothesis. If you can’t think of any in the short-term or have too many, the business may be too risky. Most knowables should cost less than a few thousand dollars (if anything) and take no more than 3-6 months to answer.

As an example, a company I’m advising needed clarity around if/how its product would be regulated by government. (you may be thinking … talking to the government … that must take decades … not so!) First we ventured out to find the most capable regulatory advisor we could find with strong knowledge of the area. We contracted for a limited engagement and spent only a few thousand dollars. Amazingly, in just a few weeks, we had an email exchange with the exact people in government that will regulate this product and got the information we needed. While there remain long-term risks (unknowable’s), we now have information directly from government that clarifies our capital needs, timeline and data requirements.

There are many types of knowables. Some knowables are business development related. For example, some upstarts will want to know that they have a critical beta-test partner lined up from the start. Other short term “knowables” involve relatively straightforward web experiments that test customer adoption, web marketing tactics, click through rates, or pricing. 

I advise start-ups to answer the knowables before taking money. There are too many examples where a start-up took capital only to hit a roadblock that could have been identified early and cheaply.

The question I’m most frequently asked (and most frequently ask myself) is how to validate and size business opportunities. Is a particular start-up or concept the next Google or doomed for failure?

I’m rather lucky. I’ve been able to spend the past year or so acting as entrepreneur, angel investor and early stage VC at various times. I think one’s process depends on whether you’re an investor building a portfolio of bets, or an early employee or founder with a portfolio of one.

First the similarities …

Evaluating businesses at its most fundamental level is really an exercise in understanding, measuring and trying to minimize risk. I’ve often said that entrepreneurship is like having 10 playing cards all face down, with the goal to turn as many over as quickly and cheaply as possible. It doesn’t matter if you’re an investor, entrepreneur or thinking of joining a young company.

In all cases, one must assess the ability to raise investment from quality investors. Capital is the venture’s fuel and the fuel has to be high quality and most importantly, you don’t want it to run out. Additionally, it’s important to feel that you’re being rewarded for the risk – the equity received should correspond to the level of risk in the venture. This can be hard to quantify, but there are some rules of thumb that experienced entrepreneurs and VCs use. Trading off some amount of equity for lower risk is generally a good idea given that the nature of start-ups is inherently risky.

Market size is also important, but can be elusive. Simply put, the venture should be attacking a hard and large problem. All ventures are hard, so if you’re going to invest money or “sweat equity,” you better be going after a significant opportunity and not an incremental innovation. I gain comfort by talking with folks in the target industry and making sure their eyes light up when I talk about what I’m doing.

People. So much of the success of a start-up comes down to the team. Does the team have a track record of success? Does everyone bring different skill sets? Does the team have good chemistry?

And the differences …

Time. My experience having founded 2 companies is that it can take many months (or more) to validate a business plan. An investor or employee can make a decision in a week with only a few calls, but the entrepreneur should make at least ten times as many calls. The entrepreneur needs to become an expert in the field in which he/she is thinking of entering.

As an investor, you can rely to some extent on other’s research. As an entrepreneur, you have to do all of your own research. You should hear directly from end customers. You also need to candidly assess whether your previous experience and your own skill set enables you to be uniquely valuable to the venture. In essence, you should feel as though joining the company improves its probability of success.

Finally, there’s the big intangible difference between investing and operating. As the operator, you have to wake up every morning and spend all day working on a single cause. To be successful, you have to believe in the mission. Without passion, it’s not worth it. Like much of life, wait for your spot. But when you find it, jump in with both feet.