By Georges van Hoegaerden



To complete my affectionate series of "idiot" articles (idiot CEOs and idiot Limited Partners) I am adding idiot entrepreneurs to the list.

Idiots

Idiots are those people who continue to participate in a marketplace that was designed to marry the two most important assets in Venture, Limited Partners with money and entrepreneurs with ideas, governed by Venture Capitalists (VCs) to the dissatisfaction and under-performance of them both. Not even the public is interested (and certainly not for the right reasons, short sellers are not too picky and may artificially boost its initial IPO value).

We know that the real problems in Venture stem from how risk is applied to the creation of early stage companies, and that more discipline deployed by Limited Partners (the investors in Venture Capital) to a new Venture model will fundamentally improve the governance of innovation in the Venture marketplace.

Until then the only constituent in the Venture marketplace who cannot be called an idiot is the Venture Capitalist who without any personal downside can continue to apply the power of someone else's money to define what innovation is and continues to get away with feeble attempts to convince the public of their value for more than ten years.

Perhaps now you understand how the adjective "idiot" is a compliment of sorts. Rest assured, the behavior of and attraction to idiots can easily be fixed.

Life is hard when you follow

Life is tough for entrepreneurs, especially for those who continue to listen to the compass of Venture Capitalists, ignoring the miserable performance of that compass for the sake getting a little bit of money. With a continued dysfunctional deployment of Venture Capital many entrepreneurs continue to succumb to an arbitrage of innovation that, by default, will never lead to achieving groundbreaking upside. Even when the idea holds merit, the flawed deployment of risk by VCs is sure to suck the life out of it.

So, here is a list of attributes by which you do not want to be recognized as an entrepreneur. An idiot entrepreneur is someone:

• Who believes that technology creates markets, rather than facilitates an electronic distribution mechanism to serve existing macro-economic marketplaces and behavior.
• Who believes and accepts money to build a gating technology proposition in search of a marketplace or without a clearly defined attachment to macro-economic behavior and upside.
• Who believes that they or VCs can actually derive foresight from studying statistics and hindsight intensively, forgetting that unique foresight is the only differential and investible attribute to successful companies.
• Who believes that capital efficiency is a unique business or investment strategy available only to them or the VC and therefor delivers any differential business or investment value.
• Who believes that market execution makes up for a dysfunctional "driving experience" and takes little streams of money to keep trying.
• Who blindly believes that raising money is the first step to acceptance of his idea. Not realizing that the compass of most VCs (95%) does not lead to the creation of value to their investors nor the public, and therefor their willingness to provide money is likely to mean absolutely nothing (or quite the opposite).
• Who calls himself an entrepreneur simply because he follows VC governance of what a hot innovation wave is.
• Who thinks that raising money makes him an entrepreneur, not realizing that raising money is not a vote of confidence from the public.
• Who thinks that raising money is an asset, yet with defunct investor performance across the board and in no less than 95% of cases turns out to yield a significant deficit.
• Who takes money from a VC, without getting to know the investment partner (General Partner at the VC firm) personally.
• Who takes money from a VC, without knowing the vintage and performance of their current or stacked funds. Ignoring blissfully any irrational behavior and panic that is about to come their way soon.
• Who engages with an investor who communicates through the valuation and cap table that majority ownership by the investor is ever a good thing in an early stage company.
• Who engages in fundraising efforts without a good understanding of the product conversion rates and operating credentials, offering many opportunities to VC of shooting holes in the proposition, to say no to the deal or drop the valuation just so you lose control of the company the moment one of your predictions do not pan out.
• Who partners with a first venture investor who cannot lead the complete funding runway, setting himself up for excessive segmentation of rounds, fragmentation of ownership and increased dilution.
• Who believes that authentic IPO value can be built for less than $25M, and dicks around with micro-VCs and well meaning Angels.
• Who does not know the difference between micro private equity and Venture, praying to beat the simple economics of input and output.
• Who takes money to drive Venture growth, but has no $1B upside strategy defined.
• Who attempts to raise money from a VC without a real CEO, leaving the inmates to run the asylum and turning the company over to the VCs at the quickest pace possible.
• Who prefers to take $250K of subprime VC money in return for 30% of the company, instead of getting a line of credit on your $1.4M house in Palo Alto (with a median house price $750K in the bay area). By the way, neither one is a good idea.
• Who creates an iPhone application using Venture money, not realizing iPhone apps do not create venture returns and the top 1,000 applications on the AppleStore make no more than $350K average per year. You and your Venture investor deserve each other, including the idiot adjective.
• Who raises money from a (government) small business fund, not realizing that a venture trajectory is incompatible with small business funding.

What to do?

Truly groundbreaking innovation is no longer recognized by the majority of Silicon Valley investors. The Venture business has turned subprime more than 20 years ago and only the delayed response by Limited Partners makes it seem like it has some of its former gusto left.

Entrepreneurs are relegated to the investment thesis emitted by overwhelmingly subprime VCs (some refer to using the oxymoron: micro-VC, which in actuality is not Venture but micro Private Equity) and Angels who, each with their own performance issues, have turned innovation into a commodities business.

Groundbreaking innovation that taps into attachment of existing macro-economic behavior does not evaporate easily and has plenty of time to wait until a new Venture model capable of attracting prime risk (and rewards) is up and running again. That type of innovation can simply not be discovered by subprime VC (let alone Angels), plenty of examples in the past have proven that out. So, unless you know how to get to the 35 out of 790 VC firms that do know how to deploy risk and produce returns, of which we estimate 3/4 do so by deploying diversification, alternative investment strategies or similarly subprime gating tactics, you should keep your job until this subprime VC maelstrom has lost its strength -- or until our systemic fix to Venture is in place.

For those people who aim to follow the investment waves of the current investors, by all means keep trying. Maybe, just maybe your pot of gold will be at the end of a rainbow.

Tags: Entrepreneurs, IPhone, Innovation, Valuation, Angels, Subprime, VC, Venture, CEO

By Georges van Hoegaerden


Some days I look at people and feel pity, with as much pity as Captain Paul Watson from the Sea Shepherd felt when many years ago he looked straight into the eye of one of the whales he was trying to rescue, while a harpoon flew over head. He felt pity for humanity. The same pity I feel for people who take the innovations business for an easy ride and kill it by sucking it dry.

Ways to work Silicon Valley

In my thirty years of the emerging business of technology I have seen product marketing managers at one of the fastest growing software companies pick products that sell themselves, and turn them into "geniuses". I have seen sales people at the same company make tons of easy money for the same reason, only for them later in their career be faced with a more sober reality. I have seen people in another Silicon Valley bellwether hop from one division to another, never to be confronted with the outcome of their guidance in each. I have seen people hop from one Silicon Valley company to another, only to pick up valuable equity in each along the way. I have seen people make friends with pivotal "gatekeepers", only to become employed for long enough to get a piece of equity their merit would have never earned them. I have seen those gatekeepers provide endless references to each other, securing them cushy positions through those who get in first.

Too many times have I seen investors loan-shark companies and dilute unsuspecting entrepreneurs into powerless share holders. I found out too late that an angel investor employed, travelled with and otherwise befriended the wife of the company founder, who I was going to straighten out because of his consistent underperformance, false promises and blatant lies. I should have known when I heard the angel was previously dating a friend's best friend, and allegedly forcing her to break up their relationship. I have seen entrepreneurs pitch to "living-dead" VC firms, crushing their dreams. I have seen Venture Capitalists straight out of business school force CEOs to adopt their misguided agendas or otherwise be sandwiched and squeezed out between investor and founding ownerships. I have seen VC artificially segment the industry, putting off outliers of innovation. I have seen VCs lie about the value I, not they created. I have seen VCs work the books so their investment thesis can never be held to account. I have seen Limited Partners play nice with Venture Capitalists knowing that someday they too will join the club that slides them into a much more lucrative salary.

I have seen it all. The foundation of the venture business is a bigger mess than I could ever attempt to describe here, and much more systemic than temporal.

Proud to be difficult and different

For many of the people described above I am difficult work with. Because I simply refuse to erode what I stand for by playing games (that sadly have become so popular). My passion is to build social economic value that touches real people and as a results builds attractive monetization (in that order). I care a lot about money, but only when I feel my participation deserves it. I do what I say and I say what I do. And every product strategy or company I built became an outlier as a result.

To do so one must challenge everything, including oneself.

The hard part is to walk away from investors and entrepreneurs. I have halted an investment at the last hour from a very wealthy family I have know for more than ten years, after I just discovered a string of misconduct and violations of fiduciary obligations of previous board members. The company would have been a blowout success under my leadership. I also declined an investment from another angel and a friend of the lead investor, after I found out that his reasons for investing where not in line with the business strategy I had laid out and executed on with great success as the CEO. In both cases the original founding board could not see beyond some quick money, and are now suffering from significant dilution in ownership and performance, if they are to survive. I challenged my own position from the decisions I made, a clearly different strategy from the self serving and pleasing route most in our business would have taken.

Technology innovation has become the Wild West who's easy days have past and where gold no longer simply washes ashore. We are now stuck with an overhang of gold diggers whose verifiable merit to locate gold hidden a little deeper has become inadequate. The actions of many in our industry have been too self serving, and therefor by default unsustainable.

Doing the right thing is more important than doing what is most popular. Yet doing what is right conserves a unique species we all rely on.

Conservation of a unique species

Whaling has been banned by most governments, but the Japanese keep hunting whales under the "research" exemption and continue to threaten the important role of an endangered species in the ecosystem. The wrong thing to do that will impact us all.

The endangered species in the technology industry are the real entrepreneurs who with great ideas and with diligence and persistence, together with experienced business managers and visionary investors have the integrity to produce groundbreaking social economic value and thus fantastic investment returns. Many VC investors, too busy protecting their own interests and busy concocting elaborate diversification strategies, have lost their ability to recognize and attract those entrepreneurs. And a reduction of VC investors will not fix its dysfunctional investment thesis, and will not cure its systemic disease in which the improper deployment of risk of micro Private Equity has displaced and dislodged venture capital. And don't be fooled again, VC spinning their wheels just like the last ten years with the improper risk deployed will not lead to the recovery of public trust the sector needs.

Circumvention of government regulation proves in whaling and venture capital that government regulation is not the panacea. The only way to prevent the extinction of a unique species is to provide incentive (or de-incentive) for supply and demand, which in technology innovation can be driven directly by the investment discipline of knowledgable Limited Partners.

So, the conservation of groundbreaking innovation is solely in the hands of Limited Partners, who if they open their eyes and get to know their ecosystem still have time to correct course and can continue to reap generous rewards from the massive opportunity in technology innovation that lies ahead.

On most days I still believe I can help Limited Partners fix venture (although some people have discouraged me), just like Paul Watson believes he can still save the whales. I remain optimistic we can save ourselves, but we are running out of precious time.

Tags: Entrepreneurs, Venture, Limited Partners, VC, Silicon Valley, CEO, Innovation

By Georges van Hoegaerden

One of the most important traits of a great person, great CEO and great investor is the unrelenting pursuit of the truth and a firm ignorance for anything else. The truth in a world that is full of smoke and mirrors, stemming from an unconnected era in which the creation of heaps of walled gardens would go unnoticed to unsuspecting participants.

Even though we don't like to admit it, we as grownups still play the telephone game frequently, in which a chain of derivatives regularly degrades the truth.

But those days are slowly coming to an end, as the internet with the free-market principles it aims to deploy, and social networking as its unforgiving arbitor is steadily eroding misplaced authenticity and trust (see Trust is the currency of success).

Most people reading this blog will think of derivatives as a financial instrument first, but our world is chockfull of others that invade our lives from every corner. The dictionary definition holds a clue:

• adjective : imitative of the work of another person, and usually disapproved of for that reason
• noun: something that is based on another source, an arrangement or instrument (such as a future, option, or warrant) whose value derives from and is dependent on the value of an underlying asset

Sound decision-making comes from a clear understanding of the difference between fact and derivative. Below are examples of everyday derivatives and the impact they have on their surroundings. Some may be shocking, but I promise will yield incredible new focus and progress if simply ignored.

Markets

Markets don't exist, we covered a whole blog about it. Read it please. Customers do not buy products because they associate or belong to a derivative descriptor of a market. They buy because the marketplace (a mechanism to buy) offers the best opportunity to serve their (often complex) individual needs. So, go ahead and thrown away your industry and market segmentation or market-share leapfrog strategies. They are worthless.

Venture Capitalists

In the investment equation between the assets of a Limited Partner (money) and the assets of the entrepreneur (idea), venture capital is merely a dating service (with no assets to speak of) that establishes the transaction of the marketplace, a financing round. While Venture Capital (VC) behaves as if it is the originator of assets and the creator of value, LPs are actually the ones that deploy the commitments to the creation of value by the entrepreneur. Contrary to their testimony to congress, VCs did not create millions of jobs, LPs did by deploying their monetary assets. While VCs force entrepreneurs to buy into their (steadily commoditizing) investment wisdom, more than 90% of those wisdoms do not pan out. An entrepreneur is better off to ignore VC advice altogether and pursue the creation of real value to its customers. Fundraising is a lot easier that way.

Psychologists

Many people seek solace in the interaction with a psychologist to solve relationship problems or otherwise. While an outside perspective may be liberating at times, a sustainable solution based on a derivative opinion is highly unlikely. Spend more time with the people you have relationship problems with, than your psychologist. Because the stories you tell him are themselves derivatives.

TV Journalists

CNN today is a prime example of a network that has gone from reporting the news (expensive) to regurgitating the news with hordes of consultants (inexpensive), delivering derivatives of the news rather than the news itself. CNN has moved from a real new source to a commodity entertainment channel, eroding and consistently being beaten at its home turf. Ignore the regurgitation by derivatives and you'll save precious time of your day.

The Stock Market

The stock market is an exchange but not a marketplace in the free-market definition of it. As if the performance, long and short, of a company can be derived from something as simple as price-to-earnings ratios. Public CEOs know how to dance the dance, market to those numbers and become short term focused to meet Wall Street expectations. Yet long term and macro-economic differentiation that requires investments (expense) is arguably more important than meeting the quarterly drill of meaningless earnings reports. The performance of stock is a derivative of the short-sellers view of the performance of the company, and by definition inaccurate. And so are the investment decisions derived from them.

Money

The dollar is not worth the paper it is written on. It merely communicates the value of trust attached to that piece of paper. And even though that money can buy you great things, it matters whether it is acquired from a foundation of trust. Cash is not king, trust is. Easy money has a way of punishing its acquirers in un-expecting and fleeting ways, hard earned money amplifies itself consistently. So, money is a derivative of trust, and someone with a lot should not automatically be confused with authenticity and trustworthiness. Earn money the hard way and you'll be rewarded for life. Money can be a derivative of trust, but with financial derivatives eleven times the size of production should not be confused with trust itself.

There are many more derivatives I can talk about. But the purpose of this blog is to make you think. Hopefully the next time you spend time with someone, you will ask yourself the following question: is that person claiming to be the authority of derivatives or the authority of truth. The answer will define your success.

Tags: Commodity, Free-market, StockMarket, CEO, VC, Limited Partners, CNN

By Georges van Hoegaerden

The biggest complaint I hear and agree with is that Venture Capitalists (VCs) just don't get it and in the words of a VP at Apple, VCs simply don't line up with the needs of entrepreneurs.

Real innovation has no precedent and leaves many VCs, with their platitudes and an army of analytics in the dark in coming up with a reliable reason to invest. I personally had a VC become teary-eyed about the prospect of having to convince the rest of his team about an investment I presented, and I subsequently got it funded elsewhere.

With monetary assets being equal, it takes a visionary or a black swan (whichever classification floats your boat) to separate the good investor from the bad. Great investors have a strong belief that finds solace in an internal compass that is fine-tuned by years of risk-taking. Risk-taking in entrepreneurship or personal life, whichever one shaped that core competency. We have many VCs with strong beliefs, but few of those beliefs are founded on relevant experience.

So, entrepreneurs (and LPs) take note of what is the most important ingredient to look for in the bios of General Partners (GPs). With few exceptions, a GP (General Partner) that has never been a CEO at a startup, responsible for developing and executing its unique ecosystem, is not a great candidate to become a VC. Neither is the GP who has never challenged him/herself personally.

Venture Capital is government

But not only are those investors hard to find, the physical makeup and workings of the current VC construct is diametrically contradicting the decision-making for groundbreaking innovation. As long as the meritocracy at the VC level of the investment pyramid that started Venture Capital is not restored, the artificial arbitration of the current aristocratic model will continue to erode high yield returns.

Here is how VC acts like government:

1/ You (still) need to be in Silicon Valley

Just like you need to be in DC to make an impact on politics, do you need to be within 20 minutes of Sand Hill Road in Menlo Park to be on the radar of investors.

2/ You need an intro to the VC

In DC you need lobbyists to get anywhere, in Silicon Valley you need to find similar lobbyists that can introduce you to the investor you want to talk to. Most GPs simply refuse to talk with entrepreneurs they have not met before. Entrepreneurs who contact VCs directly will find themselves debating the vision with an academic white swan, dramatically improving their chance to get rejected.

3/ Investment decisions require internal consensus

Politics is based on consensus. Likewise, if the entrepreneur is lucky to convince one GP of their proposition, the next monday morning meeting at the VC firm is spent on getting other GPs to agree (except if the first GP is of John Doerr stature). In essence it means a unique invention is shoved through a democratic (government) filter to be validated with chances of a majority vote rapidly approaching zero.

4/ Deal syndication requires external consensus

Many VCs don't have the balls (excusé les mots) to make independent contributions to companies and look for syndication to mitigate the risk. Just like in DC where politicians look for peers to join their charter, before they stick their necks out.

5/ Lack of accountability

VCs can hide behind the size of the portfolio to select one or two successes to brag about. Just like politicians that hide behind a party and associate themselves with many initiatives and get credit for the few that worked. Quite opposite to the devotion of an entrepreneur.

6/ Lack of transparency

To understand politics you need a graduate degree in the subject matter, to understand VC you need to be (or have been) one. Just because the type of businesses VC invests in are private, that doesn't mean VC needs to be.

7/ Far removed from its constituents

Not only physically but spiritually many politicians are far removed from their constituents when they enter into office. So are the VCs who prefer to congregate more with each other than with entrepreneurs to develop unique support for disruptive innovation. VCs are oblivious to the many "false negatives" (as described in my previous blog) they don't even get to see, just as many politicians forget that many americans don't vote at all.

8/ Fewer real innovations are born here

DC (at least before Barack) is not the place to get anything done, and Silicon Valley choking on a vast supply of sub-prime VC is not the place to get anything really disruptive done. The real world is the market, not the current VC interpretation of it.

9/ Long incubation periods

Just like in politics, once the GP secures a fund with the LP the performance of the fund is in limbo for 5-10 years. That is a more secure job than the presidency of the United States. Many GPs stack funds or jump ship before it is about to go under, picking up new management fees under a different fund and LP structure. Another 5-10 years of GP safety lies ahead.

10/ External circumstances

Just like in politics, VCs blame their underperformance on anything else but their own decision making. The state of the economy is their welcome excuse, even though startup economics are quite resilient to macro economic aberrations.

So, the point of this blog is to emphasize that in order to get VC to create high yield returns we not only need to take a close look at the GPs that take the risk but change the mechanics of VC from a "government" based system to a meritocracy at the VC level of the investment pyramid. That is the message I will develop further (and more constructively, I've hammered on VC enough) in helping individual LPs develop new relationships with VC firms.

Tags: VC, Limited Partners, Risk, Funds, CEO, Entrepreneurs, Subprime

By Georges van Hoegaerden

That's how one of the many CEOs that contact me recently described his colleagues who submit to Venture Capital (VC).

This alternatively funded CEO describes other CEO’s that seek VC funding as idiots – with a 1 in a 1000 shot at a lousy valuation (52% Round A, 25% Round B and 15% Round C). He continues that many of the serial entrepreneurs trumpeted by VC’s have no money themselves despite “successful” previous exits.

He is not alone about the ineffectiveness of Venture Capital, I frequently hear from other successful entrepreneurs about it. And the situation may get worse before it gets better. The economy is offering VCs even more excuses to turn the screws, and control of companies is gained in more ways than a simple equity stake.

I believe technology investing today is largely a sub-prime asset class as described in a plethora of sub-prime articles in this blog, and find many entrepreneurs discouraged by both the process as well as the outcome of fundraising, even when that yielded a round.

Because of the ineffectiveness of VC and the rampant false positives and false negatives I refuse to believe VCs (and the NVCA collectively), who suggest that the sum of Venture Capital equals the sum of technology innovation. We see great entrepreneurs actively pursuing more creative investment vehicles (high-net-worth individuals, private equity firms, investment bankers, sovereign funds...anyone with money), and rightfully so.

In the meantime, oblivious to recognizing their own flaws, VCs are further descending down the sub-prime spiral by restricting investments to compliant entrepreneurs, evidence that they remain clueless about the fundamental risk management of high yield returns.

Smart CEOs should simply refuse to work with many technology investors for the following reasons:

- Exorbitant loss of upside
Great entrepreneurs are known for their passion to pursue their dreams at virtually any cost, and sub-prime VCs smell their blood and desperation. Those companies become owned by VCs quickly and because of the investors' lack of relevant operating experience yields a further deflation of the valuation of the company. We've seen many companies with end-game founder stock way below 5%, which is unlikely to become life-changing. So, why would you take the scrutiny of the CEO job with that outcome in mind?

- Indirect loss of control
Voting rights as well as other fine print in the termsheet severely impact your ability as a CEO to disrupt a market. While in the beginning the founders may still own the majority of the shares, the dependance on further runway support gives VCs the ammo to press their preferred operational trajectory and leaves operational decisions at the mercy of its first investors.

- Restrictive expenditures
The powers of the CEO are further restricted by clauses on expenditures in either the articles of incorporation, termsheets, voting rights or other legal documents. We've seen restrictions requiring board approval for expenditures as little as $5,000. That means a CEO can't make pressing decisions until a next board meeting or when there is an ability to call an impromptu session. These restrictions are further evidence that a CEO does not have the trust of the board.

- Insufficient ecosystem control
Investors typify investments in technology waves (witnessed by their mindless herding at technology focused events) and blindly allocate certain expenditure expectations to R&D, marketing, business development and sales divisions. But the ecosystem of every company, regardless of segment, is unique to that company. CEOs who let VCs determine or validate the ecosystem expenditures will spend the subsequent board meetings explaining why they deviated from that, a waste of precious time.

- Deal with undeserved authority
Many VCs do not have the credentials and relevant operating experience to lead an experienced CEO. Yet it behooves the CEO to listen to the idiosyncrasies of the VC in order for them to endorse a CEO's leadership. Nothing is worse for a company's future than having to wait for the investor to validate every step along the way.

- Micro-economically sandwiched
Technology founders and VCs are often focused on building technology, very few investors pay close attention to the macro-economic differentiation (and valuation), leaving intelligent CEO left to drive a more sustainable big picture strategy with limited board and back-end support.

- Forced syndicates
Investors with early stakes can essentially force the company to engage with other VCs in subsequent rounds that favor the initial investor, rather than the entrepreneur. Many VCs huddle together in like-minded "vulture" strategies in the hopes of maximizing their often ill-performing portfolio.

- Damaging to reputation
The valley is so small and ignoring the advice from an investor can have detrimental effect on a CEO's future career. The "you will never work in this town again" syndrome is not unique to Hollywood, it is alive and well in Silicon Valley. The word spreads quickly when you challenge VCs and don't accept their terms, a reason why they tell you not to shop valuations around - it will actually hurt you.

- Sticky lawyers
We've inherited bad ones in companies we ran and found some good ones. But in many cases lawyers in Silicon Valley pretend they actually created the companies, simply because they filed their incorporation paperwork or attended board meetings. They mingle with the money sources and make the introduction to VCs that secure their billing runway. They end up getting cosy with the major shareholders and tilting the balance even further away from the CEO who signs their checks. Another entity to keep in check as a CEO.

- Low salary
Opportunity rather than salary is top of mind to entrepreneurs, but that changes quickly when they struggle to support their families and pay mortgages. $175K is not a salary that leaves much on the table, especially not when you live in the expensive area around Sandhill Road. And VCs are challenging those salaries even more while they are raking in astronomical fees associated with their large funds and sitting pretty for the next ten years. The risk/reward equation between VC and entrepreneur is completely out of whack.

- Poor severances
Board-run companies leave CEOs in a vulnerable state once its collective wisdom does not pan out. The blame for that failure is usually generously applied to the CEO, while the decision making power was not. An early stage CEO should consider himself lucky if the company can still honor its pre-negotiated severance obligation.

Pimps and Hoes

The current venture climate reminds me of the fascinating HBO documentary Pimps Up, Hoes Down in which the undeserved authority of Pimps is applied to the Hoes who do all the (dirty) work.

No self respecting CEO should accept the constriction deployed by sub-prime Venture Capital as described above. The outcome of the current entrepreneurial restrictions is not only highly predictable but has thankfully reached the balance sheets of fund-managers and Limited Partners, who fund the VCs and are starting to question the role of the VC as the intermediary.

The downturn in the economy masks the unrelated impending implosion of Venture Capital. No VC should use the economy as the excuse for the restrictions above and as a CEO you should read its deployment for what it is; a diminished faith in you and the company.

So, unless you can reach a great VC independently or with help from others quickly, my suggestion is to wait with testing your CEO skills until Venture Capital, not the economy recovers. If you can.

In the meantime I'll do my best to help fund-managers revive Venture Capital. It is about time the fund-managers hear the entrepreneur's point of view. That has become my new mission.

Tags: NVCA, CEO, VC, Valuation, Limited Partners, Economy, Subprime, Macro-economics

By Georges van Hoegaerden

I owe HP (Hewlett-Packard) a debt of gratitude; in the mid 70s (when I was 14 years old) the HP-41C, the worlds first alphanumeric programmable calculator is what sparked my interest in technology. From a beautiful but too quiet medieval village in Holland (Woudrichem) I wrote applications for it that won awards (and was paid in new accessories) and found a mental connection with some of the developers who wrote about their role (and hobbies) in a monthly newspaper distributed to all owners (think of it as a Facebook group before Facebook).

The members of the development team wrote passionately about their incredible innovations explaining why they designed the HP-41 the way they did, its extensibility, its use in space etc. I read that magazine and all other publications related to it from cover to cover. In my eyes, HP was synonymous with great design, groundbreaking innovation and flawless execution of marketplace models.

A lot has changed since then, not surprising since HP chose to move from a technology specialist to a technology generalist to keep Wall-street happy. With a big hammer it stuffs the market with massive marketing vigor and manages to stay just ahead of its competitors, for now. But HP has lost its vision, agility and enthusiasm to innovate and fundamentally change the computing landscape.

1/ Longevity by association doesn't work
HP never grew up to own a part of the evolving technology stack from hardware, to software to services (or better yet, the consumer experience) and still today is making little more than me-too gestures with large manufacturers to suggest they own a unique proposition in the application and services technology segments. HP has become a master of associating itself to many things it does not own or add value to (just like the behavior of the many parasites in our industry).

To give some examples: HP rode the gold rush of the PC evolution (driven by Microsoft) and then had to buy Compaq to win the battle in a market that is still 40% owned by no-brand suppliers. HP rode (and lost) the database war by buying a stake in Informix (rather than buying it) even though it sold more servers with Oracle as the primary database (HP's stance propelled Oracle bed-fellow Sun then). HP partnered with Apple to deliver an iPod with no value add, only to kill the program one year later. HP acquired Snapfish in the consumer photography space and never made any attempt to improve its convoluted photography strategy. Examples abound.

So, the key for HP is to own identify and own certain technology ecosystems (from beginning to end) and redirect its massive R&D budgets to build proprietary technologies that attach customers to HP and HP only.

2/ Lacks product vision and execution
Mark Hurd is a great operational CEO with a proven ability to optimize an engine so it consumes as little gas as possible, but sustainability comes from engineering new engines only HP can produce that run faster and better. Mark can continue to hold as many fire-side chats as he desires but that vision is unlikely to come from employees that have been with the company for more than twenty years. Innovation from within is likely to produce nothing more than the same.

With all of HPs fragmented and discombobulated assets in many segments such as document management, printing, imaging it should have developed by now a cohesive customer facing experience that ties these products together like Apple does with music. The company needs a CTO with business experience and an aptitude to fundamentally tap into continuously changing consumer behavior and be open to outside counsel rather than adhere to a stifling "process for investigating outside ventures to allow equal access to these firms and inventors."

3/ Treat people differently
For more than 10 years I've heard stories about how people took advantage of a one-sided aspect of "The HP Way", the ability to stay with the company for many years and move from one division to another to escape being confronted with the outcome of their own decision making. Some people left HP only to make three times the money as an independent consultant working for the exact same group. But "The HP Way" also describes a high level of achievement and contribution that because of todays large and hierarchical org-chart (with many dotted lines) is hard to measure and manage. HP needs to reorganize just once, not based on product - but simply based on ecosystems that align with customer experiences.

Many of HP executives have disclosed to me that the company does not have the engineering talent to build its own product strategy and that probably isn't helped by rampant stories of how HP (a profitable company that should not have a need to layoff employees) is now allegedly laying off people that have worked at the company for 20-years, challenging their severance payments and disallowing them to ever work for HP again. Can you imagine how fast that news spreads to Silicon Valley developers? Not too smart HP. No surprise that it can only attract the talent that favors a paycheck over a challenge.

Start with a compelling vision
But amazing things happen when you drive a company with strong leadership, vision and execution. As a CEO I have experienced that the original assessment of employees fundamentally change when they are confronted with visionary leadership. They wake up and become energized, feel part of a common cause. So, the way to optimize a business is not to simply layoff people but to deliver a compelling vision to which people can either subscribe or not. The employees that don't will walk themselves to the door, especially when you turn up the volume.

So, turning HP around is actually very easy. It requires the innovative mind that "believes nothing it hears but anything it sees". It requires a visionary who cares about nothing but customer adoption, and an ability to model a company towards its purchasing power. Everything else is simply irrelevant.

I know HP despises it when I reference Apple (only to whisper their name in a restaurant), but the company simply has a much better DNA than HP. It is not too late for HP to change but it should start by reading "How to compete with Apple" in order to assess whether it wants to make the real sacrifices that are inherent to innovation (rather than resort to business process optimization).

Call me for a fireside chat, Mark. I would enjoy repaying my debt of gratitude.

Tags: HP, Microsoft, CEO, Innovation, Integrity, Oracle, Apple

By Georges van Hoegaerden

About one year ago I attended a great session with Limited Partners (LPs) to VC firms, the Carlyle Group's Bob Grady and fund managers from Hamilton Lane and SFERS in San Francisco.

At the time I was impressed with the rationale behind a deliberate slowdown in new VC fund investments, yet every fund manager assured that the technology asset class remained an interesting one that LPs cannot afford not to participate in. The group as a whole emphasized that the new VC funds being deployed must prove substantial differentiation in its investment strategy, not unlike an entrepreneur needs to prove a similar aggressive differentiation to win market share.

With that in mind you may just be as amused as I am to see the "duh" investment strategy explained in this private placement memorandum (PPM) from a triple digit fund in early 2000:

• Market capitalization at IPO of $1 billion or more
• Rapid growth and very large potential market size
• Leveraged customer acquisition strategies: the business is able to take advantage of established customer bases, “network” economics, or powerful “viral” strategies to acquire customers at modest up-front cost
• Scalable business models
• Robust economic models: significant margin generation with potential for self-funding in year 3 or before.
• Significant competitive advantages based on such factors as proprietary technology, establishment of industry standards, customer investment in applications and/or user interfaces, or winner-take-all economics (i.e., the market is a natural monopoly)
• The opportunity to create leverage vis-à-vis suppliers and customers by virtue of efficiency advantage, neutrality, scope of business, and hard-to-replicate investments

I have seen quite a few other PPMs since and the resemblance is remarkable. No surprise that VCs have had the flexibility to latch-on to every new technology acronym, using whatever allocation per company they desire and invest in virtually any technology company that comes their way. And so they did.

They all did. In pretty much the same way, as lemmings are known to do. So now, we are over-invested in the same deal constructs (deep, see the investment atrophy described here), and under-invested in the full scope of technology innovation. As a result, large technology companies (such as Apple) are eating early-stage disruptive innovation for lunch, leaving the little deals for the bottom-feeder (sub-prime) VCs that count themselves blessed investing in "capital efficient" deals with little disruptive value, let alone IPO prospects.

No longer can fund investments be made using a single yard-stick.

LPs need to take better control of the segmentation in the technology asset class especially since maturing technology evolution will have its feet in every market segment, including crossovers to other asset classes.

VC funds need to be pushed apart to yield less overlap and provide complementary investment strategies rather than an 80% overlap. That, with the requirement to start new VC funds with GPs that actually have had early-stage CEO operating success, allows VCs to better align with the needs of the entrepreneur and fundamentally improve the chances for high-yield returns.

Tags: Limited Partners, VC, Subprime, CEO, PPM

By Georges van Hoegaerden

Silicon Valley is not dissimilar from the politics in Washington DC in the sense that its existence today is regulated by aristocratic people (investors) who are not up for re-election for another 7-10 years and have created an ecosystem that spawns more false positives and false negatives than any politician could ever get away with.

So, it is not without a smile on my face (as I have been preaching and practicing for years) that I quote Barack Obama’s innovative approach to politics that we in Silicon Valley could learn from:

Strong personalities and strong opinions
Obama looks for strong personalities and strong opinions, while the venture business is often afraid to hire people who challenge its popular opinion. Many technology companies over the years have been invaded by managers who akin to the gold-rush are looking for the gold that is no longer easy to find. We need to change too and cultivate managers that have real experience, strong vision and strong abilities to rally a team around achievable results. Let’s get rid of managers that just like politicians prefer to feed their sex drive (my first boss in the US spent his days watching porn-videos as we prepared feverishly for a major launch) and their 401K with the least resistance possible.

Think anew and act anew
Obama is shaking things up. We should too. The really new ideas in technology are few and far between. We need to build and feel responsible for an ecosystem of new financiers that fund technology ideas that do not fit the mold, rather than continue to create clubs that mindlessly perpetuate businesses that copy few successes or popular acronyms.

Extreme transparency
Obama teaches us how the disclosure of governmental documents is the floor and not the ceiling. Compared to that metric, early-stage performance disclosure is probably more than 6 feet under, or in the cellar. We have no transparency in the venture business to discover who has integrity, and who is poisoning the technology ecosystem. We need to deliver transparency in order to improve the trust in technology companies that keeps private and public investor interested.

High integrity and moral
Obama, when moving back to Chicago, took a job doing what he believed in, not what made him the most money. We need to stimulate people in Silicon Valley with a passionate desire to fundamentally improve technology adoption, rather than continue to feed people who hone their skills just to get rich.

Use it or lose it
Obama evaluates and then commits quickly. And then, when the money is forked over, you are expected to make things happen. That’s how real savvy businessmen run their companies, quite different from the puppet role many startup CEOs play to appease their boards, the source of perpetual mediocrity. We need to grow a culture of buy-in and commit, risk and reward that holds people accountable for the results.

Either we regulate the early-stage technology ecosystem ourselves or the market will do it for us - with much less grace. Already, it is predicted that 25% of the VCs will go out of business soon, freeing up LP overhang for a new crop or reallocation to a new segment. Other countries (such as China) are not sitting still, the performance of our technology ecosystem will now be challenged on a global basis.

The only way not to lose grip globally is to hold the values, that made our country vote for Obama high, and aggressively reward integrity, passion and sincerity over greed. Real capitalism rewards the good and punishes the bad. And the American dream flourishes again.

Tags: Innovation, Eco-systems, Economy, Limited Partners, CEO, VC, Startup

By Georges van Hoegaerden

Photography is a fantastic craft to which now, with the introduction of digital photography, many more people have access. Great photography relies on an ecosystem of factors (technical: shutter-speed, exposure, aperture, depth of field, ISO etc. and non-technical) to turn a simple scene into a compelling vision. Just like in business.

The similarities between photography and business are remarkable:

1/ The Art of Seeing
Great photography starts with an ability to see in the same way great innovation starts with an ability to imagine. Spotting a scene and finding extraordinary simplicity in detail is what lays the foundation for a great photograph and business. More so than the ability to master the camera, time is of the essence. Shoot it - now - with whatever camera, as that scene may never come back. So do the great opportunities in business. Carpe diem.

2/ Establish Focus
Every photograph needs a clear focal point, just like a business. One, and not more than one. But focus is not always obvious and in the middle of the viewfinder. Focus in photography and business is achieved through experience of knowing what that focus yields. In business that defines how you are percieved by your customers. As a photographer, you determine where the focus is and set the right angle. As a CEO you establish the focus and direction.

3/ Set a Composition
Composition determines what you see beyond the focal point. Other objects in the viewfinder compete for attention with your focal point, but a great composition takes your eye on a journey to the focal point and strengthens its attraction. Lines, shapes, curves and contrast establish focal point supremacy. In the same way competition in business strengthens (not weakens) the unique appeal of your business.

4/ Evaluate Exposure
Exposure determines how much light you let in. Too much or too little light washes out great detail. Too much or too little exposure undervalues or overvalues the company, either one turns off customers. Use exposure to enhance great value, not to displace it. Use public relations and marketing wisely. So, locate the real business value before you expose it. Exposures can usually be fixed afterwards.

5/ Measure Depth-of-Field
Depth-of-field establishes what is in the foreground and what is not. What is important and what is less important. In business, razorsharp focus is required to establish a solid bottom-line. But a business without “depth-of-field” is a one trick pony. A great bokeh (a photography term for the background pattern established by an f-stop) determines its longevity and - ultimately - sustainability.

6/ Know Technology
Technology is becoming more relevant in photography and similar is the impact in the business world. Technology determines how the end product can be shared and organically find its massive appeal. Now, through the internet, great photographs and great businesses will find a new audience that was previously unreachable. New, more free, markets are opened up and new opportunities arise.

For me personally, photography is a way to relax, but in actuality it is an extension of what I do in business every day. I am always looking for unique moments in time, taking great pictures and building great businesses, that perhaps - others don’t see.

Tags: Photography, Markets, Free-market, Eco-systems, CEO, Marketing, Experience

By Georges van Hoegaerden

Over the last 10 years I've also been closely involved with early stage technology funding (advising VC firms and Angels) and have invested personal time and money in early stage ventures. That has given me a unique perspective of the challenges between entrepreneurs and investors.

I've written about my Top 10 fundraising lessons for entrepreneurs, and dare to follow up with my Top 10 investment strategies that may be useful to investors and entrepreneurs, here:

1) Invest in the founders, but be wary if the company consists of technologists only. The ones that come in without an operating plan clearly do not understand what you as an investor are looking for. Get a real operator in early.

2) Invest in the business, don't invest in technology. The statistics prove it: ninety-nine out of a hundred of the most innovative technologies never turn into successful businesses. Especially investors (both VC and Angels) that made their money in the hay-days of technology have a tendency to underfund the business side, providing a weak foundation for any technology to succeed.

3) Don't invest in an early stage company with more than one product or service. Let the company become the King-of-One, rather than the King-of-None. Multiple products or services require more money to support successfully and dramatically dilutes the focus of the company. Multiple products or services also "invite" a larger group of competitors, making it hard for customers to perceive true differentiation and unknowingly, slows down adoption.

4) Don't invest in an early stage company with more than one business model. Keep it simple. Multiple revenue models sound good, but usually don't yield the projected outcome. The company should make all of its money in advertising or in subscriptions, not in both. Dilution of focus is costly and provides yet another reason for failure.

5) Don't invest in companies that rely heavily on partner support early on. This is the typical David and Goliath phenomenon. Partners sell once the company does in overwhelming numbers. The company should always have direct control of its own business model first, before they allow any partner to reduce its margins.

6) Invest money or time, don't do both. I very much relate to Carl Icahn in an interview with Dan Primack (on PEhub) with regards to CEOs responsibility to make the numbers work, and not to rely on investors to "add value". The CEO is in the driver seat, take him out if he doesn't produce.

7) Look for fundamental changes in customer experience. The Ultimate Driving Experience is what sets BMW apart, not just the timing in their engines. Customer experience is much more than a pretty user interface, it is an overall experience that spawns disruptive purchasing.

8) Watch how professional the team operates pre-funding as an indication of their interaction post-funding and with customers. Real professionals do everything with a purpose and I have mastered the art of detecting them. So well that I can tell from a visit to a trade-show floor whether a company is going places.

9) Don't categorize investment allocations based on past investments or trends. Every company is unique and requires an amount of money unique to their assets: people, timing, market and ecosystem. If you don't think you have a unique scenario, you probably don't have a valuable investment opportunity.

10) Invest with passion but don't fall in love with the company. Investing is the ultimate flirting game, but it is usually a bad idea to get really involved. Your asset value is the selection and performance of all the companies in your fund. Stick with what you do best.

From an investment perspective I see many "sub-optimizations" but not a lot of real great innovations these days. I do blame the current investment model for that sometimes. We, in Silicon Valley, have too many technology investors using the same rearview-mirror investment criteria. Although I have a lot of admiration for Apple, it is a bad sign when we need to leave real innovation in the hands of large companies like theirs.

The landscape for investors is about to change dramatically, no longer can they just continue to invest in proprietary technology silos at single digit valuations. They'll soon need to broaden their experience ("in search of the Economist VC") to understand the macro-economic impact of marketplaces, platforms and the impact of technology to other industries.

A wonderful long road for technology innovation and investing still lies ahead.

Tags: BMW, Experience, Disruption, Revenues, CEO, Timing, Markets, Investment, Startup, Apple