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Archive for July, 2012

By Jim McHugh.

Where Start-ups Get Stuck – and How to Avoid Going There

Between us, my long-time friend (and fellow blogger) Andy Palmer and I have started a lot of companies. We also advise many other companies and look at even more pitches from start-ups.  A shared observation is that while a few start-ups shine (or at least glimmer) and go on to some success, other start-ups seem stuck before they start.  Why?

Here are our observations on where start-up founders get stuck and our advice on how to prevent Stuck situations, presented Q&A style. This post also appears on Andy’s blog, The Fundable.

Q.  Andy, where are the most common places you see founders getting stuck, and why?

Andy Palmer, Start-Up Specialist
I see a lot of founders get stuck at the very earliest stages – by being distracted by fundraising.  I’ve said before – over and over again – founders should focus on developing their business first and not worry about fundraising nearly as much as they would probably like.  It’s natural to be nervous when you don’t have any money in the bank.  But it’s a healthy discipline to figure out how you are going to create value for customers who will pay you instead of spending time thinking about how to extract money from venture capitalists or seed investors.  As an angel investor, I’m always looking for people who are mission-driven and focused on their customers, as Jim says below, instead of worrying about what potential investors might think.

 Q.  So how can entrepreneurs avoid getting distracted by fundraising?

Just focus on your business and your customers.  Wake up every morning thinking about how you are going to create value for your customers. Go to sleep at night considering which of your customers you helped that day and how.  Be maniacally focused on your customers’ needs.  It sounds simple – and it is – but executing this when you are starting from scratch – with no product, no credibility, and no people –  is really hard. It requires all your energy and your concentration.

Q.  Any other tips on how to avoid getting stuck?

Be driven by your mission. The money will follow.

Q.  Jim, where are the most common places you see founders getting stuck – and why?

In my experience, the two most common causes of becoming stuck are 1) an incomplete or muddled business model (see Stuck in the Fog) and 2) directly related to that, not clearly understanding the specific needs of their customers (see Stuck in a Rut).
What do I mean by an incomplete business model?  A well-defined business model (i.e., the “guts of the business”) states how the company is organized, what products and services it sells to whom, and how the company “goes to market.” In addition, the whole company clearly understands the associated operational policies, processes and needs (both for the supplier and the customer).

Start-up and early-stage teams become obsessed (as they should) with the product/prototype, the team, and the market potential. However, they sometimes fall short in three important areas:

  • They are naive about all aspects of the business model.
  • They don’t understand – or they have chosen to ignore – the specific linkages of their product to their customer’s product.
  • They have not solved or put in place key components of the business model and assume it will be easy to “finish those later.”

The business model can be pretty straightforward if it is a simple B2C or B2B connection – that is, “we make it, you consume it.” The linkages become more difficult to sort out if the start-up’s product becomes embedded in their customer’s product offerings – for example, as a component.
One striking example I have seen of an incomplete business model was a food ingredient technology company that had considerable success raising seed money from a group of angels. This company had traction:

  • the technically elegant prototype demonstrated product effectiveness and potential significant benefits to consumers
  • the company had received approval from a key regulatory agency
  • the product was going to revolutionize one segment of the food industry
  • there were positive (but limited) real-world test applications
  • the expected market was huge

Then the company’s traction stalled; they became stuck. How could that happen?

This revolutionary product was not sold directly to end-user consumers. It was an ingredient that became part of other companies’ product formulations. The industrial and consumer target customers who evaluated the start-up’s product realized they would have to change their end-use product specs, add equipment and processes to their production line, and change their quality control testing procedures. They would also have to change their existing descriptive product information and packaging.

For some customers that would mean altering (for the better?) very successful, stable products that were established with consumers. Were the customers prepared to take the market and product risk (with a start-up) and incur the costs and aggravation associated with adopting this new technology?

Having a great product was a prerequisite for the big food ingredient companies, but it quickly became apparent to the start-up that many other factors influenced the prospective customers’ decision making process.

Q.  So, what’s your advice for avoiding getting Stuck before you Start?

To be sure, the business model for early-stage companies evolves over time. It gets fine-tuned, even changed.  But fine-tuning is a lot different from having a naive view of the customers’ needs out of the gate. It’s a cliché, but how many times does “knowing the customer’s needs” have to be said to founders?

Q.  Any general tips about how to avoid getting stuck?

Yes, it really helps to have the right people on the team who understand and have experience in the industry they are selling into.
Have you seen early stage companies that were stuck? What caused them to be stuck, and what did they do about it?

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by Don Middleberg, Member Gerbsman Partners Board of Intellectual Capital

“I’ve missed more than 9,000 shots in my career. I’ve lost 300 games. Twenty-six times I’ve been trusted to take the game winning shot and missed…I’ve failed over and over again. And that is why I succeed.”
-Michael Jordan

The most important thing I’ve learned in business is that you can’t stand still. You must try things. Not all will succeed, but on balance, if you’re smart and thoughtful, things should work out over the long term. In the spirit of calculated risk-taking, in the first six months of this year Middleberg Communications was involved in three significant developments:

1. The move into social media through Laundry Service. While a lot of folks talk about having social media capabilities, there is a huge difference between working Facebook and LinkedIn pages and having an in-house video production studio complete with brilliant film editors, creatives and social media managers who understand and work all platforms. I love social media because it works. It removes one of the major stumbling blocks that has always existed for public relations – proven, quantifiable metrics. So when founder and President Jason Stein and I decided to get together, it was a natural fit. We formally joined forces February 1, and in the nearly six months together we have built LS into a near-$1 million firm.

Social media is now a major point of difference for us. Few PR firms have the chops to do both great media relations as well as incorporate a significant social media skill set.

2. The acquisition of G.S.Schwartz & Co. Jerry Schwartz and I have been friendly competitors for years. Our deal was completed on July 1, and was a natural move for both of us given that our respective firms work in many of the same vertical markets—consumer, tech, B2B, associations, financial and professional services. I now lead the combination of nearly 25 professionals, all in our offices at 317 Madison Avenue. I’m really pleased at how quickly and seamlessly the integration of culture and client responsibilities is going. We are quickly bonding and integrating client responsibilities. To Jerry’s credit, his team is enthusiastic, smart and each brings great skill sets to the table for the benefit of our clients.

3. I am pleased to announce that Rachel Honig and David Bray, Managing Directors of Middleberg Communications, have become principals of the firm. Rachel comes to the agency from the G.S. Schwartz acquisition. David has been with me since the first day I started the firm. Both are highly skilled communications executives, hardworking, and true professionals.

So now we are a solid mid-sized communications agency working in all mediums—print, broadcast, digital and social. We are doing some great, cutting-edge work for our clients. We are poised for growth. We are excited for the future.

Regards,

Don Middleberg

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Further to Gerbsman Partners e-mail of July 10, 2012 regarding the sale of certain assets of LumaTherm, Inc., I attach the draft legal documents that we will be requesting of bidders for certain assets of LumaTherm, Inc.  All parties bidding on the assets are encouraged, to the greatest extent possible, to conform the terms of their bids to the terms and form of the attached agreements.  Any and all of the assets of LumaTherm, Inc. will be sold on an “as is, where is” basis.  I would also encourage all interested parties to have their counsel speak with Stephen O’Neill, Esq., counsel to LumaTherm, Inc.

For additional information please contact Stephan O’Neill, Esq., of Murray & Murray counsel to LumaTherm, Inc.  He can be reached at 408 907-9200  and/or at      soneill@murraylaw.com

Following an initial round of due diligence, interested parties will be invited to participate with a sealed bid, for the acquisition of the LumaTherm Assets. Sealed bids must be submitted so that the bid is actually received by Gerbsman Partners no later than Thursday, August 23, 2012 at 5:00pm Central Daylight Time (the “Bid Deadline”) at LumaTherm, Inc.’s office, located at 12600 Northborough Drive, Suite 220, Houston, TX  77067.  Please also email steve@gerbsmanpartners.com with any bid.

For your convenience, I have restated the description of the Updated Bidding Process.

The key dates and terms include:

The Bidding Process for Interested Buyers

Interested and qualified parties will be expected to sign a Confidential Disclosure Agreement (attached hereto as Appendix B) to have access to key members of management and intellectual capital teams and the due diligence “war room” documentation (“Due Diligence Access”). Each interested party, as a consequence of the Due Diligence Access granted to it, shall be deemed to acknowledge and represent (i) that it is bound by the bidding procedures described herein; (ii) that it has had an opportunity to inspect and examine the LumaTherm, Inc. assets and to review all pertinent documents and information with respect thereto; (iii) that it is not relying upon any written or oral statements, representations, or warranties of Gerbsman Partners, ortheir respective staff, agents, or attorneys; and (iv) all such documents and reports have been provided solely for the convenience of the interested party, and Gerbsman Partners (and their respective staff, agents, or attorneys) do not make any representations as to the accuracy or completeness of the same.

Following an initial round of due diligence, interested parties will be invited to participate with a sealed bid, for the acquisition of the LumaTherm, Inc. assets. Each sealed bid must be submitted so that it is received by Gerbsman Partners no later than Thursday, August 23, 2012 at 5:00pm Central Daylight Time (the “Bid Deadline”) at LumaTherm, Inc.’s office, located at 12600 Northborough Drive, Suite 220, Houston, TX  77067.  Please also email steve@gerbsmanpartners.com with any bid.

Bids should identify those assets being tendered for in a specific and identifiable way. In particular, please identify separately certain equipment or other fixed assets.  The attached LumaTherm, Inc. fixed asset list may not be complete and bidders interested in the LumaTherm, Inc. equipment  must submit a separate bid for such assets.

Any person or other entity making a bid must be prepared to provide independent confirmation that they possess the financial resources to complete the purchase.  All bids must be accompanied by a refundable deposit in the amount of $200,000 (payable to LumaTherm, Inc.).  The deposit should be wired to LumaTherm, Inc.’s attorneys Murray & Murray, A Professional Corporation.  The winning bidder will be notified within 3 business days of the Bid Deadline. The deposit will be held in trust by LumaTherm’s counsel.  Unsuccessful bidders will have their deposit returned to them within 3 business days of notification that they are an unsuccessful bidder.

LumaTherm, Inc. reserves the right to, in its sole discretion, accept or reject any bid, or withdraw any or all assets from sale.  Interested parties should understand that it is expected that the highest and best bid submitted will be chosen as the winning bidder andbidders may not have the opportunity to improve their bids after submission.

LumaTherm Inc. will require the successful bidder to close within a 7 day period. Any or all of the assets of LumaTherm, Inc. will be sold on an “as is, where is” basis, with no representation or warranties whatsoever.

All sales, transfer, and recording taxes, stamp taxes, or similar taxes, if any, relating to the sale of the LumaTherm, Inc. assets shall be the sole responsibility of the successful bidder and shall be paid to LumaTherm, Inc. at the closing of each transaction.

For additional information, please see below and/or contact:

Steven R. Gerbsman
Gerbsman Partners
(415) 456-0628
steve@gerbsmanpartners.com

Kenneth Hardesty
Gerbsman Partners
(408)591-7528
ken@gerbsmanpartners.com

Philip Taub
Gerbsman Partners/Foundation Ventures
(917) 650-5958
phil@gerbsmanpartners.com   ptaub@foundationventures.com

Stephen O’Neill, Esq.
Murray & Murray
(408) 907-9200
soneill@murraylaw.com

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Article from GigaOm.

There’s a lot of talk in Silicon Valley about a bubble in VC investing right now, with the $1 billion purchase of Instagram by Facebook seeming emblematic of high valuations for social apps without a clear revenue stream or inherently altruistic purpose. So many are wondering: could the tech industry shift toward more investment in startups that cure cancer or find solutions for clean energy? The answer depends who you ask.

A panel of investors and startup founders speaking at Venture Shift on Thursday debated whether there really is a bubble in venture capital right now, and whether the talent and money in the startup area is directed at solving the best problems.

Marcus Ogawa, a managing partner at Quest, said Instagram’s sale will absolutely inspire a proliferation of photo and video-sharing apps, perhaps more than most customers really need.

“It’s a complete and total waste of money. But I don’t want to live in a planned economy,” he said, pointing out the incredible amount of innovation and development that comes from the growth of those companies.

There’s certainly plenty of money going in that direction right now. A report from CB Insights this week found that the most recent quarter saw $8.1 billion in venture capital financing for 812 companies, the highest in both dollar amount and number of deals since the same quarter of 2001. And of that funding, 13 percent of deals were in the mobile sector with 30 percent of those companies involved in photo or video technology.

So are there more meaningful companies that aren’t getting funded because of the so-called Instagram effect?

“You see people graduating from top tech schools… and they’re starting companies in internet and mobile,” said Corey Reese, CEO and co-founder at Ness Computing. “They’re not starting companies to enhance the life expectancy, by and large.”

But Jessica Alter, founder of the startup Founder Dating, pointed out that one of the reasons so many social consumers apps are getting funded is that the costs associated with starting them are much lower. Cloud technology and open-source code have made it cheaper to start and launch those businesses, making them some of the more visible success stories compared to companies in the biotech or clean energy spheres, even if accelerator and incubator programs for health care startups do exist.

“It’s all going down, but nothing’s going down as much as the cost of starting a new consumer app,” she said.

Read more here.

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Article from GigaOm.

Venture capital investments picked up significantly this quarter, with a 37 percent increase in funding and 3 percent increase in deals over the previous quarter. The period also saw strong emphasis on mobile investments and seed funding, according to a report released by CB Insights. There was a total of $8.1 billion in financing for 812 companies, the highest totals since Q2 of 2001.

About 13 percent of the activity — or 102 deals — was in the mobile sector, marking an all-time high, with 30 percent of those companies involved in photo or video technology.

“Without being too self-congratulatory, the Instagram Effect we speculated about in Q1 2012 seems to have taken shape as the mobile sector saw 102 deals, an all-time high… For skeptics, it may also be indicative of a VC herd mentality. Time will tell.”

Below is a breakdown of investments by dollar amounts in the different subsets of mobile and telecom industry:

Some other highlights from the report include:

  • Seed investing also hit an all-time high, with 22 percent of all deals happening at the seed stage this quarter, as compared to 12 percent from the same quarter in 2011.
  • The most successful sectors with respect to number of deals were internet companies with 46 percent, healthcare at 17 percent, and mobile and telecommunications at 13 percent. With respect to dollars in funding, the top sectors were internet at 38 percent and healthcare and “other” each at 19 percent.
  • 50 percent of deals occurred at either seed funding or Series A rounds, although they made up only 19 percent of funding dollars.
  • California took the most number of deals per state at 45 percent of deals, up from 40 percent in Q1. New York remained in second place with 10 percent of deals, and Massachusetts in third place with 9 percent.

Read more here.

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Friends – 50 years and counting (from my College years)

We were sitting in the Fraternity house when I said “some day I will say I know your guys for 50 years”.  Wow, as we looked at each other and smiled with beer in hand, we pondered and pontificated on how our lives would be then.   

We were “Baby Boomers”, first generation college students growing up in the Bronx, Queens and Brooklyn and going to a the City University of New York, Hunter College in the Bronx.   Tuition was $ 24 a semester and we all “worked” to pay for books, travel, cars, insurance and the luxuries of the world.  Life was never better and who knew that we grew up in lower and middle class households.

This past week my wife and I had dinner with David and his wife.  We see each other rarely as I am on the west coast and he is in Westchester County, however the bonds of “50 years” were never stronger.  We hugged each other and joked that now we talk about health, doctors, challenges with grown up children, etc.  However it was only like yesterday that David and I met.  We were both accounting majors and got to know each other the first weeks of College.  He ultimately chose a different fraternity, but we were always there for each other.  We were both on the Freshman Baseball team, until the Coach found out our GPA’s were below the required minimum for the team;  David drove me to the 42nd St. bus station to go to basic training; I spent the night at his house before my wedding and drove me to the Temple;  he was, with my now wife, the first visitor during basic training and we went on many 24 hour road races together.  So, as we were at dinner, I said “we know each other 50 years” and we reminisced.  After dinner, as we hugged each other, we felt the love and bond that friendship and time brings.

During my time of life at college, while growing as an individual and gaining confidence, I made Friends for life.  Our Fraternity of Brothers were brought together by a “bond” and most all excelled over the years.

So thank you David (although not a Fraternity Brother), and thanks to Fred, Jack, Don M, Don R, Danny K and my AEPi Brothers.

To good health, to family and to “Friends for 50 years & Counting”

My best

The GERBS

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China Is Now Stimulating All Over The Place

Joe Weisenthal | Jul. 15, 2012
Shanghai street

A Hundred Books, a Thousand Miles

A prediction made by many China observers early in the year went like this: The Chinese economy would slow through the first half, then Beijing would step on the gas pedal and numbers would start to rebound.The first parts of the prediction are coming true.

The economy has slowed through the first half of the year. The latest GDP numbers were the slowest since the crisis.

And the gas pedal is being pumped.

China has cut interest rates aggressively.

State direct stimulus spending is starting to crank up again.

And now, according to FT, China has just cut taxes by 50% on foreign entities investing directly in China.

The full on press to lift the economy off of a hard landing is on.

Now we’ll see if the numbers rebound.

 

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