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Think Big. Move Fast.

I’ve just started watching Season 4 of Shark Tank, the incredibly popular show on ABC where entrepreneurs pitch their businesses to a panel of five individual investors (the Sharks) for investment. I thought it might be fun to give a VC’s perspective on the businesses getting pitched.

You can watch the first episode online, if you didn’t see it live, to see the pitches and learn about the businesses. I’m going to focus on analysis, and not explain the businesses themselves.

COAT CHEX

The first pitch was for Coat Chex, a company using a tablet app to make coat checks (and other “bailment” businesses such as valet parking, dry cleaning etc.) simpler and more secure. Looking past the cheesy theatre of the guys pitch, this company was the one most likely to actually pitch a real Silicon Valley VC, given its technology angle.

Mark Cuban was right to describe the pitch as a “Horrible! Horrible! Horrible idea!”.  The company was pitching a franchise business to roll out the technology nationwide, when it had yet to actually run it live in a single location. This is a classic example of focusing on scaling up before product-market fit has been achieved. The founder had not thought about his go to market approach, he had not researched competitors, and he had not done any market testing because it wasn’t convenient for him (wrong time of year – too hot in Indiana, so he didn’t bother). This business school student made the classic mistake of mistaking an idea for a product for a business plan. He thought that all be needed to get the investment was to charm and entertain, when what he needed to do was convince.

Despite all of this, Cuban made an offer to invest $200k for 33% of the company. The founder wanted to take the offer, but he called his advisor (his business school professor) who told him it was too much dilution for this stage, so he turned it down. This was the right decision. There is a lot that he can do to address the questions being raised, including building out some locations and operating the service. He had come too early to pitch.

Although the decision was right, the fact that the founder went against his judgment to listen to his advisor, and regretted the outcome later, is a negative sign. Founders need to have the courage of their convictions. They should listen to advisors, of course. But if the advisor doesn’t convince them, they need to be leaders, and do what they think is right. This founder isn’t ready to be a startup CEO.

BEV BUCKLE

The second pitch was for Bev Buckle, a belt buckle with a fold out bottle holder. The founder had sold $340k worth of the product at 60%+ gross margins at festivals around the country, and had interest (but not purchase orders) from a long list of retailers. He had problems with his manufacturer (poor quality) and working capital and had only 62 items available in inventory. He was seeking $50k and wanted to take a salary in the $2-3k per month range to do this full time. He got three offers:

  • $50K for 75% of the company
  • $50k for 51% of the company with no salary
  • $50k for a 12% royalty off the top

It is very positive that the founder had generated some sales and interest from retailers. He has shown some hustle, and demonstrated product-market fit.

The issue here is that this is likely to be a bit of a fad product. Now fad products, like the Slanket, can be incredibly profitable, but they don’t generate enterprise value. At some point the fad passes and sales will crash. Enterprise value comes from a projection of future continue sales growth, or at least stability, and that is unlikely for this product. Fad products look more like projects than companies, with a defined endpoint to the investor participation. They are often structured as loans which need to be repayed with interest, so that the investor knows that they are getting their money out. That is likely why we saw the offers structured as they were.

Two of the offers would see the founder cede control of the company to the investor. This way the investor knows that they can get their money out because they can control the payment of dividends, and can wind down the company and distribute cash if they determine that there is no future in the company. Founders can get too tied up in the product to see clearly when it is time to wrap up the company and they can waste a lot of money trying to revive a product without a future, or swinging for a new hit product. Since founders can pull salary and other benefits from the company continuing while the investor gets nothing until distribution, an investor would want control over a company likely to have a defined “end of life.”

The other offer saw money coming off the top as a percentage of revenue. This also protects the investor from a situation when the company should be wound down but isn’t. The investor doesn’t bear risk on ongoing expenses without the prospect for future revenue.

The company chose to sell 51% of the company and take no salary. I think that was a poor decision. The gross margins of the business can support a 12% royalty and this would be both cheaper in the long run, and allow the founder to keep control.

BODY WALKING INSTITUTE

The third pitch was for a company selling certifications in “Body Walking” a massage technique that involved using the feet. The pitch was all about potential, market size and math “if we just had 10 classes a month with 20 people in those classes, that is a revenue of $300k.” The company was not novel, had had very limited success to date (only 30 certifications sold in 7 years) and all the Sharks passed.

As two of the Sharks said, “Potential is not sales.”

BUGGY BEDS

The last pitch was for Buggy Beds, a company building bed bug glue traps. These guys focused their pitch on the product, and they really hid the lead. They should have led with their tremendous traction with retailers (Home Depot, Burlington Coat Factory) and direct sales to Housing Authorities that had generated $150k in sales in six months with $100k in profit.

The company asked for $125k for 7% of the company (pre money of $1.66M), having turned down an offer for $5M for the patents and trademarks before they started sales. The founders clearly believed in the upside of the company and that is why they were willing to take a lower valuation but wanted minimal dilution.

All the Sharks were interested in investing. One made an offer of $250k for 25% of the company (pre money of $750k) and offered to let all the other sharks join him in his offer. He was clearly trying to get the Sharks to collude to avoid driving valuation up. Two of the other sharks joined the offer. Another offered $150k for 15% of the company (pre money of $850k – slightly better) but made it an exploding offer and demanded an immediate response. The founders waited, the exploding offer was withdrawn, and all the rest of the sharks joined in on the group offer. The founders accepted it.

With this level of interest, the entrepreneurs should have known that they had room to negotiate. Entrepreneurs should never take an exploding offer with such a short deadline. It suggests desperation on the part of the investor. They want to force you into a quick decision, likely because they are worried that a higher offer may be made by someone else. But if they want in so badly, they will still come back later on, just as this Shark did.

Similarly, when they see so much interest from so many partners, they should push for better terms. With this much interest, it is likely that at some point the collusion will break down and one investor or more will make a better offer to try to seal the deal for themselves.

The company left money on the table by not countering, or refusing the offer. They could have said “we want just one investor, fully committed to helping us build something great, so we have to turn down this offer, but are open to alternatives” and let the Sharks fight each other to get into a deal that they all want. Almost always, having one major investor with a lot of skin in the game is better than a “party round” with lots of people in for a small amount. When the company needs help with a “party round” no one has enough at stake to do real work to help. Conversely, when a single investor has real money at stake, then they have real upside to help the company grow, and real money at risk if the company is in trouble, so will be there when help is needed.

The other big mistake that the company made was that they should have asked for more money. The company made $100k in profit in six months. Yet they only asked for $150k. What could they do with $250k in capital that they couldn’t do with the $100k that they already had? And if they waited another six months, they would have had $200k+ based on their run rate. In order to hit an inflection point, they would likely need an order of magnitude more capital than they currently had available, and should have been asking for $1M or more to build their company to the next level.

WRAP UP

Shark Tank is a fun show, with companies that are very unlike most of the pitches I see as a VC, but where many lessons still apply. I’m going to break down the pitches for each episode this season on our blog.

Follow us on twitter at @lightspeedvp.com or subscribe to our blog at http://lsvp.com/blog/

 

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As a part of our Summer Fellowship Program, we bring in influential speakers from around the valley each week to share their insights, lessons learned and tips with our teams.  The program has now been in place for six years, so with recent fellowship classes I have been fortunate to pull from our list of alumni when curating the speaker list. One of those alumni, Pinterest CEO Ben Silbermann, was generous enough to join us this past week for lunch with our fellows and alumni from past years.

During lunch, Ben shared details of his background and thoughtfully explained the journey of how he came to be CEO of one of the hottest startups in the consumer internet space.  He also shared a number of insights and lessons which I think we can all learn from:

Hire Great People, regardless of if you have a defined role for them:  Ben shared that one of the things he is thankful he did in the early days was to hire people that he thought were great people even before he knew exactly what their role would be. Great people, he explained, can add value in various roles and often provide key solutions to problems that arise throughout your lifecycle.

Learn from No:  Whether you are seeking funding, making offers to potential employees or trying to build partnerships, as a startup you are going to hear the word no a lot.  What makes Ben a great entrepreneur is that he recognizes that most of the time, people are saying no for a good reason.  He had the patience, self-awareness and intellectual honesty to evaluate the situation and make the necessary changes.  Whatever the reason for No, Ben stressed the importance of using it as opportunity to learn and to correct so that you are moving your company into a position where you can start getting some yeses.

Decide what will make you happy and commit 100% to doing it:  One of the things Ben said he learned early on was that while being an entrepreneur meant that he had control over what he was building and doing, it also meant that he lost control over a number of things like a steady paycheck or the resources of a large organization.  But, ultimately, the tradeoff was worth it for him to keep going.  His advice to the group may seem simple and obvious, but it can be hard to follow!  He was convincing – you have to find what makes you happy, because ultimately, that is the person you have to answer to first.  Building a startup is really hard, but if you are doing something you love or building a product you are passionate about, it is one of life’s greatest rewards.

Foster your co-founder relationships:  Like any relationship, you are going to have some ups and downs as founders so it’s important to foster a good, highly communicative relationship with your co-founder(s) so that you can make it through those rocky days. Again, it may seem fairly straightforward, but it is one of those things that requires consistent attention and can make all the difference.

Recognize what you don’t know and tackle it head on: This was less of a tip and more of an anecdote that Ben shared, but one that I thought was worth mentioning.  Every weekend, he reads a different business book in an effort to hone his business, marketing or technical skills.  Having a ready appetite to learn and grow as a person and a leader is no doubt a part of Pinterest’s secret sauce and something I encourage any entrepreneur to foster throughout their careers.

It was tremendous to have so many alumni back at Lightspeed and thanks again Ben for your time and thoughts.

If you found this post useful, follow me @jvrionis or Lightspeed at @lightspeedvp on Twitter.

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In the age of “big data”, enterprises will need to contend not only the sheer volume of data they generate (ranging from hundreds to thousands of terabytes), but also to manage the velocity and variety of these new data streams. (1) To put these numbers in perspective, imagine each enterprise storing and analyzing data equivalent to the volume of information cataloged by the US Library of Congress every year! (2)

Recognizing that this explosion of storage growth cannot be managed by legacy infrastructure, both investors and storage vendors are betting on flash memory as the technology to keep pace with the growing data challenges faced by enterprises.  Incumbents EMC and IBM have recently made strategic acquisitions in all-flash storage companies XtremIO and Texas Memory Systems to augment their legacy storage solutions. Meanwhile startups Pure Storage and Nutanix have raised large rounds of growth financing, further validating that investors are also bullish on the flash storage trend.

We at Lightspeed were early believers in the disruptive power of flash memory in next-generation storage systems. (3)  The decreasing cost of flash memory driven by widespread adoption in consumer devices, coupled with data access and retrieval times 10-100x faster than rotating disk, and a power and physical footprint 10 times smaller than disk well positioned flash to be the transformative storage technology in the datacenter.  Our early investments in component technologies (Link-a-Media, Pliant Technology, Fusion-io), systems companies (XtremIO), and software technologies (IO Turbine) centered around flash memory have validated that hypothesis.

To better understand the role of flash memory and its impact on performance, capacity, energy usage, and cost in next-generation storage systems, I invite you to join me at the Future of Data Storage event on September 18 in San Francisco.  Hosted by BTIG and moderated by Andrew Reichman, principal analyst with Forrester Research covering infrastructure and storage technologies, the event will bring together five leading companies focused on driving innovation around data storage in the enterprise:

  • Nimble Storage is creating hybrid storage systems that converge primary storage, backup storage, and data protection technology in a single appliance.
  • Nutanix is creating converged storage and compute appliances that allow enterprises to build Google-like, scale-out datacenters
  • Pure Storage is creating all-flash enterprise storage arrays focused on delivering high performance at cost effective price points.
  • Tintri is creating storage systems optimized for virtual machines, improving the manageability and cost-effectiveness of virtualized workloads.
  • Virident is creating PCIe flash accelerator cards that allow frequently used data to sit closer to the CPU in servers.

As we look toward the future, startups will continue to innovate around flash memory, creating next-generation storage systems stitched together with intelligent software to disrupt existing markets based on disk architectures.

If you are interested in joining us at the event please email eventRSVP@lsvp.com along with your name and contact information.  Webcasting will also be available.

I look forward to exploring these trends further during the Future of Data Storage event from the lens of five emerging startups – hope to see you there!

(1)    McKinsey Global Institute Report “Big data: The next frontier for innovation, competition, and productivity”

(2)    Library of Congress Website, January 2012 Data: As of January 2012, the Library has collected about 285 terabytes of web archive data growing at a rate of about 5 terabytes per month.

(3)    http://techcrunch.com/2012/07/13/lightspeed-ventures-positions-for-the-new-age-of-data-with-investments-in-storage-space/

 

Follow us on twitter at @lightspeedvp for more information on the future of storage and events like these.

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Over the past two years we’ve seen a lot of disruption in the enterprise storage market with everything from the game-changing performance of flash to next-generation storage architectures required to support the cloud and virtualized data center environments

And notwithstanding …

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Really fun post from ConversionXL about pricing experiments, many rooted in people’s inability to do math, and the lessons of Influence and the Power of Persuasion.

Definitely worth reading and experimenting with if you’re in ecommerce.…

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We’ve posted before about how to estimate lifetime value (“LTV”) for an ecommerce business and for a subscription business, and have provided a sample cohort analysis for each (ecommerce and subscription).  This is one of the most …

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“Customer loyalty is the single most important driver of growth and profitability. – Harvard Business Review

Today, we are excited to announce our investment in FiveStars.  Founded by Victor Ho and Matt Doka, FiveStars makes it easy, and affordable, …

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With their acquisition of Nicira today, VMware is making a brilliant strategic move that gives them not only the leading network virtualization technology but also a world-class of team of executives and engineers.  Congratulations to Martin, Steve, Rob, Alan, JJ, …

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I’m a big fan on focusing on getting the “copy” (the words on the page) right to drive behavior. I’ve posted in the past about Cialdini’s great book, Influence, The Psychology of Persuasion, and how the principles outlined in …

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Pretty interesting article in the current edition of the Economist about the psychology of discounting:

A team of researchers, led by Akshay Rao of the University of Minnesota’s Carlson School of Management, looked at consumers’ attitudes to discounting. Shoppers,

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