Atlas Insights

CEO Profile–Howard Mahran

Continuing our CEO Profile Series, we feature Howard Mahran in this post. I enjoyed talking to Howard and hope you enjoy reading this post.

I met Howard Mahran, CEO of Deep Domain, Inc., based in Redmond WA, to get his perspective on startup experiences, Deep Domain and other things.

Mindful of the blustery, stormy weather day I had come in from, Howard greeted me warmly and I was excited to sit down and talk to him. He was beaming and I found out they had just signed 5 new customer deals in the Midwest. Congratulations!

Here is an edited transcript.

Krish: Howard, If you weren’t the CEO of Deep Domain, what would you have been?

Howard: If I weren’t CEO of Deep Domain, I would be CEO of another little startup. Startups are in my blood. I have so many ideas – more than I have time to fulfill. But most likely, be the owner of a little restaurant, coffee-shoppish, that serves ladies during the day and couples at night.

Krish: That sounds interesting. Was there something, many years ago that led you into this path of wanting to be a CEO of startup?

Howard: Yes, there was one specific event. It happened during my first job. I was actually trained as an imaging scientist in college and I was hired by a small startup in Chicago called Cell Analysis Systems. We developed the world’s first imaging based Flow Cytometer. It could look at chromatin within a single cell, our technology could detect if that single cell had Cancer. I was the geek developer that helped build the technology. At our initial product launch, we signed up for a tradeshow in Orlando to introduce and demonstrate our new technology. It was August, it was over 100* and I was there with our Sales Manager (Wayne) and our Head of Research (Sarah), who happened to be the wife of the founder. Wayne and I started setting up our booth in a very hot conference center. Sarah left us but said she would be back in time for the opening. I didn’t see her again until Thursday! In the middle of setting up our booth, Wayne collapsed. He was hauled off on a stretcher with a heat stroke. It was 3 PM and show was opening at 5 PM. Sarah was to present to the press and I was just there in the background to make sure everything worked. I could not reach her (it was before cell phones). I panicked and called Chicago to beg Jim our CEO to help. He calmly said “Well, it looks like you are going to have to do this yourself. Go get some clothes from the Hotel Store and do the demo.” I bought a Mickey Mouse tie, Mickey Mouse shirt and Mickey Mouse jacket at 5 PM we were five people deep in our booth. I did the demo , I did the selling and I did the schmoozing and realized t was then that I decided to get out in-front-of-the-bench and not work behind it. When the company sold to Beckton-Dickinson, Jim made $10m and I got a $2500 cheque. I was in awe of the extra $2500 I had made after working three years. I wondered – How can I do this again?

Krish: Great story Howard. Now how did/does your personality influence you or guide you in your CEO role? There must be something in your personality that motivates you to be a CEO. What is that?

Howard: There are probably a lot of different traits, but fundamentally being an outgoing person and self-driven. When I grew up, I also moved 14 times before I was 18. I was sort of forced to learn to interact with new folk, sell myself to new people as I was always the new-kid-on-the-block. I was in 4 different high schools. I don’t know how many folks can claim that? All that moving around trained me at an early age – to sell myself. To top it, I had a rebel attitude and kind of fight-the-man attitude that seems to help with the startups. In terms of taking risks and applying my personality to what is a frightening ride many times  requires a lot of steadfastness and blissful stupidity.

I had my own business (selling watches and bike parts) when I was a kid. I was always trying to invent things and got into trouble doing that a few times, but my family supported my entrepreneurial streak and I’m very grateful for their support and encouragement.

Krish: You are in the midst of a funding round for Deep Domain. Talk to us about what you like and don’t like about the fund raising process. Also, how do you keep your focus during this process?

Howard: I am excited about telling our story and I love talking to people who are interested in listening.

I don’t necessarily like asking people for money though. It is not a pleasant experience necessarily. It is a rush when somebody, especially a smaller investor, is willing to invest their hard-earned cash in what we are doing. In general, I don’t like fundraising. It is a necessary evil. I get through it because I like talking to people. The focus part, yes that is the biggest problem. The business has to be run and in small startup you are doing a lot of things like washing the toilet, selling the product and dealing with customers. So I really rely on help, other people to help. I like to delegate where I can. If I can delegate some of the fund raising activities, for instance to Debra our CFO or to others – that really helps a lot. On the other hand, I ask people to push back at me things that I need to be doing. I call that de-delegating so I can focus back on the business – it is easy to get distracted. Having someone outside that you can trust to push you in the right direction and help you stay focused on the important stuff is critical

Krish: Is that what you would advise other CEOs in a similar situation?

Howard: If you have a personality like me – sure. But there are others who are more disciplined. We all have our strengths and weaknesses. It is really dependent on the individual. It is so easy to get consumed by the rush you get from fund raising that you could end up doing it full time and forget about building the business and selling the product. So, it all depends on the environment and your personality. There are also cases I have been in where fund raising is extremely difficult, painful, because your idea is so far ahead of the curve or your message is not clear. When that happens, it’s a good sign that you need to regroup and re-message.

Krish: Is there a good time to do fund raising? Is there a bad time to do it? How do you optimize?

Howard: Iwish there was an easy formula that someone could tell me. The anecdote is to raise money when you don’t need it and when you have the time. That’s very true and less defocussing than when you are challenged to meet payroll or meet a deadline. Fundraising really starts early. You may not be collecting cash, but you are always talking to potential investors and honing on the message, whether you know it or not.

Krish: You are socializing and getting feedback?

Howard: Yes, feedback is important. I can give one anecdotal story. My very first customer bought the product based on a written pitch we sent. We call it our “Father’s Day Hail Mary”. We found they had a bid out for doing some work that was right up our alley and they had come down to final three vendors. They were going to decide which one to go with. The decision was going to be made the week right after Father’s day 2007. We begged if we could submit our proposal too. Mind you, we only had an idea – we hadn’t even incorporated a company yet or written a line of code. We basically rewrote our business plan during the Fathers Day Weekend and sent it off that Sunday evening. We did not expect to hear anything again other than – “Thank you but leave us alone now”. We did not hear anything, but two weeks later we got a call from their legal group asking where they should send the contract. They ended up choosing us for the $100k contract. Pretty cool!

Later on as we began to know them better we made a casual call to the head honcho and asked him if he wouldn’t mind giving us a few names from his Rolodex to help us to find people to raise money from? He asked “Do you want me to give you names or do you want me to invest”? I said – sure, you can invest. He ended up signing up for $1,000,000!. If I were not in fund raising mode, I would never have asked that question and that investment would not have happened. You are always fund raising and you never know when or where it is going to come from.

Krish: Talk to us about your startup career. We believe this is your second or third startup. Is startup like raising a family? Is the second/ third one that much easier? What did you take away from your first one?

Howard: It is just the opposite for me. To use your family analogy: If I had my second kid first – I would only have one kid (laughter). Cell Analysis was a fantastic ride. It was an easy ride for me. I was not responsible for fund raising or other the stress of running a startup day-to-day, but I got involved early. With that experience I said – “Geez, that was easy – I could have a couple more kids!”. It was such a positive experience like my first kid. Then I worked in Biological Detection Systems in Maryland which got sold to Oncore. I was then recruited to a startup in Seattle in Totem Lake called Bainbridge Sciences, which got sold to CR Bard. In 1996, I was working at Bard, when my dad got diagnosed with Prostate Cancer and coincidentally I was working on technology to predict Prostate Cancer tumor stage. He wanted to know what he was supposed to do, specifically. I was on a plane coming back from a demo and while on the flight came to the conclusion that other patients would have the same question. This became the seed for a new company. In 1998 I started a company called CancerFacts.com. We started selling a tool that helped patients make complex treatment decisions for Prostate cancer and grew that to 31 other diseases. We changed the name to Nexcura, worked with American Cancer Society and American Heart Association and eventually sold to Thomson Reuters in 2005. So I want to say Deep Domain was my fifth startup, lot of kids, some adopted. I didn’t conceive all of them. Nexcura was my first from Ground Zero .

With Nexcura, we started and expanded with the .com bubble, but survived the implosion. The real ride was in the beginning, when the currency was all based on website eyeballs. At one Board meeting, one member recommended that we stop selling our product and instead just build community. If we sold something, then folks would be able to “peg” a valuation on us. We (the Board) actually resisted selling a product to avoid pegging our value. Looking back, that was the silliest thing! It took us three years to get the first dollar in sales. However, American Heart Association bought our tool (paid $500k per year), as well as others, but after a few years realized they were embedding the tool in their web sites, but providing us all with all the traffic. We then shifted to a broader permission based marketing model.

Krish: Business Intelligence for Healthcare is certainly hot. Why is it hot? What is Deep Domain doing to capitalize on this trend?

Howard: Good question. BI in Healthcare is underserved today. Firstly, Information (data) is required to treat patients better and manage chronic illness. Physicians forget about patients they have treated once they leave the exam room. In order to better serve patients, healthcare providers need to be proactive. You need data to be proactive. Secondly, inefficiencies are everywhere in hospital systems. Analyzing various data points and finding the source of the inefficiencies is critical to improving operations, patient satisfaction and costs. And thirdly pay for performance is increasing – pay for performance awards that providers give for keeping patients, such as diabetics healthy. The goal is to turn our current sick care system into a true healthcare system.

Deep Domain allows physicians to ask and be able to get answers rapidly. Our reports do not require trained Analysts to generate them. One customer had to run a report recently after a drug company informed them of glass contamination in a statin batch. All the patients who were taking that drug in the last 3 months had to be notified. Using Deep Domain, they were able to do it in under 15 minutes, instead of the typical 1-2 days or longer. There are other ways to do the same thing, but our way provides the answers, faster, cheaper and in real time. Another example from Community Health Clinics is to find patients who have not had fluoride treatment in the last 3 months that have had a primary care visit.

Deep Domain is not about convincing customers that inefficiencies exist. Our job is to help our customers see all the moving parts, see the bottlenecks, and see the metrics every day (on monitors in their hallways, for example). We found, for example, that patients had to wait an inordinately long time on Tuesdays to be admitted into the emergency room after coming off the ambulance. Using our software, our client was able to see this bottleneck, identify the problem causing it and measure the affect of changing their workflow. The bottleneck was resolved.

Krish: What is your specialization background (Sales/Marketing/Tech etc.)? Were you ever required to lead a different function? How did you pull it off?

Howard: Over my career, I have moved from being a scientist to mainly doing Product Management / Sales and business development. I can’t be easily put in a slot. I am always talking and selling. I am sure I can never get a real job anywhere! If I want to work, I have to do my own thing. I have never entered a big company through the front door; it has always been through an acquisition

Krish: If you were to predict something that would not be found in this planet in the next 20 years, what would that be? – Doctors is not a good answer.

Howard: We will always need doctors in some form or another. It’s cell phones, TVs and other devices we use today that will disappear. There will be major changes in healthcare. We see some changes happening now. There has to be changes if we want a first class healthcare system.

Krish: What are your goals for Deep Domain in 2013? How is it going so far?

Howard: (jokingly) To live till 2014. Seriously – We want to achieve real breakout growth in 2013. Our v3 product has gotten great response so far. We want to greatly expand our customer footprint and manage the growth phase well. In terms of innovations, we will be releasing an online store to sell and share reports.

Buzzer Round

a. Favorite Recent Movie: Argo

b. Favorite Food: Pork chops and potato

c. Favorite Hospital: I Take the Fifth

d. Best Startup Moment: First Sale in Deep Domain

e. What will Howard be doing in 10 years? : Not Deep Domain (laugh). I hope to be helping other entrepreneurs and be giving back.

Krish: Any parting advice in this interview for budding and current entrepreneurs?

Howard: Have fortitude. Don’t give up. Stick to it. Listen to others. You are not as smart as you think. You need help. Let others fill in.

Krish: Thanks Howard for spending the hour with me. I wish you good luck.

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Startup Boards–Part 3

In this final part of our 3 part series on startup boards, we ask and answer 2 questions 1) How do CEOs annoy Directors?  2) How often do Board reviews happen?

This chart is quite interesting. Majority of directors don’t seem to be in the loop as issues develop and feel they could have made an impact had they known earlier. Our suggestion is that CEOs find many opportunities to cultivate a close working relationship with their directors, so sharing bad news can happen naturally. Having a consistent and frequent communication with the board is really critical and will come of immense use when help is needed, such as signing on a customer or help with the next fund raising round. As CEOs, never discount the power of communication.

Another aspect that we probed into was regarding reviews of boards – by CEOs and by other board members. Members of the Board have typically not worked with each other before and it is not natural to formally review others in such relationships. 

CEOs responded to this question as to how often they review value add of Board members. 14% have never done it. 41% have done it once or twice. 41% have done it occasionally and 5% have done it regularly.  We recommend that CEOs do this review consistently and often.

When directors were asked if they ever felt that a fellow board member needed to be removed, over 50% said they have felt once or twice about doing so and 18% believe that there is always someone with the wrong fit. Having peer evaluation of board members would go a long way in a cohesive board ensuring the maximum value for the startup.

It has been a pleasure to bring this information to you and we reiterate our gratitude to over 112 participants that took the survey.

Regards

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How do Board members detract?

In preparation for our upcoming symposium on Boards, we conducted a survey of CEOs, Board Directors, and Advisors. We had an overwhelming response to our survey from 112 participants. In our 10 question survey, half were common to CEOs and Directors and rest were tailored. This is second in our posts on that subject

We asked both groups about how board members detract from the company’s mission. Not all relationships are perfect and we hypothesized we would develop some actionable data by asking about discord. Here is what we found:-

Our explanation: CEOs have deeper insight and understanding of a company’s operations. They are genuinely excited to share these details but other board members quickly lose patience (especially true if the details are regarding technology or product features).

Putting personal gain ahead of company did not seem like an issue and many had not witnessed it.

There is also a genuine tolerance for directors who ask for a lot of information, especially in 1:1 settings.

Hope you find this useful. Feel free to post your comments below.

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CEO Profile – David Lischner of Valant

We spoke to David Lischner, CEO of Valant Medical (www.valant.com).  Valant provides a SaaS solution for practice management for psychiatrists and behavioral health professionals. Valant has been an Atlas portfolio company for many years now.

The interview was held in Valant offices in downtown Seattle. Here is the transcript:

Valant CEO: David Lischner

Krish: David, Can you give us a synopsis of your career? Was Valant your first startup?

David: No. My first startup was the group behavioral health practice (Evidence Based Treatment Centers of Seattle) . EBTCS was the first startup, even though I had a solo practice, because we decided to grow it quickly. It grew from 5 founders to 25 clinicians. Along the way in EBTCS, I had the idea of doing Valant.

Krish: What about before EBTCS? Any entrepreneurial  ideas?

David: When I started in Medical School, I never expected to start a technology company. No plan to start any business. Considered it from time to time, but that was not the way my life was going. It was when I was involved in EBTCS that the instinct to start a company took hold. I started taking my ideas seriously and the idea of Valant came along the way.

Krish: Was it one moment that inspired you to start a company?

David: The drive was always there and it got rekindled when I started the practice. Years of thinking about what the next thing would be.  Me and my brother talked about Valant for over a year and finally started in 2005. The original idea was a virtual office for a small clinical practice with web enabled services. A lot of what we did was medical billing. We did mostly services for practice management. In 2007, we pivoted and became a software company, in addition to also providing services.

Krish: Take us through some of the early days of starting Valant. What were some of the challenges you faced? How did you overcome them?

David: Early days are a bit of a blur. Getting customers is the biggest challenge. Once you get customers, figuring out how to make them happy. Next – figuring out how to be profitable.

Earlier on, we had the wrong business model and it was hard to sell. The idea of whole new way of running one’s practice with software tools combined a big concept and a small concept and was a hard sell. We ended up selling to customers that were hard to service and not profitable.

At a personal level, I was working two full time jobs.  Pushing the rock over and over again up the hill without a breakthrough was the hard part. We realized a year into it that we had to change and pivoted two years from the original start. We raised fees, shrunk the business and went from 20 to 9 customers. Six months after that we decided to focus exclusively on software. From that moment, can’t say things have been easy, but definitely headed in the right direction. Hardest decision was to raise the fees.

Krish: What was the inspiration for the product itself?

David: There were a couple of experiences. I had pharma reps, sales reps come and keep knocking on my door in practice. But no one showed up to improve my practice efficiency. I also had a couple of people working for me. I used to encrypt my own notes in Word. Had no idea if that was the right way to do, but did not want to have paper charts. I thought there had to be a better way. At one point, I lost the 2 people that worked for me. That exacerbated my situation. I went and looked for solutions out there, but really found nothing. That’s where the impetus for Valant came from.

Krish: What was the difference between starting the group practice and the software practice?

David: Patients are plenty, but customers are not. Challenges were very different. Practice was local. Scaling issues were different. EBTCS is a lifestyle business. Mission and business objectives were very different.

Krish: What do you think is the most difficult phase of a startup and why?

1. Is it forming the team?
2. Is it raising capital?
3. Is it making sense of the market opportunity?

David: c. A super angel once showed me a graph that had a “trough of disillusionment”. You are in this transition and you know something is not working. You have fantasies of getting out, but you need to keep going. Raising capital is hard work. Customers are hard work. Building a team is hard work.

Krish: Take us through a typical day for David Lischner

David: I get in early enough to manage my email and then in meetings all day. Meetings for Leadership, product team, partners, customers and depending on what’s going on with other stakeholders – investors, legal etc.  In between these meetings, I have to make decisions. At least a few decisions need to be made every day. Things that don’t get decided in the office get decided after my 5 year old goes to sleep. There is usually one overriding priority or theme for a week (financing, product, team etc). It helps me give structure to what I am doing. It will be my touchstone and I return to that often. I need to keep reminding myself of that theme. There are always priorities behind that theme. Even if everything else gets sacrificed, I know I still got something done and that keeps the organization going.

 Krish: Do you socialize the theme with your team?

 David: Depends, if I think it would be useful to the team. The team always knows what its priorities are. There is standups everyday – leadership standups and each team has its own standup. It comes from Rockefeller method, but we don’t strictly follow it. It keeps everyone in lock step. It is extra time but keeps us all efficient. There is lot of friction and tension in the standup but very little misunderstanding after that, which makes for an efficient team.

Krish: 20 hr days or 14 hr days or…

David: All over the map. When I am travelling, it makes for longer days. With a 5 year old, it gives me more structure when I am in town.

Krish: One classic conundrum for startups is that you can’t go out and sell too much until you have built a product that can scale and be reliable. To build scale and be reliable, you need money. How do you manage this scenario?

David: We have raised money. We were fortunate to have a gifted founding technologist in my brother. He was productive by himself as a team. That enabled us to punch above our weight for a long time. When we needed to, we did get outside financing. We are very capital efficient and do amazing things with limited resources. Financing has been crucial. We have been doubling our sales, revenue and customer base but that does not mean we are not re-factoring or improving the product constantly.

Krish:   You are lucky to have a gifted technologist. What advice do you give for startups that don’t have that situation?

David: I would say to a domain expert to make sure they have a strong technology partner if you can’t find a tech co-founder.  Make sure that the technology partner has the same level of intensity and commitment as a co-founder would have.

Krish: Can you share any seminal moments in your startup experience?

David: There was some time where sales outstripped product. We had 300 or so customers at that time. We had a multi system failure; we thought we had decent redundancy for the scale of our business. It resulted in data loss and we convened all hands on deck with everyone working hard to fix things and manually restoring data. What we thought was an existential threat, somehow we survived. We lost just 1 customer, who had just started that month. That scared us, inspired us to reprioritize, make big investments in redundancy, monitoring, alerting, disaster recovery and failover until we were able to sleep at night. We were quite aggressive in communicating with our customers. Our organization responded in a way that kind of shaped us forever and that is a moment we can refer to and made us stronger. It is corny, but nobody blamed anyone and we all took responsibility for it and every single person in the org did their best to improve things. Our customers saw that. We knew we messed up and we had failed. They trusted we were going to fix things and never let that happen again. We are much stronger due to this. It is a kind of touchstone in the organization as to how we treated each other and how we handled adversity. It made the organization more resilient.

Krish: What are some of the key trends that you see emerging in Healthcare IT?

David: Mobile is obvious one. Mobile is a way of extending care beyond the office. Mobile implies tools for patient and tools for communication and tools for capturing useful data, wherever the patient is. The start is capturing outcome data outside of the appointment.  In behavioral health care, what is missing in the field is capturing any outcomes. Once you capture the data, what do you do with it? There are opportunities for extending it by the provider and use in the face to face interaction. Outcomes based care is a trend in healthcare and I think technology enables it.

Krish: Give me an example– Are you talking about monitoring patient behavior outside the appointment? Are you building technology for that?

David: We already have platform to capture outcomes data through patient questionnaire. That is different than automated monitoring. That is likely the next step. But, this is a huge first step. Patients and providers need to be bought in. A lot of consumer facing health technology has not taken off due to little provider involvement. Patients tend to largely trust and do what providers ask them to do, a lot. So, patients will use the tools if providers have a stake and providers see it as a tool that will help measure and improve outcomes.  This has not yet had an impact in practice of behavior healthcare, but will soon. The captured outcomes data from the patient ends up in the clinical note narrative and by doing so, the patient is more engaged and helping out in the task of documentation and this relieves the burden of inputting  data for the provider. This is a way everyone wins. Patients are engaged, submitting outcomes data and clinician has easy way of getting that outcomes data and by tracking that data over time, can drive improvements in outcomes. There is plenty of evidence that just measuring outcomes will improve the quality of care. That is a huge first step.

Beyond that, care opportunities, clinical decision support and Analytics will be the next wave for providers

Krish: There is a common misconception that clinicians do not like to measure outcomes.

David: There is resistance in some circles. The main thing keeping behavioral health care providers from measuring outcomes is that it is burdensome across the board.  If you can create a system for capturing it and if that relieves the administrative burden, they welcome it.  The buzzword in behavioral health care is measurement based care or outcome based care.

Krish: How is Valant doing? What are big priorities for you in 2013?

David: Very well. We doubled customer base in 2012. Did over $1m in sales last quarter, doubled the team. We successfully entered the large practice market. For 2013, we want to continue progress in large practice market, continue steady growth in small practice market. We are also intentionally entering the solo therapist market.  That will be the long tail for our business.  For product , we have the platform called Mobile Notes (on any device or browser). We will also build features that will appeal to large practice customers.

Krish: Some buzzer round questions

David:

1. Favorite Recent Movie: Long time since I saw one, but wife liked Argo
2. Favorite Food: Mediterranean
3. Favorite Vacation Spot: Hawaii
4. Favorite Sport: Soccer
5. Favorite App: NY Times

Krish: Thanks David for the interview and sharing your story, startup experiences and your insight on the industry. Good luck to the Valant team in attaining your goals for 2013.

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Start up Boards

In preparation for our upcoming symposium on Boards, we conducted a survey of CEOs, Board Directors, and Advisors. We had an overwhelming response to our survey from 112 participants. In our 10 question survey, half were common to CEOs and Directors and rest were tailored. Over the next few weeks, we will share some highlights of the results.

This week, we share our findings on Director attributes. We asked respondents to rank important attributes of a Board Director.

As you see, there is general agreement between the two groups as to the important attributes:-

• general business acumen
• interest in the company
• startup acumen

We observed a wide variance on importance of industry connections and on follow up, we found that most CEOs had never had a discussion to leverage industry connections. Industry connections are deemed to be “great if you can get it”.

Stay tuned for another insightful chart next week.

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New Twitter Handle

We are now tweeting at @AtlasAcc. Our old handle was @AtlasStartups. Please follow the new handle.

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Observations from Azure TechStars Demo Day

I had the pleasure of attending the much publicized Demo day for the Azure TechStars program. It was held at the Microsoft Executive Briefing Center. The atmosphere was certainly exciting and filled with energy as the Who’s Who of Seattle’s investing community rubbed shoulders with the entrepreneurs. Personally, it was nostalgic for me to be in McKinley after almost 2 years. Lots of press, investors and attendees.

TechStars runs this program and Microsoft sponsors it. Microsoft should be commended for such sponsorships. I had attended the previous program with Kinect and got to see very innovative products being built on top of Kinect then. I have seen a few companies emerge from the Kinect program and grow well in the last year.  GestSure is one such company.

I was expecting to hear a little bit of how each of these startups were leveraging Windows Azure technology. I wanted some validation that Windows Azure was doing well in the marketplace and hear some cool Windows Azure features that the Techstars companies took advantage of. Let it be said that I hope the next Azure Accelerator program highlights Azure in meaningful ways.

I will not provide a run down of every company, but highlight companies that I found interesting during the show.

Off the bat, Realty Mogul’s Jilliene put on a great presentation. I have invested in a few REITs before and agree with Jilliene that REIT investing is not customized. The  RealtyMogul platform enables accredited investors to invest in commercial real estate or residential loans in a crowd funding model. While I am not sure that real estate investing needs disruption, the availability of a marketplace definitely perks up interest in this area. Commercial real estate companies that need to reach beyond their investor networks can now tap into this platform and accelerate their deals. With the US real estate market turning a corner in H2 2012, this offering holds promise.

Socedo – another powerful presentation. Lead generation is always challenging and methods range from adhoc to sophisticated. Aseem hopes to leverage online presence and activity of professionals and end users to generate sales leads for you.  Leads are generated based on search parameters that you enter (or from your CRM source) and delivered to you overnight in their dashboard. I like this general idea. However, I think Socedo has to reach many online sources to get effective leads. They do Twitter today. Professionals are present in many online communities and to find and rank them is an interesting challenge. At some point, I think we will use Socedo for some of our projects and see how effective the results are.

After a few presentations, I was amazed by the professionalism of the pitches.

The other company that caught my attention is Mobilligy. Getting  bill payments mobile is super important and I had wondered why the existing systems from banks and brokerages had not extended bill payment to their mobile apps. Looks like Mobilligy has taken advantage of that gap. In addition to bill payment. Mobilligy is hoping that cash flow starved users would take advantage of loans for bill extensions.

Other companies that presented are keebitz, embarke, staq, bagsup, appetas, fanzo. None of them mentioned valuations, which I found unusual. I would find it useful if an update of the previous class was given.

Overall, three very interesting hours, courtesy of Microsoft and TechStars. Looking forward to the next one.

Krish

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Building Your Board

Building your board is one of the few proactive steps you can take to build valuation that doesn’t necessarily directly involve your product or service (unlike sales or product development).  Investors will recognize your appreciation of oversight and will be influenced by these directors spending their valuable time for stock-based compensation.

Advisors vs Directors

Most entrepreneurs are keen to build out advisory boards, signing members on an opportunistic basis only.  While there is a place for adding advisors who, from time to time, become known to you and sound valuable, that’s no way to build your advisory board.

Step back from the madness of big names and well-connected people and come up with a plan.  What would your ideal advisory board look like?  Every business is different here, but, good advisory boards generally include people with various industry connections for help with revenue generation and/or deep product knowledge.  For example,  one of our portfolio companies, DigitalScirocco, runs an on-line auction for content.  The CEO brought in Michael Wellman who is arguably the top researcher in computational market mechanisms for e-commerce to architect their platform.

The expectations for advisors versus directors are lighter; less contact time and no fiduciary duty.  It’s not unusual to have zero contact with an advisor for months.  This isn’t the case with your directors and it’s one of the potential flaws with building an advisory board.

Many entrepreneurs add advisors each time they see an interesting name.  Typically, that person helps with a key introduction or an immediate issue and then fades away, but their compensation continues.  If you have an advisory board, commit that you’ll look at it quarterly and determine if each person is still earning their compensation.  Don’t be afraid to terminate someone who’s no longer involved.

Your directors, on the other hand, are responsible for your strategic direction and have numerous specific responsibilities as well.  These likely include determining executive compensation, approval of the budget, approval of funding rounds and, of course, approving any M&A.  They have a fiduciary responsibility to all the shareholders to ensure that the company’s activities are in the best interest of all the shareholders.

Composition

A manageable advisory board is under ten members.  There’s no minimum as many companies do quite well without one.  If you sell into markets that are quite different (for example, Digital Map Products an Atlas company, sells to local government, search engines, and land developers), you might find that getting some representation from each of these industries help you position your offering in each segment.

You may also find you want an advisory board of customers (the Customer Advisory Board), which is a great way to keep you engaged with what your market needs and validate your product roadmap (as well as sell more to your existing customers).  Again, under ten people should be manageable.  This group does not typically comingle with your regular advisory board.

Your board of directors will probably consist of 3-5 people.  We always state that the board will contain up to five members to allow you time to recruit.  That’s usually the CEO, one rep for the common, one for preferred, and two outsiders.

Think strategically about your board.  You need someone with connections to money, a technology or product expert, and someone who knows your customer or market.  One or more of these people probably know enough about corporate governance (and your lawyer will help as well).  I say this because too often I see boards filled by investors who know corporate governance and nothing more.  Frankly, that’s the easy part.  Helping you take a product or service to market (and not just because someone’s smart – but because they know this market or this product) is much more valuable.

Investors will ask for several board seats and you may feel that you need to comply.  Often, you’ll do what’s needed for the money but know this: people who buy their board seats will often be your weakest directors.  There are many exceptions to this and I’ve worked with some great directors who were venture capitalists or super angels.  Overall, however, people with big checkbooks often lack enough practical experience to do more harm than good.  The typical, unfortunate, case is the venture partner who either had one big hit or who came up through finance or banking to become a VC.  Large investors may ask for several board seats, but in the negotiation to limit that to one and fill the other seats with people who can really help.  People who never owned a P&L, brought a product to market, or have other operating expertise are dangerous to you and your board.  Being smart, good-looking, and well-educated works to assess investments but doesn’t work in running a company.

Compensation

Until recently, I’ve never seen cash compensation for a start-up board or someone on the board of advisors.  Well, the rule’s been broken but only once so I can still say that compensation is stock only.

The amount of stock varies by the maturity of the business.  Typically, you can expect to give your advisors about 1/10^th to ½ of a percent, typically vested over 36 or so months.  There is no cliff because you may part ways after only a few months and it wouldn’t be right to leave them with nothing.  Directors can expect about ½ to 2% vested over that same time.  There are exceptions for highly involved directors.  Also, we’ve occasionally given commissions to advisors who bring in deals.

Activities

You should get your advisors together about annually in person, maybe once again or so over the phone. You generally won’t get anything directly out of these meetings but it’s a good way to keep them current and it’s healthy for them to meet each other.  Otherwise, your activity with advisors is typically one-on-one and as needed by you.  In rare occasions (this is how I provide my advisory work), you may have an advisor you meet regularly but that would make sense only if there’s a broad relationship over many areas.

Your advisors are typically there to open doors for you and to explain how an industry works.  They should lend credibility to your business because of their position within their industry.  They expect you’ll use that credibility and you can talk with them about how to make best use of them as well as their reputation.  Advisors can also be used to mentor new executives on your team who may be in an executive role for the first time.

Your directors will meet between monthly to quarterly in person with additional meetings based on events like financings or large transactions.  You should take advantage of these meetings to bring in others from the team for occasional reporting.  Many CEOs spend very little time with any directors outside of these meetings.  While that’s not necessarily problematic, you should be sure that you’re forming a close relationship with at least one director.  When management is excused from the board meeting (yes, Mr. FounderCEO, that’s you), the company will benefit by having one person in the room with deep knowledge of internal issues.

Time Commitment

Advisors should expect to attend a half-day meeting annually and then help out about an hour or so, on average, monthly.  There can certainly be dark periods followed by periods of heightened activity.

Director meetings typically last a half-day and are often (should be) preceded by dinner to help the board get to know one another.  Additionally, directors get involved in reading the company’s financial and other reports in advance and will engage in helping you with issues like writing a term sheet or reviewing a contract.  Overall, directors spend about 2-10 hours a month with the company.

Are They Adding Value?

Every now and then (at least annually), step back and assess your board.  Sure, they’re at the meetings and they don’t say anything stupid, but are they adding value?   Make a list of times each director initiated a program that added value.  Make a list of times each director took an unpopular stance the proved to be helpful.

Most directors will avoid giving the appearance that they’re not smart enough or don’t know enough about the business.  Most will not take risks in the board room.  Worse than that, many will spend time telling you to sell more or explore programs that you know you cannot afford.

There are some wonderful directors who will have the courage to be wrong in the board room and who will make a difference that you can point to.   Those are the keepers.  The rest (most) who go along with the flow aren’t really helping you.  You may not be in a position to act on these but you should at least be aware.

D&O Insurance

Most early-stage companies don’t buy this costly insurance.  But outside directors will often require it.  We usually see the purchase delayed until the company is shipping product.

D&O is needed because directors (and officers) can be personally liable (or at least sued) for issues from sexual harassment to defective products.  In general, a personal umbrella policy won’t cover someone’s work as a corporate director.

With or without D&O insurance, sign a mutual indemnification agreement. Your attorney has a standard one.  This agreement will state that no director will sue the company or another director and that the company agrees to stand in front of any director who is sued (by anyone – shareholder, customer, employee).  This is an effective prophylactic against many shareholder suits because they can’t damage the directors without harming their investment.  Note that no insurance or indemnification will protect a director who committed fraud or was grossly negligent.

Also, if you get D&O, be sure to cover employment practices.  This is often optional and overlooked but the most likely cause of a suit will be related to an employment issue such as wrongful termination or harassment.

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…I’m Glad that’s Over

The theme for our last summer Fajanza® was “Here’s to 2010”.  Well, here we are at the eve of the new year and that sentiment is felt by many.  While the year was marked by geopolitical issues from Somalia and Zimbabwe to Iraq and Iran, everyone in the US seemed to focus on the economy as it (hopefully) found its nadir and then steadily recovered.  Looking at the recession to date, it looks like we felt a dip and largely recovered.

But the real impact is more easily seen if we look at a ten-year period. With this view we see why we’ll be telling our grandchildren about 2009.

For those of us working with start-ups, the economy didn’t just make world affairs less important but made it hard to notice anything beyond concerns like making the next payroll.  I don’t know what kind of data we’ll eventually see but it was a rough year for start-ups.  Venture funding of new companies nearly collapsed as VCs decided which of their investments were worth keeping and which should die.  The former required more insider financial support as they were unable to sell, go public, or even take down funding from new investors at a reasonable value.  The latter died.  Angel investors faced much of the same situation although they don’t have investment committees that judge winners and losers.  Angels are typically more loyal and optimistic and most sought to continue support of their entire portfolio if it seemed there was reasonable hope for success or achievement of the next milestone.

We saw three venture investments in 2009: Microgreen (Waste Management and WRF); Inlustra (Samsung); and Gist (Foundry).  Three gems, frankly, in the pile of coal from which Santa picks for stocking stuffers for VCs who CEOs would judge a little too naughty for anything this year.

For employees, it was a time many of us have never experienced.  Nearly everyone had a friend or relative out of work.  Some, heavily invested in real estate and stretched with large mortgages, faced fiscal calamity.

Early-stage companies felt the end of growth more than lay-offs.  For companies with 5-10 employees, there wasn’t much room to cut and we only saw job cuts at two of our 40+ active companies.  But the growth ended.  Few start ups grew in 2009.

We can talk about investors and we can feel the impact as employees but what about those who really drive the economy?  No, I’m not talking about Madoff or Bernake, I’m talking about the start-up economy so I mean the entrepreneurs.

I’m reminded of my favorite Christmas story.  It was on December 23^rd, in 1944.  A US armored division was retreating from the Germans in the Ardennes forest when a sergeant in a tank destroyer spotted an American digging a foxhole. The GI, PFC Martin, of the 325th Glider Infantry Regiment (my old unit), looked up and asked, “Are you looking for a safe place?” “Yeah” answered the tanker. “Well, buddy,” he drawled, “just pull your vehicle behind me…I’m the 82nd Airborne, and this is as far as the bastards are going.”

Look again at the charts above.  It was in this economy that Marketfish launched, that Meteor transformed its business model with a successful new offering, that Liquid Planner showed breakthrough growth.  In the summer of 2009, Limeade was offering its wellness solution to customers as it started to grow sales and Zooppa successfully launched in a new country.  I could go on.

The boldness, the confidence, to use a popular term – the audacity of these entrepreneurs to start something new and to persevere in the worst economic climate most of us have ever known is beyond inspiring.  Technology entrepreneurs are the foundation for economic growth in this country and they defy the odds with each venture.  They set an example for all to follow in 2009 as they grew revenues (every company in our portfolio that had revenues in early 2009 ended at a higher rate) and payroll (overall, our portfolio showed payroll growth of about 10% for the year).

The entrepreneurs certainly were aware of the economic climate.  But instead of retreating, they dug in, worked harder and applied themselves to win.  I couldn’t be more proud of our CEOs and what they’ve accomplished.

The recession has brought out the worst and the best in us.  We’ve felt the sting of failed commitments, been saddened by selfishness, and been frustrated by short-sightedness.  Relations, both business and personal have been strained.  But it has also been a time of courage, of loyalty and of faith.  I’ve never felt so immersed in the camaraderie of entrepreneurship and, as unpleasant as it’s been, many of us will come out of this refreshed and better for the experience.  You’re a special breed and you don’t hear nearly enough appreciation for what you do.

Here’s to 2010.  It will be better and many of you who stood up to the overwhelming economic dangers will be proven to be heroes in your own way.  I’m proud to be associated with you.

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Sales Expectations

When we read business plans, we find that most entrepreneurs tell us how they’re going to scale to their mature size. The plans focus on the channel sales, the viral growth or some other aspect of sales that is highly scalable and compelling.

But why do some startups get initial traction while others don’t seem to get off the ground? Because some CEOs embrace one vital reality: the way you sell today won’t be the way you sell tomorrow.

Your business plan is great and your sales strategy is exciting. But if you don’t start selling now with different (typically lower) expectations and (typically less interesting) methods, you won’t get the initial traction you need. Your plan may talk about how you grow from $1MM to $100MM in revenue but that’s not necessarily how you’ll grow from zero to $1MM (of course these numbers vary). Let’s talk about what’s different and why.

• Size of the deal. Your initial sales will be smaller than the sales you hope to have eventually. There are several reasons and this could be our most important point:
  • Sales cycles are proportional to deal size and you need to close business now. Closing business sooner will make fund-raising easier, will bring in cash, and will get users sooner. Getting users sooner means that you’ll more quickly learn what you did wrong in building the product and what needs to get fixed in your customer support.
  • Your product or service quality will get better over time so don’t sell to a company-maker (i.e. the “big customer”) now. You’re going to have problems with both the product and how it’s supported. Let a less-important customer experience these issues and work with you to improve them.
  • Your deal terms will be flawed. Even with all the smarts that the best contracts attorney can offer, you’re still going to miss something. Maybe you’ll get deal terms wrong by insisting on something you later learn doesn’t matter at all. Maybe you’ll omit an important protection. You won’t get it right the first time. Make mistakes on smaller deals and perfect your deal terms by the time it really matters.
  • Your pricing will be wrong, possibly both in structure (e.g. subscription vs one-time sale or pricing mix of core product vs the disposable portion) and price. Make these mistakes on lower-revenue deals as you learn how to optimize revenues and margins.
  • You simply won’t be successful because larger buyers will more likely demand reference accounts to demonstrate the product or service works as advertised.

Together, we call this the Stair-step approach to enterprise sales. You want to sell to the great customer to the far right. Most (not all) startups that try to start there fail. Most who embrace the stair-step are able to get the initial traction they need to climb the steps.

• Margins. Margins will improve over time. Ok, this is obvious but most entrepreneurs don’t act accordingly. Too many entrepreneurs pass up early opportunities because they’re unattractive. But they often fail to factor in the value of closing the business – a reference account, a customer who will help you improve the offering, and increased investor interest (yes, investors are smart enough to understand the concept of margin improvement). If your first potential deal is a relatively small opportunity, worry more about getting it done and less about the margins on it. This is, of course different for a company that’s selling to a finite number of potential customers (e.g. a product sold to US auto manufacturers or cell phone manufacturers) or if you’re working a real opportunity to sell to a large player early in your company’s life.
• Channels. Your business plan might call for others to sell your product but don’t count on that initially. While the effort of channel partners varies greatly from just “order takers” (think retail) to proactive sales groups that will energetically sell because they make their money on installation and support (think software system integrators), very few channel partners will close business for a product that has not had a customer before. Note that I don’t say few channel partners will sign on to sell your product – they’ll do that. But signing and actually selling is the difference between your college buddy who says he’s there for you and the when he actually shows up on the day you’re moving with his truck. We wasted a fair amount of time with Meteor, trying to get ad agencies (they barely get a passing grade as channel partners) to resell the product until we realized that we had to close business first. Once we showed good traction, they engaged.
• Marketing-driven sales. Most consumer web deals and many other products focus on marketing-driven sales. Your plan shows that viral growth or marketing spend will drive traffic with good scale effects. Nearly all successful companies in your space probably grew this way. But few obtained their initial users this way. A great example for us was Findood. This market maker (grocery store buyers connecting to food manufacturers) had a plan that was based on marketing to bring both parties to the web site. But the marketing budget needed to get this started was impractical for the startup. So we picked up the phone. We called on both sides of the market to seed the site with a critical mass of buyers and sellers. To make the marketspace more attractive, we focused our efforts on a sub-market (chocolate in this case) to yield better concentration for our efforts.

Of course there are stories of companies which had great success at very early stages and you should explore these bigger, better deals on a parallel path. But understand they probably won’t close soon; don’t bet the business on having an extraordinary success early-on. Focus on Plan B with smaller deals on less attractive terms. You’ll get customers, you’ll get investors, you’ll perfect your product or service, and you’ll avoid the fatigue of a startup that just can’t quite seem to get it going.

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