WayTooEarly

How Long Is The Honeymoon

I found Guy Kawaskai's post "After The Honeymoon" to be so on target that I sent it to most of the CEO's I work with at Idealab and First Round Capital.  One of them wrote back "When does the honeymoon start" which is a good question. But an even more important one is "When is the Honeymoon over?" 

Guy seemed to feel that the honeymoon was over after you've closed the funding round, gotten the startup off the ground, and have run into some problems.  In fact, the honeymoon starts once you've closed the funding, and usually is over after the first serious board meeting post financing. I have rarely seen any company which looked as good the morning after, as it did when we closed. 

It is clear to me that the second honeymoon starts once you're cash positive. Fred Adler, a noted early NY based venture capitalist, had a sign on his wall that said "Happiness is positive cash flow."  If you have positive cash flow, you have time to solve problems, deal with personnel, product and other issues.  If you don't, you're out raising money - whether or not you realize it. And when you're raising money, there is no honeymoon till you have enough cash for another year.

Most of the solution Guy discusses are aimed at keeping a company alive on the cash it has. They are good lessons to learn, and we try and inculcate our CEOs with them.  Some, like Michael Kuperstein at Metaphor Solutions, have been through several startups and really know how to operate on a shoestring when needed, but can make effective use of capital when it's in the bank.  Others, typically first time entreprenuers, fall into the trap of believing their own hype, and spend themselves, and their companies, into disaster.

When I taught at the Harvard Business School back in 1978-79, one of my colleagues, Neil Churchill, had just returned from two years running a company.  I'll never forget his comment that "I've taught about cash flow for decades as an interesting accounting and intellectual issue.  After six months at the company, cash flow becomes visceral. It's the most important issue."

So thanks, Guy, for pointing out some of these problems and some solutions. Positive Cash Flow is the mantra!

Finally, searching is a snap (.com)

In this spririt of way too early, let's talk about my history with search.  In 1966, I was a grad student at Cornell and took Gerry Salton's pioneering Information Retrieval course. I even wrote a paper on clustering for faster retrieval.  Then, with Marvin Weinberger and Josh Kopelman, I helped start Infonautics in 1993. This was one of the first truly easy to use search engines. We aggregated the edited content of hundreds of magazines, thousands of books, tens of thousands of images, and made it easily searchable under the initial name "Homework Helper."  We launched with Prodigy, but fortunately had designed it with a TCP/IP infrastructure, so we could move it to the web. It was a subscription based service, finally sold to Proquest and still in use at thousands of schools around the country.  But it was no Google.

Then, at Idealab, Bill Gross started GoTo.com, with the radical notion that the free market system might actually lead to more relevant results than just using IR technology.  After some initial vilification for mixing paid and unpaid results (even though it led to much better relevancy), GoTo became Overture and set the paid search model that was later borrowed by Google (with a several hundred million dollar royalty payment for the patent rights - once Overture had been sold to Yahoo).

So when Bill proposed starting search once again, I was all for it and joined the board of snap.com, which launches today. The key design elements were to improve your actual search productivity - that is, the time from asking a question till you've actually gotten to the right result.  We also decided to take advantage of the broadband environment to help in putting full results in front of users. So the right side of the screen actually previews the sites in the results list - on IE, those previews are live versions of those sites, so you don't have to leave the list at all.  There is an interesting suggestion mechanism which shows possible query completions as you type to speed things along. Snap.com uses a number of other techniques, including user feedback. If most users who did a search (on a set of other search engines) on "x" clicked on results 1, then clicked back, clicked on result 2, then back, clicked on result 3, then did 20 pages views at that site, we'd rate the 3rd site higher.  And the advertising model is quite flexible, focused on allowing advertisers to pay for the actual results they need, be it a click, a viewing, a signup, or a sale. Snap has the tracking mechanisms. If you're only paying for sales, click fraud becomes a much simpler problem. Your competitor can click away all they like at your site, but unless they buy, you won't be paying. The team, under Tom McGovern and Bill Gross, has been working for several years to get performance to a place that we feel comfortable releasing to the world.

I'd urge you to try snap.com for some of your searches and compare to the other name brands in terms of how long you actually spend in the entire search process. I think you'll be pleasantly surprised and switch. I have been impressed with how well our own crawl and index have been working, and I know that we will be releasing continuous speed and UI improvements over the coming months.   

In addition, there's an interesting contest for the best idea for a clever launch campaign, "the other way to launch", with a $5,000 prize for the winner, and $5,000 for the blog that referred that winner (though, as a board member, this blog is ineligible).

Hopefully, I won't have to help invent or invest in another general search engine for at least 6 years (though FirstRound has invested in several focused vertical search engines), but, as my earlier post on the 6 P's pointed out, when it comes to search, I'm quite perisistent.

China - Way Too Early - Not!

I'm on my way back from a trip to Shanghai and Beijing, made at the behest of some friends who said there might be some interesting opportunities here.  There's no question that a gold rush is beginning, aiming at the 1.3 to 1.5 billion people who are viewed as potential consumers. With a savings rate of over 45%, there's a lot of pent up demand for almost everything.  I didn't think I was coming over too early, but certainly didn't expect to run into Raj Kapoor of Mayfield at the Shanghai Hyatt, Mary Meeker at the Beijing Hyatt, and several other carpetbaggers like myself.

At a wonderful dinner with Gary Rieschel, who left Mobius to found Qiming Ventures in Shanghai along with Duane Kuang and Ignition Partners' Rich Tong, and some local partners, I learned that it is possible to do business there. But Gary made the insightful comment that the entrepreneurs in China are such fast followers, that if a new idea doesn't have something really protectable or difficult, there will be 20 copies in a week. In the Web 2.0 space, that makes it difficult to pick whom to back.

I also saw some interesting incubators tied to universities in both Shanghai and Beijing, and many new ideas looking for capital and help in getting to domestic and foreign markets.  Building a business in China involves navigating a political system that is quite different than in the US, but the eagerness and intelligence is there in spades.  And there is regulation -  we met with the China Securities Regulation Commission, which is helping create  better internal markets, and working with Chinese companies that list in the US and Hong Kong.

My host, Dr. Yuefan Deng, a Stony Brook Professor who is a supercomputer expert spending part of his time in Shanghai working on advanced designs, helped us see how open and eager the various cities and university institutions are for venture advice - even more than the capital.   I'll be starting to look at business plans in the next few months, and hope to find some worthy ones. 

Of course, the Peking Duck at Beijing's Quanjude, which has been serving it in various locations for 142 years, was probably worth the trip on its own, but was nicely balanced by the spectacular French meal at Jade on 36 in Shanghai.

As far as investing in China, I'm probably only too early, not way too early, but there's a long and prosperous future ahead.

Changing CEOs - Too early or too late

I have often said that a board makes the usually painful decision to change CEOs at one of two times - too early or too late.  The situations that can be traced to the CEO fall into two major categories - failure to achieve results (financial or project completions), or failures of leadership.

Changing the CEO based on a failure of results is almost always doing it too late.  Much damage has already been done to the company's resources, and the new CEO will have his or her hands full digging out of the hole. Yet it is often hard for a board to make the change when the signs point to a coming miss of targets. The CEO will argue that the targets are almost in reach, that just "one more quarter" is all that is needed to reach the goals.  And it is in the nature of boards to give CEOs a fair amount of leeway.  After all, we would not have chosen that CEO if we didn't believe in their ability to achieve.

Making the change based on a failure of leadership often happens too early.  Particularly when a CEO is changing the culture of a company, and comes from outside, there may be grumbling and undermining by the existing team. Often, the current team has built relationships with board members and may feed them concerns about the management style.  I have been in several companies where the level of complaints from earlier management team members almost led to the firing of what turned out to be excellent CEOs.  But in those cases, it took about a year for new teams to be built that were compatible in style to the CEO.  Sometimes these complaints come from those who think they should have been given the job. There are tyrants, consensus managers, and middle of the road managers - and each can be an effective CEO if their underlings can match the style. But when a tyrant or micromanager enters a consensus culture, the clash can be substantial.  Reading about the undermining of Michael Ovitz as he entered Disney provides a sobering example of this.

Because venture capitalists see many companies over a decade or two, patterns of performance appear. I often liken it to being able to fly above the landscape and see the giant chasm that the company is headed for. The CEO is moving along on the road, and can't see it until they are either too close or have fallen in.  If we change the CEO before he falls in, we're accused of doing it too early.  If we wait until the drop, we're told we did it too late.

Getting it just right is the mark of great boards, and leaving at the right time is the mark of a great CEO.