Focus and Why Less is More

Posted by Joseph Ansanelli on Mar 27, 2011 in Startups | 3 comments

Focus and Why Less is More

Besides questions about people, what’s often one of the most important execution questions for a startup?

What should we NOT do?

Focusing on one or just a few things is the proverbial strategy of “putting all your wood behind one arrow.”  Yet it is amazing how much pressure there is to do more.  Often investors will push to do more, you will feel competitive pressures to follow all the things your competitors do, and of course you have a long list of things that you’d like to do.

Yet the good thing is that focusing on doing one or a few things really well has proven time and time again to have amazing results.   What if I told you that a product that weighs 137 grams or less than 30 quarters, could generate $10 Billion in revenue? in one quarter?  That’s of course the iPhone.  And what’s even more amazing, in the fourth quarter of 2010 Apple generated almost $27 Billion in revenue from products that can easily fit on a startup’s conference room table.

Now, it’s easy to look at one of the biggest blockbusters and successful companies and say everyone should do that.  Yet when Steve Jobs returned to Apple, Apple’s annual revenues had been dramatically declining -- in 1995 $11 billion, in 1996 9 billion, 1997 7 billion -- and many had written the company off. It owes much of its turn around success to its effort to focus. (Disclosure: I worked at Apple from 1992-1996)

In a 1997 MacWorld speech, Steve Jobs outlined the key things on which the Company would focus:

  1. Board of Directors
  2. Focus on Relevance
  3. Invest in Core Assets
  4. Successful Partnerships
  5. New Product Paradigm

Fast forward to 9:10 of the video to see Steve talk about this.

Of course, with any good strategy, people should come first and the strategy should come second and thus Apple’s focus on the board and team.  And yet points 2 and 3 are all about Focus. To enable its turn around Apple shored up its strengths and focused on creative professionals and education. It canceled lots of products to focus on few and made them great.  It invested in re-building it’s brand. In general Apple focused on its core (no pun intended…) before it did anything new and only then did it have a chance to do new things and to eventually become the most valuable technology company today.

But of course, you’re probably thinking,  ”Well that’s easy for Apple to do but we’re a startup. We have to go out and do lots of things to in order to become bigger and grow and become dominant!” Interestingly, if you look at almost any successful startup company, they got there by doing a few things, or even one thing, really well before moving on to do something new.

Facebook started out as a service just for Harvard, and then expanded to other Universities, before eventually opening up to everyone.

Google did great search.

Amazon sold books.

These were all unknown companies at some point.

Focusing on one or a small list of things that really matter and getting success there first is key in a startup because you have limited resources -- not enough people, not enough money, and definitely not enough time.  You have to get success in one place before moving on to tackle the next set up of things.  And there are lots of other examples from companies with which I have worked.

At Lookout (disclosure: I am an investor and Chairman of the Board), we developed mobile security software.  We started with Blackberry, Windows Mobile, and Android. About a year ago, we shifted our focus from Blackberry and Windows and put most of our effort behind Android.  And now we are the top mobile security app for Android, and one of the top ~25 applications for all of Android.  It was a tough decision to shift our focus away from the other platforms, but we had a small team and decided to put all our proverbial wood behind one arrow.  And it’s only now that we are talking about expanding internationally and looking at other platforms.

At ZangZing (disclosure: Co-founder), we’re building a new way for groups to share photos more simply and beautifully.  We’re starting by focusing on the web and making sure that is awesome before moving into mobile apps.  Some people say we should do it the other way around, but we think once you see what we’ve done on the web, you will understand why… And either way, we could have done web and mobile at the same time, but we have limited resources and decided to do one thing well first.

At Vontu (disclosure: Co-founder here too), we developed data loss prevention security software.  We decided to focus initially on helping companies with lots of customer data such as credit card numbers, social security numbers and other personal information.  And we focused on the US.  And only on the Fortune 1000.  And even within the Fortune 1000 only on a few key segments: financial services, retail, and insurance.  And as we had success, we then expanded and eventually had customers all across the Fortune 1000 and outside the US.  The revenue ramp was great -- half a million, 3 million, 13.5 million, almost $30 million, and on the path to $50 million when Symantec bought the company for $350 million.

In summary, in a startup, don’t give in to the temptation to do more because usually doing less results in more success, more quickly.

Anyway, i hoped you enjoyed the post.  A few others you might like about planning and execution are Can you Count? and If you don’t know where you’re going, well, you’re lost.

And let me know what you think.

And thanks to Kevin for his awesome focus photo.

Read More

Startup 130: 10 Questions for Ray Rothrock of Venrock

Posted by Joseph Ansanelli on Aug 18, 2009 in Recent, Startups | 1 comment

This post is an “email interview” I did with Ray Rothrock of Venrock.   I sent Ray 10 questions on venture capital, what he looks for in his investments and the people he backs, as well as what are his favorite iPhone apps.  Enjoy.

On Venture Capital

1.  Venrock is celebrating it’s 40th anniversary this year.  That’s a long time in the Venture Capital business and does not even include Laurance Rockefeller’s “venture” investments in the 1930s in Eastern Airlines and McDonnell Aircraft.  How has the venture capital business changed since those early days and in what ways has it stayed the same?

Differences in the business are around the limited partners.  These days the money comes from all sorts of institutions – foundations, endowments, retirement funds, etc.  In older times, it was largely from wealthy families and individuals.  As such, in the 90s the venture activity morphed into an asset class for these institutions as they diversified.  The data for this asset class was based on a much smaller business, fewer venture capitalists, less money and still a fairly information inefficient world.  That is all changed now.  Today, success has a much higher bar because of information flow and ease of access of capital.

Similarities in the business are all about the entrepreneur.  There are still people out there trying to invent things and change the world with their ideas.  In short, entrepreneurs are still entrepreneuring.  I think the personal drivers are also the same – it’s about changing things, not so much about wealth creation.  Wealth often comes after success, not the other way around.

2.  With so much money “chasing” both consumer and enterprise companies which can get real traction by leveraging services such as amazon’s ec2 and open source software, what are your thoughts about the suggestion that today’s venture model of large funds and big investments does not work?

Big outcomes are mostly driven by huge markets.  If the market already exists, it is very hard to take share from incumbents.  If the market does not exists, then you need some good luck for the market to happen.  So, betting on the creation of huge markets and good luck is really hard to sell.  I think a lot of folks have downsized because it is easier to develop numbers for the limited partners that will keep them investing, e.g. ROI.  I think venture is about creating wealth – cash on cash.  You cannot use ROI to buy a Christmas turkey.  Make no mistake, small funds that have great results are wonderful things.  If you have a big fund, then you are in a different returns regime.

3.  What are Venrock’s top 3 investment areas going forward?

There is a huge trend of outsourcing everything and it is accelerating.  Infrastructure that supports this is a huge trend – clouds, networks, SaaS, etc.  Data control and management.  As the world becomes more and more dependent on data, protecting that data is HUGE.  Third, healthcare information.  You can only manage what you measure.  I think healthcare will see a revolution in measurement and systems associated with that.

4.  In addition to a successful information technology practice, Venrock also has a very successful healthcare and medical investment team.  How does the complete team work together and make investment decisions on things that are seemingly so unrelated?

Every deal is reviewed and approved by all partners.  Technology is only part of the due diligence.  Building a business – recruiting, selling, customers, all pertain to every business regardless of category.  Since we focus on people, the CEO and team are crucial, even if I don’t understand a science or a market demand.

5.  It seems most VCs keep a list of deals they “missed”.  What’s your list?

We don’t keep one.  We all have our story.  Ours was Yahoo.  Because of our early internet investing, we saw it very early when it was still at Stanford.  We chose not to pursue.  Ouch.

On Entrepreneurs and Startups

6.  On the “quantitative” side of things, what are the most important things you want to learn about a company in a first meeting?

P&L and Balance sheet are really important.  We do all sorts of “unit analysis” and compare margins, rev/empl, and things to determine if a plan is reasonable.  One thing not to do, don’t show five year detailed projections unless you know every number.  Someone will ask you about why the marketing budget, for example, change in 2013, and you better have a good answer.

7.  On the “qualitative” side of things, what do you look for in a company and its founder/CEO? And what turns you off as well?

The CEO must be a leader and a good one.  First impressions are crucial as well as impressions after the fourth meeting.  I always ask myself if I would want to work for this kind of person.  They of course must be knowledgable about all aspects of the business.  They should not be flip in their remarks and answers.  If they don’t know something – they should just say it and move on.  The biggest turn off is, when asked a question it should be answered immediately.  Don’t talk for 5 minutes and wander around.  That tells me you don’t know the answer or afraid to state it or whatever.  Answer, then elaborate, not the reverse.

8.  What are the top 3 do’s and don’ts for an entrepreneur presenting at an all Venrock partners meeting.

Do – be mindful of the time and keep the presentation complete
Do – a demo if possible as this conveys best what it is you have
Do – know who are you are talking do.  Do your homework.
Don’t – be too jocular or sarcastic or dismissive
Don’t – assume every one in the room has detailed science background to understand.  If science is important explain it at a level all will get it
Don’t – don’t forget to tell us why we should invest, e.g. returns, outcomes, comps, etc.

9.  What makes for a successful Board of Directors/Investor/Founder/CEO relationship?

Trust and openness.  In meetings, keeping an agenda and sticking to it.  Startups are complex and staying on point is important.  Investor/directors need to be respectful of the preparation for a board meeting and do their homework, e.g. read the materials in advance.
Talk often.  This eliminates things drifting too far before the group resyncs.

Bonus

10.  What are your favorite 3 iPhone apps?
Music 2 by Simplify Media – access my home music server on my iPhone – I don’t have to carry my iTunes library with me.  Shares with 30 people.
TripIt – trip itinerary automation.
AroundMe – access to local business and activities based on location.

———-

I hope you liked the post and feel free to leave a comment or question and I will relay to Ray.

Lastly, if you like this, please share it with friends using the buttons below. And, if you want an update for the next post, sign up below or follow me on twitter. Thanks.


 

More Links

Read More

Startup 129: Term Sheet – Board of Directors

Posted by Joseph Ansanelli on Aug 2, 2009 in Recent, Startups, Term Sheet | 3 comments

This post is a continuation of the series about venture capital term sheets.  If you have not yet read the previous posts on Valuation and Dilution, Liquidation Preferences, Anti-Dilution, and Voting Rights and Protective Provisions, you might want to start with them.  In particular, when thinking about the Board it’s important to understand investors Voting Rights and Protective Provisions, and the requirement of investors’ consent on certain decision.   (The links are at the bottom of the post as well…)

There are lots of things to consider for a startup’s Board of Directors including its role, who should be on it, and how to best work with the board.

You’re Fired! (or Hired)
To start, a Board of Directors has one primary job, which is to hire and fire the CEO. Sounds a little like your worst Donald Trump nightmare, eh?  What this truly means is that the Board is an oversight organization for all the company’s shareholders and an advisory group for the company’s management.

The Board ultimately holds the CEO and the executive team accountable for meeting agreed upon objectives, manages compensation for the top executives, and works with auditors to ensure appropriate accounting and business practices.  This is their “ongoing” job.  Additionally, over the life of the company, the Board will vote on key decisions such as raising more money or selling the company.

Term Sheet
Typically the language in a term sheet is very straightforward and will simply outline the number and names of people on the board.  The Series A will set the basic blueprint including the representation of the common shareholders and founders.  The following example language is from the NVCA’s sample term sheet:

“At the initial Closing, the Board shall consist of [______] members comprised of (i) [Name] as [the representative designated by [____], as the lead Investor, (ii) [Name] as the representative designated by the remaining Investors, (iii) [Name] as the representative designated by the Founders, (iv) the person then serving as the Chief Executive Officer of the Company, and (v) [___] person(s) who are not employed by the Company and who are mutually acceptable [to the Founders and Investors][to the other directors].”

Not only is this common language, but this also happens to be a very ideal structure with two investors, two common shareholders including the CEO and then an outside, non-employee and non-investor board member.  It’s ideal because all shareholders are represented and if needed, the outside board member can serve a tie breaking function.

As you raise additional rounds of funding, almost every investor will want a seat on the board which can get quite unwieldy.  I strongly encourage companies to have a small set of board members (ideally 5 but no more than 7) who appropriately represent the shareholders.  Only if needed, offer to future investors “Board observation rights”.  Observer rights allow an investor to sit in on a board meeting but they are not voting members of the Board.

The Board is Your Team
Choosing your board members is as important, if not even more important than the structure.  Think about each board member as if you were hiring them to work for the company.  Do they have certain technical competencies that make the company better? Ideally each board member brings experience with startup execution or understands the business and market or both.

It is also important that they have the right relational competencies to work well with you, the rest of the board and the entire company.  A board of successful people does not necessarily mean a successful board.  They have to work well together.  (Read It’s the people, stupid part II for more on relational competenticies.)

Making the best of it
Now that you have the board set up, the question is how to best work with your board.  Despite what many fear, the Board is not responsible nor does a good board want to run the day-to-day operations of a company.  Does that mean that the Board will simply let you do what you want?  Probably not but if your board wants to run the company then you have not put together the best Board or, and I hate to be blunt, it could be that you are not doing a good job.

The key to a successful board relationship is leadership.  Being a good leader means you have followers.  And the best way to have the board “follow” you is to set a plan, deliver on the results and keep in regular communications especially sharing bad news early. I have never heard of a successful company having a difficult board dynamic.

For more on this idea, I suggest you check out the posts If you don’t know where you’re going, well, you’re lost, and A few golden rules for a great Board relationship, and Control Freaks Are Us to learn more about how to ensure a successful board relationship.

Anyway, I hope this helps.  Enjoy the other posts and please feel free to share your thoughts or questions. And to get notified about future posts, please to sign up for email updates or follow me on Twitter.  Thanks, feel free to share the post with your friends, and go get started…


 

Related Posts and References

Read More

Startup 127: Term Sheet – Voting Rights and Protective Provisions

Posted by Joseph Ansanelli on Jun 15, 2009 in Recent, Startups, Term Sheet | 2 comments

This is the latest in a continuing series of posts about venture capital term sheets.  The first three dealt with term sheet issues around ownership, dilution and the impact of Valuation, Liquidation Preferences, and Anti-dilution.   You might want to start with those three posts before diving into this latest which covers Voting Rights and Protective Provisions that venture capitalists require in their term sheets.

Voting Rights – What’s the Big Idea?
Voting Rights are pretty straightforward.   The language you will find in a term sheet usually looks something like this:

The Series A Preferred Stock shall vote together with the Common Stock on an as-converted basis, and not as a separate class, except (i) the Series A Preferred as a class shall be entitled to elect [_______] members of the Board (the “Series A Directors”), and (ii) as required by law.

Voting on “an as-converted basis” means that in the case of any shareholder votes except for the Board Seats and assuming there have been no triggers for anti-dilution, the preferred shares convert on a 1:1 ratio and everyone votes based on their company ownership and the majority rules.  But of course, it’s not as simple as that. And while Board seats are very important, before you think about how to structure a startup board, there is something even more important to understand which are called Protective Provisions.

Protective Provisions – What’s the big idea?
In general, the Board of Directors approves most strategic management decisions.  And for most decisions requiring a shareholder vote, everyone votes based on the number of shares they own.  However, there are certain things that investors get to decide (or at least must consent to) regardless of their ownership stake or make up of the Board of Directors.  These include:

  • Any sale or dissolution of the company
  • Issuing new shares of stock
  • Changes to the size of the Board of Directors
  • Creating, owning or selling any subsidiary
  • Any change to the certificate of incorporation or Bylaws.
  • Changes to any rights of other shares which give the same or better rights as their preferred shares
  • Purchases or any dividends on stock before the preferred shares
  • Issuing any debt

In many ways, Protective Provisions are as important, if not more important, to understand as how to organize your Board of Directors (which will be the next post). Investors include them so that when the preferred share holders are a minority, they are protected against certain actions of the majority such as a the possibility that a majority of the shareholders being able to sell the company to a family member for $10 and as result, wiping out the investors.  In general, they are reasonable protections when they serve as protections as opposed to control.

Protective Provisions – How do they work?
Protective Provisions are actually pretty straight-forward.  There is the list of decisions to which the preferred shareholders have to agree or consent before the company can act.  There is some negotiation for items such as taking on debt, as usually there is some threshold below which the company can take on debt without consent.  Though most of the items are not very negotiable.

However, what is negotiable is how the Protective Provisions work when you raise multiple rounds of funding.   They can either work in such a manner such that all the preferred shareholders vote together as a class regardless of when they invested or alternatively each series of preferred shares have the right to vote separately for each series on the protective provisions.  As I will explain, having all the preferred shareholders vote as a class is in the company’s best interest.

Let’s take the example of a company that has raised one round of funding, called a Series A, in which the preferred shareholders own 30% of the company.  In this case, the preferred shareholders have to vote on any of the itemized protective provisions and it’s simple.

Now what happens in the case that you raise two additional rounds of funding, a Series B and a Series C? Each time you raise a new round, it’s in the best interest of the company that the preferred shareholders vote all together and share the protective provisions otherwise you could have a small minority shareholder that has veto rights over what are big decisions.  For example, let’s assume the Series B owns 15% and the Series C owns 5% of the company. If the Series C had their own protective provisions, then a 5% shareholder could veto a decision to sell the company even if 95% of the rest of the shareholders voted to sell the company.  This is an example of how a protective provision can become a controlling provision.

Additionally, there is one other twist, which is the threshold for the voting in the protective provisions.  In general, it is in the best interest to have a majority or close to a majority, such as 60% because again, this is supposed to be a protective provision and not a controlling provision.

In summary, while a company may think that the make up of the Board of Directors is the most important item, it turns out that the protective provisions  give the preferred investors quite a bit of power over key decisions. Does this mean that the Board does not matter? Absolutely not, and that will be the topic of the next post.

I am also going to interview Bill Gurley of Benchmark Capital this week. Send me your questions for him via the Contact form.

Lastly, if you like this, please share it with friends using the buttons below. And, if you want an update for the next post, sign up below or follow me on twitter. Thanks.


 

More info and References

Read More

Term Sheet – Anti-Dilution

Posted by Joseph Ansanelli on Jun 3, 2009 in Recent, Startups, Term Sheet | 4 comments

Term Sheet – Anti-Dilution

This is the third post in a series attempting to demystify term sheets.  The first two posts are on Valuation and Liquidation Preferences and are a good place to start.

Delusional on Dilution
As mentioned in the previous posts, a term sheet is a non-binding letter of intent that outlines a potential investment in a startup.  Much of what a term sheet covers is the value of the company and how much ownership the founders and other shareholders give up in order to get the investment.  The amount of ownership a company gives up is called dilution.  And between valuation discussions, liquidation preferences and especially with the math for anti-dilution, this whole process might start to make you a little delusional.  But hang in there, as this is the last big term dealing with dilution.

Term Sheet Anti Dilution – What’s the Big Idea?
In addition to giving up a stake in the company, when you raise venture capital, in a term sheet investors typically get additional protection rights that, in certain cases, their ownership stake will not be diluted.  This primarily deals with the case when a future investor gets a better price to invest in the company.  The term is referred to, as you already guessed, Anti-dilution.

Anti-dilution is a price protection guarantee not unlike, for example, when a store like Best Buy guarantees it will make up the difference on the price you pay for a camera if you find it for a lower price later. In reality, you only have to worry about this term if you have a down round.  A down round is when a follow on investment is made at a pre-money valuation that is lower than a previous round’s pre-money valuation.  (Don’t know what pre-money means, then check out the post on Valuation.)

As a result, based on how well you execute you have lots of control to avoid having investors ever use this protection.  (See previous post Control Freaks are Us). Plan, execute and deliver results and odds are that even in tough times your valuation will increase from each round. But let’s look at how this works in the case you do have a down round.

How it works
As mentioned earlier, Anti Dilution is basically price protection for the investors.  Let’s go back to the example used in the previous two posts in which NewCo, Inc. sells shares in a Series A investment at a pre-money valuation of $6 million and raises $4 million of new money. If there were 6 million shares (4 million for the founders and employees plus 2 million for a 20% option pool), that would price the shares at $1 per share ($6 million/6 million shares).  By raising $4 million, NewCo, Inc. issues 4 million new shares at $1 per share to the investors for a total of 10 million shares.

Following so far?  I hope so because that’s the easy math!

Let’s say for some reason that disaster strikes and NewCo misses most of its goals, the economy goes into recession, and yet the company needs to raise more money.  NewCo, Inc. gets an offer from a new investor to provide $1 million for a Series B at a $5 million pre money valuation.  Since the post money of the Series A was $10 million and the pre-money of the Series B is $5 million, this is referred to as a down round. In this case, the Series A Anti-dilution protection would kick in.

There are two types of Anti-Dilution preferences – Weighted Average and Full Ratchet.  Let’s start with the most common, which is a weighted average formula called “Broad based weighted average”. According to Wilson Sonsini, a leading Silicon Valley law firm, 92% of their term sheets in 2008 used Broad-based weighted average.  And that’s good news, because it is the most favorable for the company other than not having any Anti Dilution which is probably not going to happen for most companies.

So what happens?
Basically, Anti-dilution lowers the price at which preferred shares convert to common stock.  As mentioned in the previous post on Liquidation Preferences, in the case of a sale or an IPO that exceeds the minimum liquidation preferences, preferred shares convert into common stock.  In the case of Anti-dilution, when the conversion happens, the preferred shares convert at lower price so that preferred shares receive extra shares of common stock as their price protection.

In the case of broad-based weighted average, the idea is to lower the original conversion price to a number somewhere between itself and the new price per share based on a weighted average of the shares issued in the down round and the number of shares that would have been offered if the round had been at the price of that investors round.

And now for the fun part – Algebra.

The formula to calculate the conversion rate is:

((Fully Diluted Shares pre-down round + Shares issuable if investment had been at higher round price) / (Fully Diluted Shares pre-down round + Actual shares issued in down round)) * Original Conversion Price

In our example of NewCo, Inc, the new conversion factor is calculated as follows:

(10,000,000 shares + 1,000,000 shares)/(10,000,000 shares + 2,000,000 shares) * $1  = $.92

  • The 10,000,000 shares is Fully Diluted Shares following the Series A, all common shares help by founders and employees, all allocated in the option pool and all preferred shares help by investors.
  • The 1,000,000 shares issuable is calculated based on if the investment had occurred at the Series A price by dividing the $1 million new investment by the Series A price per share which was $1.
  • The Actual shares issued in the down round are calculated by determining the price per share ($5,000,000 pre-money valuation divided by 10,000,000 shares outstanding) of $.50 and then dividing the investment amount by the price per share ($1,000,000/$.50) which equals 2,000,000 shares issued in the down round.
  • The $1 is the Series A price per share and conversion price.

As a result, the 4 million Series A preferred shares would eventually convert by dividing the total numbers of shares by the new conversion price.

4 million shares / .92 =  4,363,636 shares.

The 363,636 additional shares is the result of the Anti Dilution protection for the series A. In summary, the idea for a broad based weighted average anti-dilution is that investors get some protection based on the weighted average of all the shares in the company on a fully diluted basis.  Of all the alternatives, this is the most reasonable and desirable for the company.

What are the Twists?
First, if there is more than one round of funding prior to a down round, then each round would go through a similar calculation.  The difference being the “Shares issuable if investment had been at higher round price” uses the price for each round.  This is not really a twist but causes further dilution as each round gets a new and lower conversion price.

Secondly, you will sometimes see something called “Narrow-based” weighted-average.  These are far less typical and the difference is basically that it excludes unexercised options, warrants and the like.  As a result, the new conversion rate is lower and more favorable to investors than broad-based weighted-average formulas.

ratchet_and_clank

Rachet and Clank

Lastly, there is the dreaded Full Ratchet.  This is much simpler to explain yet thankfully in only about 5% of all term sheets though it was in 10% of 2008 down round term sheets (Again all data from Wilson Sonsini).   How this works is that the lower price of the down round simply becomes the new conversion price.  In our example, the Series A investors would convert at $.50 per share instead of $1.  This means they would end up with 8 million versus the 4.3 million shares under the broad based weighted average.  (4 million shares divided by .5) Clearly this is painful and it’s not that common because it dilutes the founders and employees to a point, that it’s not in their interest to stay for the long term as their stake is no longer meaningful.

Additionally, the earliest investors avoid using this because it may never benefit them and if the down round is higher than the Series A price, it may only cause dilution for themselves.

Summary
This has been a long post with lots of math so thanks for hanging in there.  In summary, most every term sheet has Anti-dilution.  If you can, focus on getting a broad based weighted average formula and then make sure you execute well so that this never comes into play.

UPDATE: Posted the next in the series Startup Term Sheet – Voting Rights and Protective Provisions

Please feel free to leave a comment or ask a question if something does not make sense.

And of course, if you like this, please share it with friends using the buttons below. Lastly, if you want an update for the next post, sign up below or follow me on twitter.  Thanks.


 

More info and References

Read More

Term Sheet – Valuation and Dilution

Posted by Joseph Ansanelli on May 20, 2009 in Execution, Popular, Recent, Startups, Term Sheet | 5 comments

Term Sheet – Valuation and Dilution

Lots of folks have asked a very common question about startups: “What is a Term Sheet and what do all the terms mean?”  In general, a term sheet is a non-binding letter of intent that outlines a potential investment in a startup. Since there are lots of terms as part of a term sheet, I will break the discussion of the terms into multiple posts to get the content out more quickly and in smaller digestible chunks.

Term Sheet – What’s the Big Idea?

Before jumping into post-money valuations, liquidity preferences and other legal mumbo jumbo, you must first decide whether you want to go down the path of taking venture capital.

The main reason to raise venture capital is because you need money to get your company off the ground or your growth is significantly constrained by not having more cash to invest. Put more simply, cash is the biggest inhibitor to your company growth.dollars-smaller1

It turns out that in some cases, you are better off growing your business organically especially in the current world of web and software as a service in which the needs for cash are dramatically lower than ever.

The Flip Side

Of course, just because you need money to grow, it does not mean that venture capitalists will want to invest in your company.  Not only do you need to decide if you need funding but you should also do a gut check on if your company is right for the venture business.

At the end of the day, venture capitalists want to invest in great teams going after billion dollar markets through which they can return 5-10 times their investment.   If you cannot convince a venture capitalist that your idea will achieve these results, then trying to raise venture capital is an exercise in futility.

Startup Term Sheet Basics

But let’s assume you are a good venture capital opportunity.  To start, a startup term sheet is just that, a sheet of usually only a few pages with various legal terms that serve as an outline for an investment in your company.  Other than the confidentiality of the term sheet itself, it is not a legally binding commitment to invest.  It is basically a letter of intent.  This point is very important to remember.  Getting a term sheet does not guarantee your funding since it is not a legally binding obligation to invest, but it is usually a big milestone towards completing a round of fundraising.

Give to Get

To get venture funding, you have to “give to get”.  And your “give” is some amount of ownership and control of the company.  The question of how much ownership and control is the essence of the term sheet.  This first post will deal with the question of valuation and ownership.  I will get into the topics of control in future posts, but it is important to remember a term sheet is primarily about legal control versus actual control.  (Read Control Freaks Are Us on how success is the best way to stay in control.)

Ownership and Valuation

While VCs use terms like pre-money, post-money, option pools, etc, the general idea for valuing and subsequently selling a portion of your company is quite simple yet with one important twist.  A VC offers to buy a percentage of your company at a certain price and valuation.  The price they pay is determined by first figuring out what is referred to as the “pre-money valuation”.  On the simplest (though not completely accurate) level, this is how much the company is worth before the investment.  This is best illustrated with an example.

Let’s say you are running NewCo, Inc. and want to raise $4 million.  If a VC wants to invest $4 million, they may offer to value the company at $6 million.  The $6 million is what is referred to as the pre-money valuation.

Post Money Valuation

The post-money valuation is, as you probably already guessed, the pre-money valuation plus the amount that gets invested.  In this example, it is a pre-money valuation of $6 million plus the $4 million investment that results in a $10M post money valuation.

Pre-money valuation + Investment = Post Money Valuation

So What Did You Have To “Give To Get”?

The first thing you have to give is some amount of ownership in exchange for the investment.  This is similar to an initial public offering in which a company issues new shares that are bought at a certain price.  The amount of the company you  give up is referred to as dilution.  To figure out the dilution those with some good math skills probably divided the amount invested by the post money valuation and it would seem you gave up 40% of the company for $4 million dollars, right?

Amount Invested/Post Money Valuation = New Investor Ownership %

$4,000,000/$10,000,000 = 40%

The Twist

Well, there is one twist that complicates this.  That twist is called the option pool.  The option pool is a set of shares that will be issued in the future to new employees, board members, advisors and others.  And the way traditional Silicon Valley style investing works, VCs require the option pool for these future grants to be part of the pre-money valuation.

As a result, by having more shares, which  no one currently owns, included in the pre-money valuation total the VCs lower what is the true valuation of the company before the financing.  You are probably thinking, “Wait, say that again?  The pre-money valuaton is not really how much the company is worth?”  Yes, that’s correct and let me explain in more detail continuing with the previous example.

In the case of NewCo, Inc, the investors offer to invest $4 million at a $6M pre-money valuaton.  In addition, the investors require the very typical early stage company option pool equaling 20% of all the shares issued to founders, employees as well as to the investors following the financing also known as the fully diluted number of shares.

That means that instead of splitting the $6 million pre money valuation evenly across all the existing company share holders (founders and employees), it is split between all the existing shareholders such as the founders and employees as well as the shares in the option pool set up for future use.

Below is a table which compares what happens to ownership stakes both without and with an option pool.

Ownership Without an Option PoolOwnership With an Option Pool
Existing Shareholders 60% 40%
Option Pool 0% 20%
Investors 40% 40%
Post Money Total 100% 100%

As you can see, the True Valuation (this is my term and not a common term used by VCs) is actually $4M before any effect of the financing which equates in this example to 60% dilution when you count all the shares being issued for the option pool.   In other words the calculation should be as follows:

True Valuation + Option Pool Valuation + New Money = Post Money Valuation

$4M + $2M + $4M = $10M

The term should actually be the “pre-money, post option pool valuation” but at least now you know what it really means.  When evaluating an offer for investment, be sure to calculate the option pool to determine how much ownership you truly give up, which is the company’s dilution.

Now many of you are probably thinking, “Well, why don’t we include the option pool afterwards?”  This is one of those things that simply put “just is”.  It’s the way terms sheets work and you should not spend time trying to change this.  The place to focus your negotiation should instead be on maximizing the pre-money valuation and managing the size of the option pool to accurately reflect the future needs to distribute shares.

The Art of the Deal

Some of you are probably thinking, “Great, so not only am I totally confused by all this math, but you have not helped me to figure out how to maximize the valuation of my company!”  Unfortunately (or fortunately?), there is no magic formula.  It is part science but also lots of art.

The science part is that most VCs look at what has been accomplished at the current stage of the company and have valuation ranges for each stage.  The further along you are and the more traction you have, then the higher your valuation.

The art part is economic supply and demand driven negotiation which occurs between the startup and VCs.  The greater the perceived demand to invest in what is a fixed supply of your company will increase the valuation.

Therefore, the key to maximizing your valuation is first to demonstrate why you have the best team to solve a problem and then to get as far along in terms of customer, product and market leadership.  This will help to maximize the investment demand from a set of great investors. The more investors that are interested in what is a fixed supply of your company will result in a higher valuation.  You should not go talk with every VC under the sun, but start with a focused set and work to get several of them to put forth term sheets.

Interestingly, getting a term sheet from one VC can often trigger more demand from others.  A few years ago, a friend of mine made this cartoon that jokingly illustrates this point.  Experience has shown that once you have multiple term sheets, you are in a much better position to maximize the pre-money valuation with the knowledge of what is the true money valuation of your company.

partners-meeting

http://thevc.com/strips/strip08.html

 

The next set of posts will cover startup term sheet items regarding control such as liquidation preferences (UPDATE: The next post Startup Term Sheet – Liquidation Preferences is posted!), board of directors, and others.  If you like this and want an update for future posts, feel free to sign up below for email updates or follow me on twitter.  And of course, if you like this, please use the links below and share it with a friend.

Lastly, feel free to leave a question or comment if this does not make sense.  Thanks for reading.

UPDATE: I’ve posted a valuation and dilution calculator that should help make this A LOT easier!


 

Reference Materials

Previous post Control Freaks Are Us on how success is they key to control

Check out thevc.com for more comic stip humor on raising money

Money picture by TracyO

Read More

Startup Life 101: The Marathon

Posted by Joseph Ansanelli on Feb 14, 2009 in Execution, Startups, Teams | 4 comments

Startup Life 101: The Marathon

Being successful in all aspects of your life – your work, your relationships, your community and your personal life – is not easy especially when working at a startup. Conventional wisdom is you have to work 18 hour days, 7 days a week to succeed. Yet maybe it’s not necessarily the best way to succeed?

http://flickr.com/photos/beforethecoffee/

http://flickr.com/photos/beforethecoffee/

What got me thinking about writing about this was re-connecting with a professor I knew from the Wharton school, Stewart Friedman. He recently wrote a book and teaches a class titled Total Leadership: Be a Better Leader, Have a Richer Life.

I will not do the concepts complete justice but the NY Times summarized his ideas as “Get a Life: 101”. Total Leadership is a process to optimize all parts of your life – yourself, your family, your work and your community – in order to be more successful and ideally more happy.  You do this by clarifying and having a plan for what is important in all the domains of your life (self, family, work and community); you then engage with the people in all those domains and make sure they understand what’s important; and then experiment and figure out what are the ways to achieve the things that matter in all the domains in your life.  You can read more about it on Stew’s blog too.

This past week I presented to one of his classes and this is the first of three posts about applying Total Leadership to startup life.

Marathon
An important first metaphor used by many and important for applying Total Leadership is that a startup is a marathon and not a sprint.

Now, I have never actually run a marathon. I actually only like to run if I am being chased.  But I do like to ride my bike and I (surprise, surprise!) think startup life is a lot more like the Tour De France (surprise, surprise!). The Tour has multiple stages – all challenging in their own way. It’s a race of 2,000 to 2,500 miles happening over 21 days or “stages”.  You start off “easy” riding more than 100 miles a day on flat roads that end in a short sprint, you have mountain stages that climb the highest peaks in the Alps and Pyrenees, you have an individual time trial during which each rider races against the clock, and many other hard rides.  And it also happens to be a team sport. The diversity of challenges and duration certainly compare to a startup.

To win the Tour, one of the first keys to success is having a good plan. I recently wrote about planning in “If you don’t know where you are going, then you’re lost” and won’t repeat that post here. Suffice it to say that by first having a plan for what you need to achieve then, and only then, can you succeed in winning a Tour de France or having a successful life in a startup.

In addition to planning (and having a huge heart, strong legs and massive lungs!), another key ingredient for success in the Tour is setting the right pace.

And that’s startup life too. It’s important to work hard but not work all the time. It’s important to known when to work intensely to achieve a key milestone yet to relax and enjoy success. It’s important to have a pace for your work life that is maintainable and sustainable with the other aspects of your life. And to invest time in yourself and your family. Why? Because if you do not have the right pace and burn out, you will not likely make the best decisions, be the best teammate or team leader, and you will not be prepared to deal with the unplanned challenges that occur all the time. That is true for yourself and for how you act as a leader. By leading with an eye for the long term, you will ensure a more engaged team with lower attrition which makes it more likely the startup will be successful.

This does not mean that startup life is easy. It’s one of the hardest things you can do. But there are things you do which can make it better for yourself and as a leader.

Now many of you are saying it’s impossible! You have to work all the time to be successful in a startup! Rumor has it (Ok, it’s in a blog post on the NY Times) that President Obama played basketball or exercised almost every day on the campaign trail. And today as President he gets up in the morning, spends time with his kids, reads the newspaper and gets to the office (The Oval Office that is!) each morning around 9am. If the President can do that, then “yes you can” too. Oh and for all you Republicans out there, Ronald Reagan was known to do the same thing.

In summary, one of the keys to practicing Total Leadership is that you live your startup life with a plan and with a sustainable, long term pace.

Next up will be a post on the importance of Leadership and why “Total Leadership” is not just a marketing ploy to get people to buy into what might seem like a simple time management philosophy.

Subscribe to get automatic updates of new posts.  No spam, just a short email to let you know when I’ve written something new.  And of course, please feel free to leave a comment or two.  Thanks.


 

Read More

A few golden rules for a great Board relationship

Posted by Joseph Ansanelli on Feb 5, 2009 in Recent, Startups | 7 comments

A few golden rules for a great Board relationship

Working with a Board of Directors can be, well, scary.  Why?  Because they ultimately have the responsibility to hire and fire you.  That’s really one of their only jobs.  You say you don’t have a Board?  A Board might be a group of people or maybe just an individual to whom you are responsible to report on your job results.  If you think about it like that, we all have a Board.  

Board

Many people have asked how I ensured a successful Board relationship at Vontu.  To be honest, I tried to keep it simple and follow a few golden rules:

  1. Keep your expectations in check
  2. Pick your board wisely
  3. Tell them what you are going to do and do it
  4. Communicate, communicate and communicate

Keep your expectations in check
After our first round of funding at Connectify, my second startup, I sat down with each of the board members and asked what were their expectations of me and what I should expect of them. The board consisted of two venture capitalists, two outside “operating executives”, one of my co-founders and myself. The most interesting feedback was from one of the investors who said,

If you don’t expect more than money, then you will be happy.

Needless to say, this was a surprise.  I expected to hear how they would help us to recruit the team, find our customers, get publicity, and on and on.  If you read many of the venture capital websites, that is what they promise.  Yet his advice was quite sage because the reality is, especially with investors, they typically have 6-10 (if not more!) investments and are constantly looking for new ones.  The model for venture capital is one of a portfolio of investments in which the few very successful companies deliver the lion share of the investment returns.  And at the end of the day, they are investors relying on you to deliver the results.  Does that mean that they don’t help?  No.  Great board members help but you should expect that the help will be somewhat sporadic and usually only on the really big stuff.  I was lucky to have a great board but at the end of the day, it was my job to deliver the results.

Pick your board wisely
If you are afforded the luxury of being a founder, adding board members is as important as anyone else on your team.  And you should “interview” them and be sure that you are comfortable that you will work well together.  Board dynamics are tough enough without having people whose personalities clash.  If you have the smartest people in the room, but they don’t have the right “relational competencies” (see previous post, It’s the people, stupid part II) then it’s likely the board will be ineffective.  You say you can’t choose your Board?  Well, if your board is your job, then sometimes finding a new job with a great manager is the right answer.  

Additionally, especially for startups, it’s really important to have a balanced board that includes part of the management team, some of the investors (but not all if there are lots of them) and some outside board members.  That way the discussion is balanced across all the constituents.

Tell them what you are going to do, and do it
This is such a simple idea for a successful board relationship.  Actually it’s a great idea for any relationship. Your boss. Your team. Your spouse. Your friends. By setting the right expectations and achieving them, you build trust. If you are a math junkie, its a simple formula:

Success equals Results less Expectations

And to have success, it starts with the Expectations or plan.  As discussed in the post “If you don’t know where you’re going, well, you’re lost“, you should make sure the Board agrees with your Wildly Important Goals and the Objectives for measuring their success.  They can be consulted on the strategy for how you achieve them but that is ultimately your decision.  And try to keep the discussions away from the day to day tactics.  Without an agreed upon set of Wildly Important Goals and Objectives, well, the relationship will likely go awry.

Communicate, communicate and communicate
As in most any relationship, communications is another key ingredient.  For our Board, we established a rhythm of meeting approximately once a month.  During those meetings we would use our Wildly Important Goals and Objectives as the template for how we gave the board updates.  And each person on the executive team would review the results from the previous month focusing on top 3 success and top 3 challenges.  This way the board always knew how we were doing at any given moment.  

This works great for the normal updates, but anything important, typically bad news should be communicated early and often and never wait for a formal meeting.  Bad news early and being honest is always the best policy. I remember when we were about to close a $10 million round of funding and weeks before the contracts were signed and the money was wired, I realized we would both miss our sales targets and we needed to let go of a senior executive.  I could have waited until after we had the money to tell everyone so as not to risk the funding, but that was not the right way to work.  Instead I called the investors, swallowed hard, and told them what was happening.  Maybe not so surprisingly the response was one of support.  Generally the investors said that by being honest about a short term issue and putting the funding at risk, it made them more comfortable to invest.  Granted overall things were going well, but needless to say it made a big impression on the new investors.

In summary, if you keep your expectations low, choose the board thinking about relational competencies, tell them what you are going to do and do it, and constantly communicate, then over time, the board will  develop an ever increasing level of trust. This trust means more focused board meetings, support for management’s decisions, and generally less stress.  And again, these not only work for a “real” board of directors, but for anyone to whom you are responsible for delivering results whether in your job, community or relationships.  

Let me know what you think and feel free to subscribe to receive updates as I post new entries.  I promise, no spam.  Thanks.


 

Read More

If you don’t know where you’re going, well, you’re lost.

Posted by Joseph Ansanelli on Jan 28, 2009 in Execution, Startups | 0 comments

It’s true.  The best laid plans of mice and men often go awry.  Lots of startups plan to do one thing and end up doing something else.  And that’s ok.  However, what often leads to failure, is when a team does not have a well understood, small set of very important goals.  Goals that are so important that “failure is not an option.”

Sounds easy and pretty obvious.  But it’s actually pretty hard.  It’s hard to get a group to generally agree on “Wildly Important Goals” (as named by FranklinCovey); it’s hard to get larger groups to know and understand goals; it’s hard to figure out what to do day to day to achieve the goals; and on and on.   President Kennedy did it well in setting a wildly important goal of landing a man on the moon.

It’s hard, but a leader is defined as “someone with followers”.  And to have followers you should know where you are going.  And more importantly, the team had better know where they are going with you.

Here are some thoughts for what makes good goal setting.

  1. Focus on what’s “wildly important”
  2. Build out the strategies, objectives and tactics
  3. Communicate, communicate, and communicate again
  4. Review the plan frequently and adjust as needed

Wildly Important
A great plan should only be a few key goals that if you don’t achieve, lead to failure. A wildly important goal should be aspirational and big picture so as to differentiate from the often urgent, yet less important things which bombard us everyday.  Ideally, your wildly important goals become a rallying cry for the team.

And they should be simple and short.  3-5 bulleted sentences.  That’s it.  No long 20 page business plan document.  3-5 bullets that can be written in an email or on the back of a napkin.

Strategies, objectives and tactics
Often during a goal setting effort, there are lots of questions about what’s a goal versus a strategy, objective or a tactic.  Someone once gave me this as way to keep them straight.

  • Wildly Important Goal -- A simple declarative statement of something you want to do or achieve.  It’s aspirational.  A goal most of us can understand might be “I want to lose weight.”
  • Strategy -- this is the “how” you are going to achieve it, not the tactics, but the big picture “how”.  For example to support the goal of Losing Weight, a strategy might be  ”Exercise regularly or Go on a Low Carb diet.”
  • Objective -- an objective is how to measure your success.  It should be quantifiable and time bound.  For example, “Lose 5 pounds in 2 weeks.  Lose 15 pounds in 2 months.”  And for each, make sure people know who is responsible for achievement of the objective.  Accountability is a key ingredient as its how you manage the team as well as an individual and their performance.
  • Tactic -- this is the day to day actions you take such as “Eat 2 hard boiled eggs for breakfast or Ride my bike today for 2 hours”.  Too often tactics get mixed up as strategy and objectives.  For example publishing a white paper or doing a press release are tactics and not objectives.

Even with the strategies and objectives, a great plan should fit on one single 8.5x11 inch sheet of paper.  You don’t need to include all the tactics as each person should have their own list.  If it is more than a page it’s too much because then it’s nearly impossible to communicate, impossible to remember, and too complicated to manage.

Communicate, communicate, communicate
The reason to do a plan is to lead a team to achieve great things.  The key is to communicate the wildly important goals and explain the strategy (how) and objectives (scorecard) for everyone.  And once you have communicated the plan, communicate it again, and again, and again.  And then email it out and post in on a bulletin board or a intranet site.  And refer back to it when dealing with the day to day tactics.

Getting a team to understand, buy in, and own the plan is key to success.  If great teams know what it’s important, they will figure out how to make it happen.

Review and Adjust
Planning also means reviewing and adjusting as needed.  In success you should celebrate, and in failure, you should reflect and adjust to get better.  By honestly talking about failure (which starts with the leader) you may even engender a greater loyalty than in celebrating success.

Whatever the outcome, a set of goals should be a living document that is reviewed regularly.  I suggest a regular 90 day review and adjustment of a set of rolling 18 month objectives -- especially for a startup.  Most organizations create a calendar year based plan if not an even longer multi year plan.  I argue that those are obsolete in the world in which we now live.  Markets change, competitors adjust, and you learn new things.  A series of smaller course corrections over a shorter period are easier to manage, less disruptive and more effective than a massive change once a year or worse.

In summary, keep it simple, build out the objectives, strategies and tactics, communicate and review the plan frequently.

This little clip from Apollo 13 is a great example of wildly important goal setting along with some objectives, strategies and tactics.  A wildly important goal should mean “Failure is not an option.”

Let me know what you think and if you’d like to get an email for each new post, please sign up or follow me on twitter.  I promise no, spam.


 

Read More

What if Steve Jobs was GM’s CEO?

Posted by Joseph Ansanelli on Dec 23, 2008 in Economics, Startups | 3 comments

What if Steve Jobs was GM’s CEO?

In the continuing General Motors saga, Thomas Friedman, author of The World Is Flat and a NY Times columnist, suggested at the end of an article that Steve Jobs, the CEO of Apple, become CEO of GM for a year to fix its problems.  That, plus some of the emails I received, beg the question “What lessons from Apple might apply to fixing GM?”

Now, I don’t really know what Jobs would actually do.  But interestingly, when he came back to Apple he made some great decisions, many of which were actually very “startup like”.  I was working at Apple in the early 90′s and can attest to the fact that the place was in a world of hurt.  ”Rumor” had it that at one point Apple was teetering on bankruptcy as well so the comparisons to GM are reasonable if not at least instructive.

To start, the Apple turn around is an amazing success story and Steve Jobs did a few startup things to get Apple back on track.  They include:

  1. Focusing on people
  2. Leveraging Apple’s strengths
  3. “Keeping it simple, stupid” aka KISS
  4. Made a few key bets
He did a lot more but those are pretty relevant to the issues at GM.   Let’s take a look at each of the above.

Focusing on People
Soon after Jobs returned, he started rebuilding the team with some great Apple Alumni and also lots of new people.  And he invested in keeping some of the great talent already there.  By the way, he also got rid of lots of the non or under performers.  Here are a couple of examples on the executive team.

Jonathan Ive joined Apple in the early 90′s.  I had the pleasure of working with him on a few projects including one code named “Lindy” which became the Newton MessagePad 110.   He (and others that get less limelight) are incredibly talented designers and deserve credit for giving Apple the distinctive look and feel of todays products -- iMac, ipod, iPhone, you name it.  He is an example of retaining an incredibly talented person who has truly delivered in Apple’s turn around.

Steve also recruited new people that filled gaps and holes in the team. Some were alumni from Apple, such as Phil Schiller, and others were new such as Timothy Cook, now Apple’s Chief Operating Officer.   Cook brought years of manufacturing and operating experience from IBM and Compaq’s hardware business.  This is something that Apple desperately needed in order to re-invent its supply chain for the 21st century.  There is a great article about Cook in Fortune if you are interested in learning more.  Fortune is suggesting that he is the likely internal candidate to become the next CEO of Apple…  But replacing founders and CEOs is a topic for a future post.

So if Steve Jobs were CEO, my guess is that he would first focus on people and figure out who is great and should be retained and who should be brought in, either GM alumni or other folks, to fill in needs and gaps.  This includes who should be replaced within the existing leadership team.  And he would push this process deep into the organization to go beyond the executive team and focus on the whole company.

Leveraging its Strengths
When Jobs became at first interim CEO and then full time CEO, Apple had its share of challenges and lacked many of the strengths it has today.  It did not have an iPod, or an iPhone and its computers did not have the cache they have today.  But Apple did have some strengths and Steve played to them.  Interestingly, many of its strengths were what many people thought were its weaknesses.  One key strength to start was simply that it was different and its loyal user base was graphic designers and non mainstream PC users.  It was not a Windows PC.  Apple strengthened then built off of that position.  It did this both in advertising and then in its products.  Remember its ad campaign, “Think Different”?  Read the text of its introductory ad which reaches out to those who challenge the status quo and don’t like rules. This was all about leveraging its strengths in its core customer base.


A key startup trait is don’t try to be all things to all people.  Leverage your strengths and dominate one area profitably.   This is what Apple did to start.  They went back to their roots and leveraged that strength.

If Jobs were CEO of GM, he would do the same thing.  Leverage a key strength.  Without knowing all the details, my guess is that Jobs would focus on strengths of a few key brands -- Cadillac for high end luxury sedans, GMC for the best trucks you can buy, Chevrolet for mainstream affordable cars and Corvette for sports cars.  And then the question is what to do with the rest…

Keeping it simple, stupid (KISS)
One of the other things Jobs did was to simplify and GM needs to do the same thing.  When he came back there were lots of Macs with lots of configurations and Apple was still funding Newton which was bleeding money.  I promise more detail on Newton later…  What he did was focus and keep things simple. Apple simplified its product line by focusing on the high end graphic designer and workstation market and also the education and home market with the launch of the iMac.  And it killed Newton and the whole effort to have other companies manufacturing Macintosh clones.

GM needs to do the same thing and cancel or sell off a lot of the stuff that is not making money.  Start by killing Buick and Pontiac as they are simply re-labeled cars from other brands.  Kill Hummer as it was a nice fad car but not a long term profitable market.  Sell off Saab.  Shut down or sell off Saturn as allegedly it has never turned a profit even though it has a pretty good brand.

Get back to a core strength and dominating 1 or at best a few key markets.  Downsizing will be tough as lots of people have something to say about it (see previous post about GM and the friction in its infrastructure) but if GM does not then it will simply continue on its decline and eventually go completely bankrupt since after the US Government, no one else will step in to help…  Now if it did all this, then what would be next?

Make a few key bets
Once Jobs got Apple healthy again, he started making a few key bits though not all at once.  They included launching its own direct sales channel -- both apple.com and the Apple stores.  This was a big bet because it had relied on others to sell its products and now was going to compete.  It then launched the iPod and as it famously delclared, “Hell Froze Over”, and had the iPod support Windows.  (GASP!).  Apple too had to think differently and by supporting Windows with iTunes, it greatly expanded their market for the iPod.  That one decision not only made the iPod a success but got many people that had never purchased an Apple product to consider a Mac and has driven sales of the Mac too.

If Jobs were CEO of GM, after making sure it had the right people, leveraging its strengths, keeping things simple, he would likely bet on just a few things -- a break through new product such as the Chevy Volt and maybe a new distribution channel.

The Chevy Volt is an attempt to make an electric car that works with today’s electric and gas infrastructure and is affordable. You can read more about the Chevy Volt here. It has the potential to be the kind of breakthrough product GM needs.

With respect to sales and distribution, isn’t it about time that I can go online, configure the car I want, give my credit card for a deposit and have the price be $1000 over their manufacturing costs, and then have the car delivered to my garage?

And of course, I am sure if Steve Jobs was CEO of GM, the cars would have amazing industrial design and be a delight to both drive and simply admire. GM could use some pizzazz too.

I don’t know if this is what Steve would actually do, or if it would even work, but it is fun to dream. Isn’t it about time that GM started to think different? Very differently? Let me know what you think…


 

Read More