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a dose of realistic optimism
preventing startups from stopping

page three of four | previous page 

jamey harvey: the moment of opportunity

I'm curious.  How many people here are either CEOs at startups or founders at startups?  Can you raise your hands?  [It is nearly the whole group of over 300 people.]  I'm going to talk directly to you.  Everybody else can feel included anyway, because I'm sure you'll start a company sometime if you're hanging out here.

          iKimbo is the third company I have started. I started an interactive comic book/CD-ROM company in Mountain View, California, and did that for two and a half years, then I started a company called Digital Addiction in Laurel, Maryland, which did online game distribution technologies.  iKimbo is a new platform for group communication that we are delivering to companies so that they can let their customers communicate with each other P2P¾Peer to Peer.  Somebody was laughing before, asking how long we have been calling ourselves a P2P company, “Ever since that article came out in The Washington Post?”  I said, “Yes, we have only been saying it for three days, but we have been building it for a year.”  So, there you go.  We are going to be one of those “path to profitability” companies.

          I want to talk a little bit about what the job of a CEO is.  I realize I have a vastly different perspective than anybody here on what we are talking about today. At every company I have started, there has been a moment where you realize that what you are doing isn't working¾every company, including the one I'm in now.  That moment is the moment of greatest opportunity an entrepreneur can ever have.  It is in that moment when you get to recreate yourself.  You get to see what the new opportunity is because, when you start a company, you are projecting yourself into the future.  You had better be projecting yourself into the future because, if you are dealing with the market that is here today, you have already lost; you are already starting the wrong company.  You need to be starting a company that will be relevant one year, two years, three years from now, so ask yourself before you get started: “Is what I'm doing a fad?”  If it is, you have already lost.

          That goes to what Mike was saying, that there are things which are out of your control.  Yes, the marketplace is out of your control, but, if you are the CEO of a high-tech startup, it is your job to get it right.  Bottom line, you are accountable for getting it right.  You are accountable for making sure that the business you build is relevant to the marketplace you are addressing.  It doesn't matter if the market changes; it's your job to get it right.  You always need to be out there a year, two years in the future asking, “What's going to happen next?  What is the next trend?  What are we doing wrong?”  Constantly cycle in your own doubt, adjust the plan and communicate it to your team in a way that makes a difference.

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          Some things to avoid.  When you get to that moment when the company needs to transform, you need a good relationship with your shareholders.  Your other job as a CEO is to create value for your shareholders.  At the end of the day, that is the metric that you will be measured on for your success¾they bought at 25 cents a share and sold at $5 a share.  Okay, base hit.  Right?  If you are growing the value of the company for the shareholders, you are succeeding; if you are not, you are failing.  There are moments in any company's history when it's growing and moments when it's tapping out.  You have to be profoundly aware and realistic about which is happening, and you must adjust your plan to succeed.  It's very important to be . . . two-faced would be the wrong word . . . let’s say “of two minds” at the same time.  You must be able to be optimistic and realistic at the same time.  The key to having a good relationship with your shareholders is not to mislead them.  Do not get all airy-fairy with your shareholders in your board meetings¾ “Oh, it's great!  Oh, we have this deal coming!  Oh, look at our projections!”  They see right through it.  They have sat on boards before.  They have been in train wrecks.  Bring your doubts and your fears to your board meetings.  Partner with the people who have money in your company.  Depend on them.  When they call and ask you how things are going, tell them the truth.  Ask them for help.  If you do that, they will back you when you go to make this transition.  You don't want to get caught in a situation where you have to recreate the company and they all look at you and say, “We don't believe you anymore.”

          Here is a very practical lesson I have learned.  When you get to that moment when you intend to recreate your company, it's just as easy to build a company that is going after a huge market as it is to build a company that's going after a small market.  The truth of the matter is, it took just as much work to grow to 35 people and build a software product that addresses a $100 billion market, which is what iKimbo is doing, as it took to grow a company that was addressing a $1.6 billion market, which is what Digital Addiction is doing.  The big difference is that you can get the second company funded, but you can't get the first company funded.  It's that simple.  What we tend to do, as entrepreneurs, is go after the opportunities that are easy to recognize, and those tend to be smaller opportunities than the ones that change the world.

          When you get to that moment when you are recreating yourself, you need a good relationship with your shareholders; you need to be able to present the public face while adjusting in the private face; and the other thing you need is cash.  If you are running out of money at the moment of the transition, you will die.  Even if you don't die, you will become one of the walking dead, one of those companies that's going nowhere.  Here’s a couple of stories.  It's gotten progressively better for me.  You do learn, and that's a big relief to me.

          My first company built interactive comic books.  Originally, we were writing original comic books on CD-ROM and distributing them worldwide.  The first order came in and we made $400,000 having only spent $100,000 to develop the title.  We cranked out another one and we made $20,000 on the second order.  We said, “Uh-oh.”  That's the moment of truth, when the business seems great, but you know it's just not going to work doing what you are doing.  I'll give the CEO of Inverse, Inc. a lot of credit.  He saw it.  I came to him with an alternative and he jumped on it.  We implemented it.  We went out and licensed Superman, Batman and The Tick.  We changed the model and started delivering the comic books into K-Mart and Wal-Mart instead of software stores.  We went very, very low-end consumer, highly branded comic books, and then we raised a round of financing from very, very dumb money when we were running on fumes.  The very, very dumb money came and said, “Well, this is fine.  I know you need the money to make payroll next week.  We have added an extra term to the deal.  You have to give us all of your technology, all of your patent applications and the software engines.  All of that belongs to us.”  We were out of money.  They took the deal and the company was dead.  It was completely unfundable after that.

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          But it's your job to get it right.  If you are running out of money and trying to restart the company, it means you made a mistake and you will suffer the consequences.  Your employees and shareholders will suffer the consequences.  You need to be making those transitions when you have enough cash in the bank for a year.

          At Digital Addiction we had a much better story, but it had its bumps as well.  We brought out the first game and the business model just sang.  One out of five people who downloaded the software bought, and they were buying $70 worth of virtual collectible cards.  Nothing.  They were paying $70 for nothing.  It was so beautiful.  Then they lived on our site and never left.  The name Digital Addiction was completely appropriate, but we couldn't drive enough downloads and we had no money for marketing, so we created this new viral marketing technology to take that business model and move it everywhere.  When we started talking to investors about it they said, “This new marketing technology is awesome; we want to fund that.  Why don't you forget about this game thing?”  That's the moment of opportunity.  You are making the transition.  What you did before didn't work.  It is an opportunity because that's the moment when you can recreate yourself.

          What I did wrong was that I took nine months of hemming and hawing before I made the split.  That has iKimbo coming to market nine months later than it should have, and it made life very difficult for everybody at Digital Addiction for nine months while we were essentially straddling two strategies.  Make the decision.  Make the change.  Live with the consequences.  It's your job to get it right.

          As it worked out, Digital Addiction is doing great as a game company.  I expect that the investors in that company will do just fine.  iKimbo is singing along.  You need to be decisive at the moment when you recreate yourself.  At iKimbo, we have been going through that over the past six weeks.  We built this incredible system for delivering service; we brought it out and found that there was a lot of interest.  I started talking to companies about partnering, and every one of them said to me, “We don't want a piece of this, we want the whole thing.  The system you built is great.  We can see how your business is going to be awesome, but we want that business, we don't want a little corner of it.”  We banged up against them and we kept saying, “Oh, man, this isn't working right.”  Then, one day, my partner Eric walked in and we looked at each other and said, “Heck, let's sell it to them.  Give them what they want.  We already have it built, we have our first couple of beta clients signed up.  They are going to come and take the system and distribute it all over the world.”

          I said to somebody this morning that it's like being shot out of a rocket, the moment you make that transition from what doesn't work to the new opportunity you create out of the barriers you hit.  I truly believe that the moment when you realize that what you are doing isn't working is the moment to seize. It can be painful.  It can be scary.  There are people around to support you, if you are doing it right.  .  you have a team, you have a board and you have advisors who can help you.  Do not hesitate because things move very fast in this world.

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the audience: q&a

Ms. MacPherson:  Thanks, Jamey, for sharing those real experiences and to the panel for their insights.  We are now going to take questions

Mr. Kayatin:  My name is Justin Kayatin with microCreditCard.com.  My startup, which provides a number of different services for eCommerce merchants, recently completed seed funding and we are burning through our cash at a fairly rapid rate.  As we go out for more money, should our messaging focus on all of the services we provide or on the one of paramount importance?

Mr. Harvey:  That’s hard to say without knowing all that you provide, but the general answer is that you should see how it works.  I'm a big believer that when you start talking to investors, you tell them a story.  Start with a couple that aren't that important and listen to what you hear from them.  Write it down and go back.  Rework your story and tune it to what the investors are looking for. Actually, what you want to do is research each VC to find out what they are interested in, then put a slant on it that works for the VC you are talking to.

Ms. Smith:  It's very important to have a scalable message, and it's dangerous to focus on one thing you are doing well now if it's not part of the vision of where you are going.  Never position your company entirely for what it is today, but for what it can do.  I think you have another step to that message.

Ms. Abramson:  We are certainly looking for a path to profitability, not just to build market share.  We are looking for return on investment, so I agree that we need to know the whole story.

Mr. Makowski:  I'm Mike Makowski, one of the  co-founders of Mighty Acorn.  We are a million dollar management team that has brought in some money and things are going well.  Is this the right time to bring on a CEO?  Is there a point that's too early for that, or one that’s too late?

Mr. Lincoln:  I don't think there is a single answer to that question, unfortunately.  You have to be opportunistic, first of all.  If you have an early stage company and that person presents himself or herself to you, if he or she is willing to work for a low salary in exchange for 5% or 10% of your company, you might have to seize that opportunity.  Many companies, of course, will hire the “rock star” CEO on the eve of an IPO or other major funding event.  In my experience, it varies widely.

Ms. Abramson:  You have to be realistic about your skills and the skills of the existing management team.  Given what you need to accomplish, are the people in place able to do it?  It isn't that you are looking for somebody to come in and create an entirely new company, you are looking for somebody to come in and take it to the next level.  Be realistic about who's onboard and what you need, then begin looking sooner rather than later for the person who can take it to the next step.

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Q:  Should a small company consider the Over The Counter Bulletin Board (OTC BB) instead of VC money?  It can bring more awareness to the public about the company.

Mr. Shames:  The accepted route is to do an IPO, but you see some companies do what's called a Direct Placement Offering (DPO) and there are other variations.  I will tell you that we, as a Big Five firm, don't really deal with anything but IPOs. We tend to get a little nervous when you're dealing with other types of offerings just because they are more complicated and there is more risk on our part.

Ms. Smith:  The OTC BB is sort of the tail end of the Nasdaq¾you are a public company but you are not really in a market . . .

Mr. Shames:  You are very thinly traded and there are not many shareholders.

Ms. Smith:  Your stock is usually a buck or less a share.  It's really a sick scenario.  A business starts going well and they say, “Well, gosh, we have a pretty good company and we want to get some recognition . . .”

          You are dead before you start.  Nobody, not significant analysts, nobody is going to pay any attention to a company that took this path because they are going to say, “If these guys were smart, they wouldn't have done anything so dumb.  We don't want to mess with them.”  That's really what it boils down to, so, no, don't do that unless you are going to go out of business.  Even then you might still go out of business and then you might have shareholder liability suits on top of all your other problems.

Ms. Abramson [Laughing]:  Esther, how do you really feel about this?

Mr. Shames:  It really is the absolutely last resort.  It wouldn't be something where I would start, and you shouldn't go there unless you really are desperate and there is nothing much more you can do.

Mr. Kling:  I’m Arnold Kling with homefair.com.  As a follow-up to the last item, one of our competitors went public that way and we referred to them as having gone public on the Yugoslavia Stock Exchange.  We didn't worry about it and we had no need to.

      I have interviewed various entrepreneurs and have been surprised at the number who say that they messed up in the way in which they gave away equity.  For example, giving away equity to somebody and ending up in a lawsuit with them.  What are the right and wrong ways to give up equity?

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Mr. Lincoln:  One of the mistakes that is often made is the failure to properly paper equity incentives.  Later, there is a falling out and you have some disagreement about what the arrangement was for somebody who has been brought in.  If you are going to give away equity, the other thing to do, of course, is to provide a vesting schedule or a forfeiture clause.  That's like golden handcuffs in which people have to earn the equity over time or through performance-based milestones.  You need to make it clear that their equity or some portion of it is subject to forfeiture if it doesn't work out and they leave.

Mr. Shames:  Obviously, equity is an extremely important commodity for a startup, and I would encourage everyone to be very careful about when and how much equity you give out.  There are a lot of service providers and other people who will come to you asking for equity, and I would encourage you to say no.  Give it only to those who are really necessary and need to have it, such as your board of advisors, your board of directors and people like that.  Even then I would be very careful how you give the equity out.

Ms. Abramson:  On the other hand, once you are raising a venture round, a venture fund is certainly going to want to make sure that your management team is properly incentivized, committed to the company and has equity.  By the time we come in, we are not looking for the ownership to be pushed only into the CEO's hands.

Mr. Shames:  That's a good point.  There is one group that should get equity, your employees.  Typically, when you do a VC round, there is something like a 15%-20% pool that that gets allocated to your employees, and that's very, very important.

[continued]

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