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operational challenges for startups
blocking and tackling
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Mr. Britton: For the first part, it's because they didn't give us money.

Mr. Robertson: Fair enough.

Mr. Britton: It was the cheapest form of funding at the time, but, looking back now, I realize why they didn't give us money. We weren't ready for it. We didn't understand ourselves enough to communicate clearly and effectively what it is that we do in order to convince them to give us that money. Luckily, we did get an angel who has been a tremendous help. As Duke was saying, it's the mentorship that is worth more than the money itself. I would still be willing to give up the money and the equity just to have that same mentorship. It comes back down to the people, the knowledge that they can open up for you, and teaching you to build the business to where you want it to be.

          Now we're at a stage where we know how to communicate effectively to the VC community. We even have VCs as customers who fully understand what it is that we do. We will start looking for money as it comes along, but it's because we're ready to grow now, not to build. If you're building a company, I would still suggest that you don't necessarily go the VC route because they aren’t going to help you build as much as an angel or a mentor who will get involved versus just making an investment.

Mr. Robertson: Great. We're going to wrap up with that. I want to highlight, if it's not a case of stating the obvious, that these are four very different entrepreneurs with four very different companies. Yet, in one way or another, they all faced the same challenge areas, and there are some common threads. Among them are a deep personal commitment, and that came out in different ways. There's also personal honesty about what you do well versus what you don't. Are you ready to sacrifice 14 months without a salary, and so on? There was a common theme of balancing what you do well with the real need in the market and the value placed on it relative to what you do. It’s also apparent that each of these entrepreneurs answered these challenges in their own way, and that's a pretty important message. I don't think there is one magic solution to any of these questions or challenge areas, and that was a nice contrast across this panel. Finally, it's quite clear that, before you jump into things, whether these folks knew it ahead of time or learned it pretty quickly off the bat, you’d better know what you're doing.

          I want to thank everybody very much for coming, and to thank our panelists. Now, Mario is going to do a wrap-up, then he'll move on to talk more about Netpreneur.

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mario morino: wrap-up

Good morning. I want to thank everybody who came today, especially Larry, Duke, Don, Alba, and P.V. for a great discussion. There were some very good points raised today, and they deserve a summary before I come back to talk about the future of Netpreneur.

          PV said it well: It is a great time to start a business.

          As crazy as that sounds, it really is a great time to start a business. You're back to being real entrepreneurs, and all the foolishness of the last six years is gone.

          We went through a bubble, folks. Forget it.

          There was an article written about eight months ago that basically said, for those who came in during the bubble, you've got to unlearn everything you learned. It's back to real life now. It's back to 1994 or 1990 or 1985 or 1972 when being an entrepreneur meant going 14 months without a salary. It meant bootstrapping. It meant begging for what you were going to get next. It meant scraping through things.

          That's what it's about.

          We went through a bubble. It was false. We allowed far too many people to believe they were entrepreneurs, and that's what the bubble caused. Some people made a tremendous amount of money, but it wasn't necessarily because of their skill; it had a lot to do with market momentum. Don't ever forget that. Market momentum. That's not taking anything away from anybody, but now real life is back.

          And, in all honesty, it isn't as bad as it seems. That may be hard to hear if you're not employed today, but, on balance, it really isn't.

          I just left a meeting at a private investment firm where we spent two days going through some numbers. It was pretty interesting. There are upticks out there, although they’re not obvious. If you're in the venture field right now, don't kid yourself, some more firms will crash and burn. There may still be more venture firms going down because the down economy won't allow a their portfolio companies to get enough runway. They won't have the survival resources to make it through the next one or two years.

          The key right now is survival for many in the tech sector. As bleak as that sounds, that's it. Have enough sustenance and sustainability in your business that you're going to make it through this drop. When it comes out, we'll be back in business. We've lived through these cycles before, although this last four-year cycle was one of the biggest aberrations since the 1960s.

          Most of you are not as old as I am, so this is the only one you ever saw. We started our business, Morino Associates, in 1973, and it was a bear. You couldn't get the time of day from anybody, but we were oblivious to that. We didn't know the economy was bad; we were just starting a company. You go out, you start a company, and that's what an entrepreneur does. 

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          On the concept of “model” that was talked about, it’s a wonderful word, but it basically amounts to: those who can, do, and those who don't, choose not to. It's very simple; it's all about execution. The world is full of ideas, but it’s not full of people who deliver. An entrepreneur delivers. You have an idea and you're going to figure out how to deliver it, driving it home no matter what.

          We just went through a discussion recently with some investors. Do you know what the discussion was about? Do you invest like an investment banker, which means looking at it analytically, or do you bet on the person? The answer? You bet on the person. Here's why: “Professional management” is a wonderful term, but don't bet on it in the early days of a startup because their staying power is lower than that of the entrepreneur.  At the early stages you want somebody who has unbelievable conviction. You want to invest in somebody who knows that they are not just going to win; they are going to dominate a sector. That's what you buy. If you don't see it, you walk. The team sees that fervor, that excitement, and they form around it. You have to have this belief.

          As Alba said, pick your spot, but, when you pick it, know it in a compelling fashion. This is not about “studying” your markets. You should know your market. You should have lived your market. Then you don't have to worry about the research because you're using firsthand knowledge. You lived this, you were part of it. We just did an investment in a firm doing a payment system. After talking to the guy, you walked away from the table knowing he had an absolutely compelling understanding of that space. He ran human services for a state government for years; he was a consultant in the field after that; he developed systems for years; and he decided to create a business. He knows his field backwards, forwards, sideways. No market researcher could ever tell him about his field, so you walk away with great confidence.

          You have to feel in your heart that you can really beat the next person, and then you do it. You execute. As Alba said, you beat the giant because you know more than the giant in your space. It's guerrilla warfare. That's what it's all about. In my day, we went up against IBM. They were far stronger than we were, but in our piece of the business we often won because we knew what we knew better than they did.

          As to the idea of needing cash when you're ready to go to market, well, don't be afraid to bring out your product or service, and don't be afraid to sell vapor—as long as you know that you can deliver. Larry Ellison made a fortune by selling ahead of himself. The next version was always going to solve your problem. It wouldn't get there until two years later, but the world bought it, and Ellison and Oracle delivered.

          There was a company created here many years ago called VM Software, which became Systems Center, which became Sterling Software. Bob Cook sold that product before the product was developed. He sold contracts, but he knew he would deliver the thing. Our first product, I'm not kidding you, we sold it and it wasn't ready. We were sitting on the floor of a company in Worcester, Massachusetts, on Christmas Eve writing code. They thought we were writing documentation, but we were writing code for the product. We stayed on that floor through New Year's Eve, through January, and we came up with every excuse in the world until that baby ran. You get out ahead of yourself, just don’t get as far ahead of yourself as we did! In fact, if you're not out ahead of yourself, you're too conservative to be an entrepreneur. There's a risk/reward equation. Don't be foolish, of course. As I said, don't do what we did that first time, but you've got to take a chance when you don't have all this behind you.

          When do you go after venture capital? As was said here, you don't necessarily have to go after itl. At my company we never had a dollar of it in our business. It was a different era, of course. We each put in $600, and that was to clear the books in DC. After many permutations, it was eventually sold for $2 billion, so there’s at least one example that you don't need to do the VC route for funding. Once again, you've got to forget the bubble.

          There are times when venture capital is really more than the money. You may have a certain type of business or competition that drives you there, or, as PV mentioned, you may need a certain connection base. As Alba said, and as Don is living through, however, you can actually build a business today without it. Remember, the bubble distorted everything. The bubble told you that you couldn't do it. The bubble is gone. You can bootstrap. The point is this: As long as the need in the market is there and the competition isn't filling that need—that's the other issue, of course; if the competition is there, you're dead—but if you've picked your niche, you have the time to move.

          If you don't have capital, do you know what you do? You either go without salary or you work another job. Then, the other 16 hours, you work on this job. That means you don't sleep a heck of a lot, but that's the price. You either want to pay the price or you get out of the kitchen. That’s what separates you from the others.

          I know several of these speakers here today. I know what they've been through because I've lived it. Don housesat for me. I would come in at 1:00 in the morning. There's Don, he's working. I would get up at 7:00. Where's Don? He's out of the house already. I work hard, and he's as bad as I am, but that's what it's about.

          I don't want to be discouraging. I think it's a phenomenal time to start a business because the flight to quality is on. You'll get the best people, you'll get the best funders, and you're going to find the best clients. It just means you're going to have to be the best, too. That's all. If you feel that about yourself, good. I don't think this is necessarily a bad time at all. It's a hard time, but, if you've got it in you to be an entrepreneur, you're going to make it. It’s a question of choice and what you're willing to give up in your life to get there.

          Now, to move on to the second part of this discussion, we put out our announcement yesterday about sunsetting Netpreneur at the end of this year. To a lot of people that wasn't news, but to some of you it probably was. It was really my decision. It was  a very personal decision. I went through the thought process starting a year ago August, so it was something that had been going on for a while. I came up with two conclusions. Number one, I needed to have more focus on my family. Anybody who has been around me knows this has been a growing issue for me. I've been doing a better job ever since 1992. Number two, we had to focus on the single most important, passionate part of what we are doing to make a difference, and that is dealing with the lives of children and the nonprofit sector that helps them. As you go through your lives, you will make hard decisions about how you're going to spend your time. That's what this decision is about. It has nothing to do with Netpreneur, it has nothing to do with the economy, it has nothing to do with the region. It's a very personal decision about where to spend our time. 

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          I love Netpreneur. I've enjoyed this beyond any measure. I get my jollies when you people come up and we talk about entrepreneurship. I live and die on this stuff. The reality, though, is that I also live to serve nonprofits who are working to help children.

          In the same way that you're trying to change a market and build your businesses, we have an opportunity to change how philanthropy supports nonprofit organizations. Today, you give to a nonprofit based on how low their overhead is. It's the dumbest thing. We choke them. We don't let them grow. We don't encourage them to manage. We don't encourage them to think long-term. It's not that the business people are any smarter than nonprofit people. In many cases we're not. You'll find absolutely remarkable leaders in that community who have not been given the same kind of chances we've been given in the business world. They don't have the resource base that we have.

          I'll give you an example of what we're doing with some of the organizations we've already funded. I know you haven’t heard the full story, but we were very fortunate. We started Venture Philanthropy Partners during the bubble—keep that in mind, timing is everything—and we got commitments for $35 million. That’s unheard of in the country, by the way. No one has put together this kind of multi-donor fund that matches its size. We actually didn't start collecting money until the meltdown began. We now have $28 million in the bank, thanks to the 30 families involved, and we still have $6 million to collect, but the fact that $28 million has been put away is significant by itself.

          The Morino Institute has funded the startup costs of this operation, and, as of next year, the yield on that $28 million begins to fund its remaining operations costs through early 2006. Our objective is to deploy all $35 million in five years. We either live or die by performance, and, if we don't perform, we'll go away. If we perform, we'll get some more money, we'll get a whole new fund, and keep going. The likelihood is very high.

          To give you an idea of what we're trying to do, we're now engaged with five organizations in the region. They go from organizations that do mentoring and tutoring for children in the District; to a program in Virginia that deals with mental health interventions for immigrants, specifically refugees, which is a huge problem in our region today; to childcare centers in Alexandria; to our most recent investment, a group that deals with Asian-American children and the problems they face dealing with two cultures.

          If you think your funding is a challenge for your field, Lowell Weiss and I wrote an article last year after September 11 called “The Perfect Storm.” It discussed the potential for what could happen to funding for social services programs. We just updated it for our board yesterday, and that scenario has played out. Go ask Governor Warner in Virginia what's happening to social services funding in Virginia, or Governor Glendening in Maryland. Ask Mayor Williams where the money has gone in DC for afterschool and preschool funding for kids. It's almost like we've created a society that hates our children. The money is imploding. The giving patterns are still there, but they've changed. Corporate funding and philanthropy have been cut back because of the economy. The big issue now is not September 11, it's the economy. At the very time where the demand for services for these families and children is the highest we've seen in a while, many of the potential funding cuts for the next several years have already started, and it could be devastating. That puts in perspective the role we're trying to play.

          I'll give you an example. We're investing in a mentoring/tutoring organization, Heads Up. When we started working with them, they were at about a $1.4 million annual budget for a tutoring network of about 500 children. They pull in students from colleges to work with the children in the evenings. You're getting the tutoring benefit, but also a mentoring benefit as well. The two leaders of this effort are remarkable young men. Remember, their budget is about $1.4 million. We are investing $2 million. First of all, it's almost unheard of to put that kind of money into an organization of that size that does not go to programmatic services—it goes exclusively to building the strength of the organization. This is going to sound familiar to entrepreneurs, it goes to recruiting the best people, building the funds development process, understanding how to measure outcomes, understanding how to be more accountable to the stakeholders, etc. It’s all aimed so that they become much stronger as an organization, much more effective. They’ll be able to reach more children with even more effective services.

          This is a somewhat radical departure in the way much of philanthropy has been done, but it really goes back to the strategic, engaged philanthropy of Rockefeller. The Meyer Foundation was front and center in helping Heads Up get to this point with their funding; now we build on what Meyer has already done with our funding and support.

          We're taking many of the same techniques that we've used working with business entrepreneurs and now applying the same model to social entrepreneurs. The difference is that the focus is on improving the lives of children. I'm not trying to be melodramatic, but that's where my passion sits. We're not walking away from you entrepreneurs—because we're going to come back to you in a different way—but the focus is on the other side. We made an effort to get funding for Netpreneur from other sources, and, although it didn’t work out, there were people who stepped up, as Mary mentioned.

          Netpreneur will live on, but it will be by your choice. I've always maintained that Netpreneur, in its essence, was one thing: an organic network. It wasn't a program. It wasn't a Coffee & DoughNets event, it was the people who were involved that made it. If you could see the emails pouring in since yesterday's announcement, you would know that it will live on in different ways. Just look at the people in this room. You've created networks, sub-networks, small networks, and contacts. Since I walked in here, three of you came up and asked, “How can I help keep things going?” It won't go on in its current form. The challenge and the opportunity for you, if you want it, is how do you step forward and let it grow organically. If you want it to continue, you'll make it work that way. It's like being an entrepreneur. Do you want to do it or not? It's a choice, and it's your choice this time. We'll help you do it. Mary has agreed to work on it well into 2003 to help. We would certainly like to see that happen. It may not go on with the same robustness, but it will go on in a very entrepreneurial sense. We’d love to see it happen.

          And, it may be that no one steps forward. That's okay, too. Although this program will shut down come December 31, the change in this region has been enormous in terms of the number of people who are now connected, who can reach out to each other, and who have networks. It’s not because of us; we've been a facilitator. It's because of how the community came together. I don't mean that in a corny fashion. There are relationships and ties that have been built because our timing and luck were right on the money. Magic happened in this region during the last five years, and it will be one of the forces behind this region’s economic future. 

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          Let me touch on the idea of the economic future for a minute. It is a tough time for an entrepreneur, don't kid yourself, but it's also a good time. If you really believe in yourself, it's a time when you're going to get a lot of leeway. If you're good, you're going to have more VCs shaking you down than you can shake a stick at. I remember back in the '70s and early '80s when people would say that venture people didn't look at Washington, DC. That was baloney.  But, when Bob Cook created VM Software, guess what? The VCs were all over him like ants on a sandwich. They wanted every piece of VM Software. In '85 and '86, we had people calling us at Morino Associates, wanting us to invest or take us public to get a piece of the action. If they spot a company that's alive, the money will show up, rest assured of that fact. Money always moves to a successful company. That's one thing you can take to the bank in this industry. The question is, is what you've done good enough to demand that kind of attention?

          So, what is with this economy today? The interesting statistic I’ve heard is that for the first time in a while there was a click up in capital expenditures on technology. If you go back to the beginning of this year, capital expenditures budgets in technology were running negative. It was that bad. They're now projecting a 5%-7% increase for 2003. What's more important is that the percentage of capital expenditures directed to information technology—which has dropped down about 50%—they're projecting to go up into the 60%-70% range as 2003 and 2004 come forward. It doesn't mean nirvana, but it means the ship may be turning. One of the tools for economic recovery is technology, although it will be sold very differently than it was during 1995-2001.

          The other remarkable thing we picked up is that the entire services industry is going to go through a change. This may not be good news for some of you, but, because of the boom/bust, a lot of the talented people who previously would have gone to work at vendor companies are now going back to the user companies in the Fortune 1000. It's reversing a trend that started in the late 1980s in which those companies did not have the internal ability to install the products and solutions themselves, and that gave birth to an enormous integration services industry. That trend is beginning to reverse, and my caution to you is that it's probably not good news if you're a general services company. User companies are becoming more able to hire first-rate talent to do project management integration work again, which is a sea change from what we've seen in the last 10 years. If you have highly specialized solution services or if you're selling products, it's a plus for you because your ability to sell into that company and find the talent inside to work with is higher. It may open up product sales again because, going back to the end of the 1980s, the early 1990s, the gating factor in product sales was not market, but people. What you're hearing from top CIOs is that they can now hire the kind of talent they need to start unleashing major development projects in-house. I would argue that, long-term, this is a very positive element for the technology field.

          Another factor—and this may be small comfort to you if you're out of work today—but Steve Fuller just finished one of his reports at George Mason University, and they're predicting a net 9% growth in jobs in the region by the end of the year. Sometimes we get caught up in the media and we hear the stories of gloom and doom, but that argument is relative. Gloom and doom compared to what year? Gloom and doom compared to 2000? Oh, yeah, but not compared to 1996 or 1995, and certainly not to 1990. Why is all this traffic still on the roads if no one is working? Where are all of these cars going? If there have been 30,000 or 40,000 jobs lost, which may be the number, have we forgotten the 160,000 that were created? Did we forget how much net wealth was created in this region? If you took AOL stock, even at its deflated price today, it is a staggering wealth injection into this region. In spite of the fiasco at WorldCom and others, you've got to take a net view. There has been enormous wealth creation, which is both good and bad. The wealth creation for the part of our community where most of you live has been great. At the same time, going back to those kids, the wealth gap between the money and the poverty is actually worse. While this whole explosion was going on, people failed to realize that the gap kept increasing.

          A recent study showed the degree of the poverty element of DC, which I'll argue pertains as well to parts of Northern Virginia and Maryland as well. The poverty is exasperating, but on your side of the fence the flow of money is coming out stronger, you're seeing more innovation, and there are some upticks in the company earnings. When IBM, Apple, or Microsoft are showing nets coming up, those are positive indicators.

          I'm not trying to give you an artificially rosy picture of where we're going with all this, but the reality is that there's great opportunity for entrepreneurs today. As hard as it is, there are all kinds of market voids out there. What you want to do is to get a survival strategy that will get you through a 12-, 18-, 24-month period. If you can hold the line through that period, unless there's some kind of massive macroeconomic hit coming, you're looking at a 24-month window during which you'll start seeing a relatively healthy tech turnaround.

          But don't think it's going to be 2000 again. Go back to 1995. It wasn't bad, folks. It just wasn't unreal. You had high venture money moving, you had a lot of interesting startups going on, you had IPOs. It was realistic.

          I'll leave you with that relatively positive picture if you're an entrepreneur in the region.

          Lastly, and I'll be doing this many, many times over the next seven or eight months, I want to thank the Netpreneur team members. “Team” is a sort of amorphous phrase in some ways because, in many respects, it encompasses hundreds of people in the region, but the formal team, past and present, that started in 1996, has been remarkable. I can't thank them enough. I sent a note to them yesterday saying that we should take pride in the fact that we've been able to do what we did in this period of time, and we should take even more pride watching what you have done. Not that we helped do it, but in being around the laboratory of accomplishments that took place in the region. Despite all the gloom and doom, let me tell you something: This region really rocked, and the net benefit is still very strong. When we start feeling sorry for ourselves, remember that there are people a heck of a lot worse off in this country, even in this region.

          Thank you very much.

[End]

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