http://localhost:4503/content/lfw/en/blogs/larrys-vcview-blog.html2017-01-10T11:22:35.103ZLarry's VC View BlogLarry's VC View is the bi-weekly blog by photonics entrepreneur and budding venture capitalist Adobe Experience ManagerWater deals noemail@noemail.orgLarry MarshallIt's been said that water is the new gasoline--I hope not, it will be hard to drink. ;-) I am a big believer in water investments; in the US we pay a fraction of a penny per gallon of water, while in the rest of the world it is priced by market forces--many times higher than here. As it did in telecom, deregulation will hit this industry and fortunes will be lost and made. In my real estate investments I have a partner who has been in bottled water for years, and is seeing a disproportionate escalation of water-related real estate values (i.e., land with springs and no waterfront). About 10 years ago I helped a friend with a European water bottling outfit differentiate his product using <a href="">laser marking</a>--there&rsquo;s a stretch of technology. ;-)<br /><br />In China and India, clean water is on the top-10 list of key infrastructure needs for the future. Coming from Australia, which is almost always in drought, I have a keen appreciation of how critical water is. Israel is a source of exceptional water-related technologies because, as with most things, need drives solutions. So far I have seen quite a few water deals, but I am having trouble finding the killer app/technology. There are membrane technologies that filter the water, specialty plumbing systems that recycle gray water and use it for non-potable applications, and there are software suites that model and optimize flow. It's a really large and fragmented industry; it's hard to make sales and they are usually consultative and long, with slow-moving technology adoption. Sound familiar? <br /><br />So we laser jocks or telecom experts should be good at this area…maybe.<br /><br />So many of the areas we plan in have this same characteristic, but the water industry exacerbates all the usual obstacles to selling for a startup: you are small and they take a long time to make a decision (you may burn through two rounds of financing before they put you in a field trial). If you win the field trial, then you have to support it, and if you get a design win, then you have to convince them you can supply and you'll burn through a third round of funding just doing that. But then you can ride the wave. :-)<br /><br />There are some great, venture-investible technologies that help the water ecosystem, despite its fragmentation and selling difficulties. <a href="">Acoustic leak detection</a> systems using sonar, fiber-optic pipeline monitoring, unique algaes and chemicals that simplify and improve water purification, and also new electrolytes and electrode materials that make electrolysis easier to separate H<sub>2</sub> out of water driven by solar energy. As with Palm Oil, water may be seriously undervalued--but we had better hope people don&rsquo;t start turning it into energy for fear of making life's vital quantity-priced like, correctionnoemail@noemail.orgadministratorOne of the key gifts of <a href="">a great entrepreneur</a> is their ability to execute real-time course correction in response to market changes, team changes, morale changes, and investor and customer sentiment. :)<br /><br />As a hardware guy, it's fascinating for me to observe the truly real-time nature of management of <a href="">Internet companies</a>, and the amenability of the data to real-time analysis. For example, a retail web business continually tweaks its Web site -- everything from background color to placement of the buttons and core code -- but they do it in an endless series of micro tweaks, then measure the changes in site metrics to determine whether it was the right tweak or not. I saw the extrapolation of this metrics-based management in a company that sells specialty products to women when they tested a series of "hardware" initiatives in the same way they would test Web. In this case, they tried selling their product through real-world parties with interested women customers and measured the effects of different party structures and formats across multiple events to determine the optimum. When I heard the results and analysis and ultimate conclusions, I was struck with the simple question of "why not just ask someone who has done Tupperware parties or Avon, how they do it, and why?" Especially when some of the conclusions on the formats that didn't work were based on fairly obvious problems like, "if the women in the group didn't know each other, we didn't sell as much…" Fairly obvious, even to a non-Avon user. <br /><br />Contrasting Internet, software, and hardware highlights to me a fundamental difference and issue in the area of product management, which is always the Achilles' heel of startups. Despite the experiences of VCs, most startups still suffer badly from poor product management -- it's not a well understood discipline, and confused with marketing and sales as much as marcomm is confused with true marketing. Being one of the classic failure points, I am always surprised when investors don't want to spend $ on a solid product management expert before "developing the technology" -- how on earth will you know what to develop? In any hardware company -- take your pick from semi to medical device -- the product is always late because the software isn&rsquo;t finished. :) The software guys can't really test until the hardware is done. For the hardware guys, the product management and vision had better be perfect. Otherwise, the chip that took over a year to design, tape out, and FAB may work great but have the wrong interface or attributes, or control software that simply doesn't suit the customer -- and another spin takes at least 6 months more. :) These issues are somewhat amenable to analysis (not as in a consumer Web site), but largely the work of a very thoughtful and usually somewhat visionary product manager who understands the customer, the technology, the market, and the likely changes. Good startup CEOs know the fatal error of asking the customer what they want and building the product based solely on that (you get the same product you have today, but at a lower price with more features).<br /><br />Let's face it, software might be trying to eat the world but if you really know what you are doing, you do it in hardware. :),;t get discouragednoemail@noemail.orgadministrator<br />So the pitch went great, lots of good discussion and Q&amp;A, but still no $...what happens now? Firstly, don&rsquo;t be put off by a <a href="">VC not investing in your idea</a>--there are many, many reasons why this happens. Please don&rsquo;t assume your idea sucks; at the same time, also don&rsquo;t assume they don&rsquo;t get it--the fact is, you can&rsquo;t kiss every girl. VCs (should) only invest in things they can really add value to--so if they don&rsquo;t understand your technology or haven&rsquo;t personally built a business in that space, chances are they wont want to fund it because they cant add anything beyond mere $.<br /><br />A little known fact, VCs love to learn--why did they listen to your pitch if they didn&rsquo;t really understand the space? Because you can teach them--in return, they will teach you. They will spend some time with you helping you find the right VC through their network, if you seem to have a solid idea. Furthermore, if they do understand the space generally, they will often spend a long period of time helping you iron out the kinks in your plan. I know of one company that Dado spent almost 18 months with before ultimately funding. Some companies take a lot of work before they are investible. This is a really good piece of the ecosystem--now, many entrepreneurs from other places don&rsquo;t realize or believe how much time a valley VC may be willing to spend to nurture a potentially great idea. So, here is a story--some chip guys came up with a very high risk concept pushing the chip performance envelope almost to its theoretical limits. They were pretty well qualified to do so but while their chip design knowledge was great, their market knowledge was poor. So a very well known chip investor spent about 9 months working with the team, almost turning them into EIRs and letting them work closely with the rest of his team to flesh out their concept. The company was probably 3 months away from being investible, but at that point they secured a term sheet from one of the top 3 firms on Sandhill rd, not well known for syndication of deals--they took the money &amp; ran (per good advice ;-) but failed to get the original VC dialed into the deal--very, very bad...). One of my own companies in the optical space had a similar history where one of the founders had leveraged actually 3 different, small VC firms for almost a year before getting funded. I found out about the history about a year after that and set about mending fences, but hard as it is to believe entrepreneurs are stupid enough to leverage this help and then dump the VCs in favor of another, the emotion is a lot likely being dumped for a prettier girl, and it leaves pretty nasty scars, too. Now, this ususually is a byproduct of heady times of rapid market growth--in poor economic climates, it's far more common for VCs to band together and prefer more people at the table to share the risk.<br /><br />Getting turned down isn't the end of the world--in fact, let's turn it around to the VC getting jilted by the entrepreneur. In the case of the chip company, the dumped VC now had a very clear perspective of the space and knew what he felt was wrong with the team&rsquo;s original idea, so was in a great position to evaluate the next 4 groups that pitched him for the same concept and thereby selected the optimal competitor who is now making the original team&rsquo;s life, isn&rsquo;t it. Every no from a VC is an opportunity to learn. Make sure you ask for a debrief--VCs are optimists and they live by relationships. They want to invest the $ they have; they will work with you to make you investible if you are patient, honest, and have fundamentally a good idea. The more honest they are the more it can hurt, but make it easy for them to be honest; otherwise, all you&rsquo;ll get is &ldquo;love the deal, but we are not doing any more in this space.&rdquo;<br />, is too shortnoemail@noemail.orgadministrator<br />Larry Ellison has known this for years, as he tries to extend his years ;-), but also in the sense, I mean. I had breakfast with a friend at <a href="">Kleiner</a> last week and he was bemoaning wasting 3 months on a deal and having to drop it. He was doing a deal with a foreign company in a region known for tough negotiations--and great falafels. So he had done all his diligence, reworked the plan with the team 5 times, secured his tier 1 co-investor (yes, even Kleiner likes to have a co sometimes), and had signed the term sheet. But there was a slight problem: There was a local angel investor who wanted to renegotiate the deal. He wanted blocking rights, veto rights, and the more they talked, the worse it got. Worse, the CEO clearly couldn&rsquo;t manage the negotiation, and my friend had been negotiating with the wrong person and quickly decided 3 things:<br /><br />1. If the CEO couldn&rsquo;t manage his investor, then he couldn&rsquo;t run the company.<br />2. The angel investor added no value to the company, and would jeopardize its success.<br />3. Life is just too short; he had seen this movie before and knew the ending.<br /><br />There are very few negotiations you will do in your life that are transactions without some form or ongoing relationship. Even when you buy a car--a negotiation that is very adversarial complete with appeal to authority, missing man scenario, even ignoratio allenchi, and all 7 of the classic gambits--there is still a relationship to worry about post-transaction: Someone has to service your car and deal with your warranty.<br /><br />Someone who takes a transactional approach to a deal with you is a great example of life&rsquo;s too short--you should politely bow out and forget the deal, no matter how good it seems. Entrepeneurs have been often been advised to tell the VC that they don&rsquo;t need or want the money--don&rsquo;t play this game--you will get "great, then come see me when you do." If it's going to be all about price, go to a bank, a strategic investor, or an angel--the price will inevitably be better, but the value-add will likewise be less. And if it's just a transaction, why would you expect any value after the transaction?<br /><br />Another classic tell is assignment of blame--in its worst form, the entrepreneur blames you when things go wrong, but generally it's their team or the economy, or the weather. Life is simply too short to work with anyone who won't accept personal responsibility for what they do. This tell usually comes out in the first Q&amp;A session.<br /><br />First impressions from engineers are difficult because they are almost always geeky--a good friend here in the valley created the first impression with some foreign investors that he would make a lousy CEO. Too much of a techie and a geek--kind of a gangly, dorky guy. Now, he is that, but if you have ever worked with, say,&nbsp;<a href="">Intel</a>, you will find that they are all a bit that way, but if you listen to what they are saying, you will quickly realize that they are really exceptional business people as well. The culture of semi people is quite unique--to be good, they have to be quirky, and only the paranoid survive. :-) So, I am not talking about superficial first impression--you have to see deeper than that. As dorky as my friend can be, his integrity is without question and his dedication focus and passion for what he does are compelling. He also built 4 tech companies and turned a zero-revenue tech acquisition into a division on Intel generating 100s of millions in revenue--so his business skills aren&rsquo;t too shabby, either.<br /><br />A young guy in Sydney caught my admiration dramtically when he argued passionately on a panel of older, more experienced investors, a very controversial point--but he showed passion and belief, and some serious cojones to take the position he did. (And, by the way, against my point of view as well--yet as a first impression--I&rsquo;ve gotta find a way to work with this guy!)<br /><br />It's really hard to practice what you preach in this regard. I am working on a project at present where we are literally founding the company around the entrepreneur--which any good VC should do. In this case, it&rsquo;s the opposite of the first impression--my first impression was "there is something here; this guy is good, but he needs a lot of help." In working with him I have since seen many red flags, but can't get past my first impression--we&rsquo;ll see if it works out. :-)<br />, 500

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