A VC in Vacationland

Seeking the next gen supply chain technology breakthroughs

recent posts

about

  • Battery Ventures Acquires HighJump

    As the philosophers say, may you live in interesting times.  The recent announcement of the sale by 3M of HighJump, once touted as the entry point for 3M into the web world, ends another chapter of the “Synergy Strategy Dialogs for Clueless Corporations” and starts a whole new, and yet unnamed,book for venture firms.


    3M initially purchased HighJump in 2004 when the mantra in the supply chain marketplace, thanks to Wal-Mart, was item level tracking.  The label guys, like 3M, thought that this would be an interesting new product for their huge sales force to sell in addition to labels.  Why not high margin software sales, in addition to commodity, low margin label buys?  Well, it turns out one needs much different sales techniques and contacts to sell software. The synergy was not there, but HighJump did a great job on its own growing its overall revenues during the last four years.


    Let’s be charitable and assume 3M got most of their money back.  The sale price is estimated at $85 million, essentially equaling the cost of original investment, plus the costs of a few acquisitions and some capital infusions over the years. Not bad in today’s marketplace for a traditional software vendor, perhaps a bit less than 1X revenues, if HighJump’s revenues were $90 million as reported in some sources.  But certainly not a homerun investment.


    It will be very interesting to see what Battery has in store for HighJump.  Like any good VC, they will want a nice strategic exit for their LP’s.  Acquisitions will presumably be high on the list, along with sales growth.  But are these enough to drive the value for an IPO or eventual sale to a major ERP player?


    I’m not saying HighJump is not a good company.  It is, but the marketplace is crowded with competitors with equally interesting, well capitalized strategies.  Supply chain software, especially mid sized vendors, are being squeezed by the best of breed players from below and the major ERP vendors moving into the mid market from the top.


    They have brought in an experienced CEO, Tim Campbell, to drive the business forward.  Let’s hope that Tim is able to quickly drive growth, both organically and by stealing share from competitors.  And make a few well-focused acquisitions to fill in any holes in HighJump’s suite of products.  Battery got a really good deal on the front end; the trick will be to sell this company for $250-300 million in a few years.

  • I Love Serials….

    Well, I really do like Special K with strawberries in the morning, but the “serials” I am speaking about here are serial entrepreneurs.  These are the people who have either done a successful startup or somehow acquired the knowledge to do one.  These are the people I like to invest in as they know what they need to do to be successful.


    So many of the first time entrepreneurs I encounter need a lot more help and advice than a typical angel investor or especially VC has time to give them.  Often, they get frustrated when the investor says: “No money until you figure out what you need to build to be successful”, or some such variation on that theme.


    Let me offer a few words of advice to the first-time entrepreneur to help overcome investor skepticism:

    1. Have real products and real customers.  First-time entrepreneurs will find it nearly impossible to attract any investment without a working product and some initial clients.  The product  does not have to be anywhere near complete, but complete enough to attract some respectable customers, even just alpha customers.  Few investors are going to bet on a set of PowerPoint slides from a first-timer.
    2. Attract a group of reputable advisers. Investors, lacking evidence of your prior success in this space, want to see  world-class professional who have worked in the space for a long time, have good networks and are capable of helping the entrepreneur figure out how to be successful. These advisers can be given an equity stake in the company in return for their services.
    3. Get professional management on board.  Unless you were a CEO/COO in your prior life, devote a chunk of founder equity to attracting leadership for your startup.  You cannot usually pay them up front, but many retired or semi-retired executives will work for equity.  Be sure that the executive has experiences in and successes in the relevant industry for your startup, e.g., software.

    It will be difficult for the first-time entrepreneur to get to first base with investors if they do not have the above capabilities in place prior to funding sessions.  Increasingly, even angel investors want a more complete package from the first-time entrepreneur than just a deck of slides, not matter how intriguing the idea.

  • Predictably Irrational and Sway

    Irrationality has become a hot topic in the business book world. First, there was Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely and just recently Sway by Ori and Rom Brafman hit the market.  Both books cover the same basic theme–that humans are humans and do not always act rationally, that some of this behavior is “predictably irrational” and that understanding the causes of irrational behavior can be valuable in life as well as business situations.


    Predictably Irrational details how irrational we all can be in everyday life.  Written by an MIT behavioral economist,  the book summarizes numerous real-world experiments the author conducted to examine questions like: why do we now buy really expensive coffee at Starbucks when a few years ago, a cheap cup would do?  There are a number of interesting life lessons on how to avoid irrational decisions, but I particularly enjoyed the business oriented chapters. 


     In The Cost of Zero Cost chapter, for example, the author outlines the power of FREE! (the exact word he uses throughout the chapter). People are attracted to getting something for free–look at all the technology, like Linkedin or Zoominfo, that is given away for free so that the owners can develop highly valuable business networks, and try to get you to upgrade to the Gold version.  Or companies like SeeWhy, who give away a free version of their business intelligence software, hoping that you will like it and again upgrade to the professional version.  His point is that many businesses could use FREE! more effectively in their marketing and sales cycles.


    The Cost of Social Norms chapter was also insightful. Start-ups operate on the underlying principles of both social and market norms.  And its woe to the venture capitalist who does not understand how to work in both of these worlds.  From a social norm perspective, company founders have (from their perspective) a brilliant idea and want to be recognized for building a successful company with products that fulfill real customer needs.  From a market norm perspective, these founders, along with their investors, want to make money.  But which norm gets people to put in 80 hour work weeks?  Dan Ariely would say that the social norm trumps the market norm on this one. Encouraging people to go above and beyond normal commitments and develop extraordinary solutions to difficult problems is not a 9-5 job.  Normal market reward structures, like overtime, do not do a good job of driving entrepreneurs.  VC’s who do not recognize this often incorrectly try using primarily cash and equity to further motivate this behavior, instead of telling the founders again and again how their hard work is making the world a better place, or some variation on this pitch. 


    The book is well worth reading as there are numerous other lessons on irrationality that can be applied to life and the business world.  Just don’t get overly paranoid about acting irrationality.  After all, who should define rational and irrational anyway? You.


    Sway is less academic and more anecdotal than Predictably Irrational, but this does not dampen it’s basic messages (if you can find them).  The Brafmans softly slide into the puzzle of irrationality by looking at some traditionally irrational themes–why do individual, companies and countries get trapped in the “swamp of commitment”, why is it so hard to challenge “conventional wisdom”, why we ask all the “wrong questions” when interviewing a potential employee, how we react like Pavlov’s dog to irrelevant factors when making important decisions, why “fairness” is not the same across the world, why compensation can make people work less and why it is so difficult to be a dissenter. 


    Chapter 4, Michael Jordan and the First-Date Interview, has a very useful section on asking better interview questions.  The authors show why most questions we ask of potential employees are “fat softballs down the middle of the plate” which let the applicant perform and give us little information about how he or she will do on the job. Their point is that an interview should be all about the important information.  What kind of software are you familiar with?  What experience have you had in running marketing campaigns? How would you improve the product development process?  It’s the Joe Friday, just-the-facts, ma’am approach, rather than teeing up easy questions


    I liked the book when I first read it on the way back from San Francisco, but had difficulty a few weeks later remembering any useful insights.  I reread the book before writing this review, but again had trouble finding the kernels of truth, which the authors choose to hide in their unrelenting narrative and illustrative stories.  A nice paragraph summary of the key learnings from each chapter would make the book much more useful.  I ended up doing that for myself, and probably should send it to them for the paperback edition.    


    What did surprise me was that neither book had much to say about “irrational enthusiasm”, to quote Alan Greenspan, which engulfed the United States twice in the last decade.  A chapter explaining why we were caught with our hand in the “free money cookie jar” by both the Internet and then housing bubble would have been interesting and timely.   And certainly more relevant, Dr. Airley, than explaining why aroused undergraduates make worse decisions about sexual partners and behavior than those that are not.  Duh.


    And they both missed the most “predictably irrational” story of the last few years, as told in The Billionaire’s Vinegar : The Mystery of the World’s Most Expensive Bottle of Wine by Benjamin Wallace. How the billionaire Bill Koch was tricked into buying wines purportedly from Thomas Jefferson’s own cellar from a German pop band promoter defies intelligence.  The “savvy” buyer (or the auction house)could have easily checked with the Jefferson Library as the President kept meticulous records of his wine purchases.  Bill didn’t and got hosed.  Call it irrational exuberance or billionaire hubris, but now it’s all in court.

  • The Omnivore’s Dilemma: Our Food Supply Chains

    The Omnivore’s Dilemma by Michael Pollan is one of the best supply chain strategy books ever written.  That’s a pretty strong endorsement from a guy who’s read most if not all supply chain strategy books produced in the last thirty years. It’s not your classic supply chain strategy book, but one that explores where your food comes from, how it gets to market and how your consumption affects and is affected by the environment in which the food as produced.


    At the supply chain strategy level, the book explains in great detail how our food is sourced through four distinct supply chains–industrial, industrial organic, pastoral and personal. 


    Industrial refers to how the vast majority of our food is produced, using corn as a basis for many products, along with “healthy” doses of petroleum-based fertilizers and pesticides.  OK, not much new here, but the actual processes of how our industrial food machine creates and distributes so many products is fascinating reading.  Industrial organic refers to the Whole Foods supermarket world and related “organic” aisles at traditional grocers, with mega suppliers such as Cascadian Foods and Earthbound Farms providing huge quantities of “organic” (see the FDA guidelines and you will be surprised that the supply chain is only marginally different than the industrial, primarily in the use of pesticides and some fertilizers).  Pastoral refers to the “beyond organic” producers who are local providers of foods grown in a manner consonant with the environment, such as using manure and green plants as fertilizers and rotating crops to control pests. Personal refers to the “do-it-yourself” methods of hunter/gatherer food collection, including shooting your own meat, collecting your own greens and mushrooms,etc.


    In spite of the fact the author is a vegetarian, he presents a very balanced view on the whole issue of animal meat consumption, mostly focused on the treatment of animals in the industrial and the industrial organic food chains.  I won’t spoil the story, but it will make you think a lot about where you food comes from and under what conditions it is “harvested”.


    One interesting aspect of the book is that many of the industrial and industrial organic suppliers would not let him view their food production processes in detail, or at all.  Many suppliers cited national security concerns, so as not to give potential terrorists insights in where and how food is produced, as if they could not figure that one out for themselves.  The scary part is how easy it would be to disrupt parts of our food supply chains if terrorists figured out ways to poison food in process, something we manage to do quite well it seems all by ourselves–witness the latest salmonella scare with tomatoes (or is it jalapeno’s?)and our inability to figure out where those vegetables were sourced.

  • “Get Good Co-Founders”

    Paul Graham, founder of Y Combinator, a “new kind of venture firm specializing in funding early stage start ups”, recently was asked in an Xconomy interview what founders can do to improve their odds of being funded.  His answer was “get good co-founders”.


    I have often recommended to entrepreneurs that your team is the most critical part of your business model.  I repeatedly see entrepreneurs with interesting business concepts, but with no or little background in the proposed industry and/or no one on the team that has ever done a start up.  Funding, except from possibly friends & family, would be nearly impossible in these cases. Who wants to double up your risk with an unproven team on top of an interesting, but untested business plan?


    What can a founder do to attract “good co-founders”?  Here are a few suggestions:

    1. Rewarding Key Resources. Although you may not have any real money to pay required talent, many experienced experts or business professionals will work for equity if they like your idea.  Figure out how much you are willing to give away, then be prepared to have to offer a lot more to get the right resources.
    2. Expand Your Network. A broad network of experts, some you just know and some that can act as advisers, also helps improve credibility of a start up.  Usually, the key resources mentioned above bring with them a broad network of industry contacts that you can exploit in refining your business model and in getting introductions to potential customers. Use Linkedin, or some similar business networking site, to keep track of these network partners.
    3. Refine Your Story. Like with venture firms, you will only have one chance to make a good impression with a potential co-founder.  Although you do not want to act as an expert in their space, you do need to be able to ask the right questions, so bone up on their area of expertise and ask intelligent questions during your discussions. And be able to discuss the business concept clearly and concisely.
    4. Get Local Experts. Local experts, ones that you can meet in person, are preferable if available.  You will need substantial face time to define the right business model to match your innovative idea.  Effectively communicating over long distances with advisers can be difficult, in spite of Webex and other technologies.

    Where can you find these experts?  Local CEO/business round tables, industry conferences, and recommendations from friends are the best sources for finding co-founders.  Do not try and convince a stranger during a first meeting.  Find a way to continue the discussion if they are interested and set a meeting with other team members to explore the ideas in more detail.  Remember that everyone likes to be asked their opinion about an idea and not preached to about your pet idea.  Do not be angry or defensive if a potential co-founder craps all over your idea. They may be give you valuable insights into refining your ideas and making them more fund-able. 

  • Rethinking the Black Hole of Supply Chain Strategy

    Where does your supply chain thinking stop?  When it goes out the door of your distribution center? At the customer DC? At the store back room or shelf?  Or as it goes out the door in the hands of the consumer?

    For the typical consumer products company, I’ll bet that it probably stops when it goes out the door of your DC.  You probably have a 95+% fill rate on orders at that point.  It then becomes the "responsibility" of your marketing and sales guys, right?  They are the ones supposed to make the sale happen at the consumer level.  But the reality is that average on-shelf product availability are in the mid 60’s, according to numerous retailer surveys, and have remained at that level for many years.

    When was the last time you saw a sales or marketing guy take an interest in the exotic logistics of getting the right product onto a shelf exactly when the consumer is ready to buy it?  Try never, or rarely, and that mostly consists of whining to the supply chain guys about why they can’t get it right.

    Last mile supply chain management–from the retailer DC to the store shelf, ostensibly the responsibility of the retailer, is the black hole of supply chain strategy.  Once in the store back room, on-shelf stocking becomes the job of low-paid and generally untrained store employees or merchandisers.  Hit or miss stocking strategies are often focused on replenishment schedules for employees defined by store managers, or specific days-in-store for merchandisers, only sometimes based on sell-through data or forecasts.

    Why has last mile supply chain management never been taken seriously by supply chain professionals?  There are many possible reasons–it has not been taught in the universities, there is little research done on the subject, only a few technologies exist to manage the last mile, there is confusion between sales and supply chain and/or manufacturers and retailers about who "owns" the last mile, etc. etc. This is not to say that companies are not working on these problems.  A number of major consumer product companies are initiating collaborative work with their retailers to improve on-shelf availability.

    So what are some ways to "fill" the black hole of supply chain management to reduce on-shelf product out-of-stock problems? Here are three ways in which supply chain professional can begin to tackle the problem:

    1. It’s the Revenue, Stupid.  For consumer product companies and retailers, low on-shelf availability cost them both money.  Retailers often say they don’t care about on-shelf out of stocks because substitute products are only a few feet away. Consumer product manufacturers say that in-store supply chains should be "managed" by sales & marketing, not their supply chain guys. There are also data sensitivities as well as not wanting vendors involved in retailer decision processes. But this intransigence results in lost revenue for both parties, something that makes less and less sense in a world where long-term growth in consumer spending is threatened by energy and commodity price increases.
    2. Who’s on First? As we mentioned earlier, responsibility for in-store, on-shelf product availability management is a contentious area.  Retailers do not like vendors telling them they are doing a poor job. Similarly, most consumer products companies do not have solutions available to help retailers better manage in-store operations.  Before any meaningful progress can be made on reducing on-shelf out of stocks, retailers and vendors must engage in serious discussions about how changing the business models will benefit both of them.  One consumer products company is proposing a "turn-key" solution for their retailers, that involves the vendor suggesting product stocking levels at retailer DC’s and eventually stores, along with measuring and reporting improved revenues for both parties.
    3. Innovative Business Models. Most every vendor has shown up at a retailer sometime over the last decade with a mandate from their management to "do something to help you" to improve revenues. When asked how, words like "collaboration" and "account teams" are mentioned.  Rarely, however, have the vendors or retailers thought out the correct business model to make this happen. How are people going to interact, what new processes need to be put into place, what new technologies are needed, how will success be measured are only a few of the questions that need to be answered. Often, no one wants to put the time in to answering these questions and the initiatives become forgotten.

    The big question is whether vendors and retailers are ready to tackle this problem.  For vendors, there is not much else they can do to improve their existing supply chains, which now basically end at the retailer distribution center.  The opportunity for vendors lies in defining new supply chain management capabilities that can reach into retailer stores to help them improve on-shelf availability without creating new issues and costs for retailers. Only then can they tap that huge lost revenue pool defined by a consumer showing up in a store and not finding the product(s) they wanted.

  • Marketing/Supply Chain Innovators: Nine Inch Nails & Motley Crue

    A few months ago, I wrote a Blog on on how Don Henley & The Eagles were reinventing the marketing and distribution of music by producing and initially selling their latest album via a single channel–Wal*Mart.  Similarly, Radiohead followed a similar path by releasing their new album on line, allowing buyers to set their own price.

    We are now seeing additional variations on the same theme as Nine Inch Nails launched their new album, Ghost I-IV, on line, with options ranging from free to outrageously expensive.  You can get a free download of the first nine tracks (get it? nine tracks from Nine Inch Nails…) from the Ghost I-IV album, a $5 download of all 36 tracks, a $75 deluxe edition, including CDs, DVD’s, Blu-Rays, downloads, etc. and a $300 4 LP set on 180 gram vinyl (sold out in a few days). NIN’s contract with Interscope expired last October and it has since decided to go direct to consumer, a la Radiohead. The MP3 album also went live on Amazon at the same time, the only on line music store to offer it.

    And then there is Motley Crue, which released its newest single, Saints of Los Angeles, through a computer game.  The band cut a deal with Harmonix and MTV Games to offer the track as a download in Rock Band, along with many other artists who offer their tracks for sale. Motley Crue is headlining Crue Fest this summer, a 40-city tour.  At each tour stop, Rock Band fans will get a chance to battle it out in their own Rock Band for the chance to take the Crue Fest concert stage between acts and become the local Rock Band champion.

    Musicians are becoming very creative in their marketing, sales and distribution strategies, much to the chagrin of the record labels. Direct to consumer is clearly the emerging strategy in an industry that is shaking off the servitude inherent in old style record deals.  Once contracts expire, many top groups will adopt the new approaches and technologies to reach their audiences.  The days of the large record labels and record store are numbered…. 

  • Energy Vampires

    Every company has energy vampires.  You know, the people that are always negative or subtlety thwart activities that help a company grow and prosper. They tend to suck the creative juices out of your people and spread a bad atmosphere around the office.

    Energy vampires can be particularly dangerous in start ups. I recently served a stint (9 months) as the interim CEO of one of my portfolio companies. One of the senior executives was a particularly destructive energy vampire, spreading ill will among the troops, refusing to get on the bandwagon and resisting efforts to cure broken processes.  He was not a bad person, just someone stuck in his own paradigm about how things should happen.  He was unwilling to discuss change and engaged in active resistance.  And, trust me, we really needed to change the way we were doing business.

    I thought that I could reform him.  I should have known better.  I worked with him to help him see how we might be more successful.  He spent the day telling other executives that I made his life hell.  I should have counseled him out immediately.  My reform attempts were foolhardy at best.  Things only got worse.  So much for being a nice guy.  My delay costs us dearly in the market.

    What can you do to mitigate the impacts of energy vampires?

    1. Fire Them–Perhaps my drastic response is colored by my recent experience.  However, other experiences with energy vampires in my life have confirmed my belief that a quick exit is generally the best solution for the most egregious vampires.
    2. Reform Them–You get the hero’s award if you can pull this off without hurting the rest of your company.  I had people quit because I put up with the energy vampires in my past.  However, if you are committed to this course of action, don’t be an enabler.  Avoid empathizing with the negativity of the vampire.  Be brutally honest about how their behavior is affecting other people. If they continue not to get it and morale is falling, see 1. above.
    3. Isolate Them–OK, so you have an energy vampire that you simply cannot fire or reform.  First, ask yourself if it is really true that 1. or 2. is not possible.  Assuming you must keep them–perhaps they are key to a product introduction, then isolate them.  I had one energy vampire telecommute during a critical phase of a consulting project because the client hated him, but he had critical knowledge about the potential solutions to their issues.  Needless to say, the person was counseled out after the engagement.

    The important message here is that you should not put up with energy vampire behavior.  Period.  You will seriously regret leaving them in mainstream of your company, project or life.

  • It’s the Best Thing Since Sliced Bread (II)!

    A recent Blog of mine focused on how entrepreneurs often fail to provide the right market context for their proposed business.  My point was that saying your idea was different than anything else in the world was not a selling point because investors and customers could not easily relate to the idea without relevant context.  I suggested that your pitch revolve around your idea being "just like a successful company, only different"

    OLX, Inc., a craigslist clone that focuses on free classified on-line ads in markets outside North America (where craigslist does not have a real presence) has just raised $13.5 million in second round funding from VC heavyweights General Catalyst Partners, Bessemer Venture Partners, Founders Fund and DN Capital.

    Who says copycats don't succeed?

  • Buying a Vowel

    There is an expression in the venture community that every fledgling entrepreneur needs to take to heart.  "Buying a vowel", popularized by the TV game show, Wheel of Fortune, often emerges in a partner meeting where new investments are under discussion.  One partner says, "We need to buy a vowel" on company XYZ, meaning we need to wait a couple of quarters to see if their performance lives up to their business plan.  The other partners nod their heads and they move on to the next company under consideration.  Sometimes they revisit the investment in a few months, more likely they do not.

    Often, this is because the partners are suspicious of the company’s forecasts for client acquisition, product introduction or financial performance.  Many entrepreneurs wait too long to raise money. And you can smell the fear in their cash flow forecasts.  Why did they wait until they were about to run out of money to start fund raising again?  Who knows, but it is a very frequent occurrence.  I had one entrepreneur recently tell me that asking him to wait a month for a meeting was an "eternity in entrepreneur time".  When I asked him why, he admitted that he was out of cash and need an infusion immediately.  Next….

    What’s the message here?  Plan your funding campaigns well and as much as possible have them conform to good times at the company.  Don’t wait for trouble to raise cash.  It will not happen. No one wants to fund a problem child.

    I realize that this is easier said than done in most start-ups.  One, it is said, never knows when bad times might strike–a client delaying signing can kill a quarter, or a problem with software QA can hurt a launch (and revenue flows). This can be true, but when I have looked at the events leading up to such crises, it is often the case that the bad outcome could have been predicted months before.

    I was recently tangentially involved in a highly funded start-up(not my money) with previously successful executives at the helm.  Scheduled to launch last October, the company’s success depended on significant pre sales to customers in the second and third quarters.  But nobody was seriously selling and the sales guys took extended summer holidays.  With no revenues in the bank, the company ran out of cash in early October.  The backers, well, backed out.  They said they were "buying a vowel", but in this case that meant firing all the employees and putting the product in suspended animation for a few quarters while they figured out what to do, if anything, with the concept and IP.

    The learning for entrepreneurs is to do a really good job managing cash flow and the timing of fund raising, avoiding if possible situations where investors will choose to buy a vowel rather than give you the money. Sounds like common sense, but I see the opposite story more often than you might think.