A VC in Vacationland

Seeking the next gen supply chain technology breakthroughs

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  • The Secret Sauce of Success

    Along with hundreds of my fellow retired partners, I recently received a copy of The History of Accenture.  This privately published book is a retrospective look at the development of the information technology consulting business from the perspective of one of it’s most successful players.  I was proud to be a partner of Andersen Consulting/Accenture (AC/ACN) from 1991 until 2002.

    The book also made me think about why AC/ACN was so successful at building new businesses.  AC/ACN was, and is not today, a monolith controlled top down by a leadership team–the typical style of many modern businesses.  The secret sauce was that the individual partners were all entrepreneurs and responsible for building and maintaining a book of business at key clients, with partner/client relationships often going back over decades.  AC/ACN maintained a stable of skills, ranging from strategy, through supply chain and into information technology which could be used to meet the evolving consulting needs of large clients.  Designated "client" partners basically walked the halls of their customers on a daily basis to meet with key executives and see where emerging business needs could be tackled with AC/ACN’s toolkit of skills. Partners with the relevant skills were then brought in to began discussions with the executives and Voila! a new project was initiated.  Well, it was not quite as easy as it sounds, but AC/ACN has had remarkable success in satisfying and growing it’s global client portfolio over the last five decades.

    So, how can start-ups learn from such successes?  There are at least three ways in which a start-up can use the lessons from Accenture to better manage their own business:

    1. Everyone’s a Salesperson.  You could not survive very long at Accenture, above the entry level consultant anyway, unless you were good at building profitable client relationships.  I see too many start-ups where all members of the senior management team do not work to develop and sell clients on a daily basis.  All senior executives, as well as many mid level managers, at start-ups need to wake up every day and ask themselves what are they going to do today to attract and close new business. You do not need to spend 1/2 of your day doing it, but certainly a few hours is minimum.  It helps to keep you focused on what counts in small businesses–bringing the right clients into your world.  Selling also keeps you close to your current/potential customers and their needs as you develop and evolve your products and services.
    2. Network of Trust.  I continue to interact with my former Accenture partners on a daily basis, even though I have been retired from Accenture for over four years.  Some partner with me as CEO’s/executives in my investments.  I co-invest with another group of retired and active Accenture partners in Tumri, Biflex and Vtrenz.  I use many retired and active partners as sounding boards for my new investments.  I help them get new jobs.  I just like them as friends.  Why do I do it?  The simple answer is that I implicitly trust them to help me make the right business and personal decisions. The value created in having a network of trust within your business in incalculable.  Being able to draw on the skills of knowledgeable people, whether within your own start-up or with  your channel partners, vendors, advisers, etc. is critical to help you make the right decisions.  When an Accenture partner in a large client came across a supply chain problem, he or she did not try and convince the client that they were an expert in that space.  They would call on one of their supply chain partners with the appropriate skills to come in and address the issues.  Start-ups need to realize that bringing the right skills to the opportunity is critical to their long term success, even if it means sharing some revenues with knowledgeable business partners.
    3. Effective Marketing.  Start-ups cannot afford to have legions of high paid partners roaming the halls of key clients looking for new opportunities.  They can, however, take advantage of new marketing automation tools to keep in touch with key buyers and influencers at target clients to make sure that when an opportunity comes along, they will be on the short list of possible vendors contacted to respond.  I know, you are thinking that this is a shameless ad for one on my investments, Vtrenz.  You would be correct.  Vtrenz uses permission-based marketing techniques to provide you with the next best thing to a partner roaming the halls–frequent communications with your likely buyers in target companies. Coupled with related sales tracking tools, such as salesforce.com, start-ups are able to maximize the probability that they will successfully execute against desired business opportunities.

    Of course, many other factors will influence your success over time.  I do believe that the three areas outlined above should definitely be in the top five or ten success factor list for your business.  I have seen too many companies with great products and services, often far superior to ones already on the market, fail because marketing and sales were not considered to be the key driving force of the business.

  • Microcredit: Giving Back

    We have so much that we have to give back to people that are less fortunate.  I know, I know it’s my liberal fantasies emerging once again–I can make make a difference and make the world a better place!  For better or worse, I still believe in that stuff.

    The World Bank and the UN say that 4 billion of the world’s poor live on less than $3/day and that 1.2 billion live on less that $1/day. To me, that is unimaginable, especially when I think nothing of spending $5 on a Starbuck’s latte.

    Microcredit, according to The Microcredit Summit organization, are programs that provide credit for self-employment and other financial and business services(including savings and technical services) to very poor persons.  Microcredit is not new, having been around since the late 1970S, but it has recently accelerated through the proliferation of charities, banks and investment funds that specialize in providing credit to the poor on all continents, including the U.S.

    Microcredit recipients are 80% women and the repayment rates exceed 95%–better than any big banks I know.  The loans are used to build small businesses to take a family out of poverty, not for building bigger businesses in the capitalistic sense.  Many women use the profits from their businesses to better feed their families, educate their children, and help their husbands start a business. Ninety-three percent have put their children in school.  Their goals have often been to lift the family out of poverty via the businesses they develop.  Some are serial entrepreneurs and have founded numerous businesses, often with loans of less than $100.

    These women find a niche in the market, for example, making inexpensive shopping bags out of discarded cement bags (try finding a plastic/paper bag at a store in Bangladesh), employing other women to make them and then selling them in local markets.  These businesses supply basic needs and are not affected by global economic cycles. The loans are often made in "communities" of poor women, so if one has trouble repaying her loan that week, say, due to a sick child, other will make the payment for her and expect the same when they have problems.

    People-to-people lending is also emerging in the US and the UK, allowing small businesses or individuals to receive loans based on their credit ratings.  Based on the traditional Asian models, such as the hoi, a cooperative of Vietnamese neighbors who pool money to lend to one another, the aspiring pizza shop owner can get loans at more favorable interest rates than local banks, assuming he or she has good credit and a sound business plan.

    There are many ways to get involved in microcredit, either as an investor or a donor.  The following organizations are some of the many banks, non-profits and venture funds that are active in the microcredit space:

    Representative Charities

    Representative Venture Funds

    Finance Co-ops

    More Information on Microcredit

    Supply Chain Ventures has invested in microcredit funds and will continue to donate a 10% of our profits to additional microcredit programs.  It is the least we can do to help local entrepreneurs in less developed countries realize their dreams, as we do for the entrepreneurs in the US.

  • It’s the Size of the Fight in the Dog

    A good friend of mine, Jonathan Colehower, CEO of Optiant, reminded me the other day of the old saw: "It’s not the size of the dog in the fight, but the size of the fight in the dog".

    He was exhorting his sales team to push harder against well-established competitors in selling Optiant’s clearly superior products to customers.  The software sales arena is definitely a dog fight these days, with few rules and less ethics. And the size of the fight in the dog is also being redefined to reflect the new realities of software sales processes.

    More than ever, sales strategies need to involve extended networks of supporters–board members, investors and old friends who can call potential customers and vouch for the capabilities of the products and the executive/support teams.  Companies, especially smaller software providers, cannot expect to close sales without exploiting their networks. I was glad to see that Jonathan’s newsletter recognized the critical role of his extended network "partners" in winning sales at new customers.

    But another, more disturbing trend is also emerging in the sales process.  A number of my CEO’s have caught competitors telling outright lies about their companies to potential customers–lies that could easily be countered and exposed if the customer called the purported source or the company.

    I know, you are thinking that Dave is getting too old and is not connected to reality.  Lying about competitors in the sales process has gone on for ages, right?  Well, perhaps in some forms, but not as blatant as it is today. The  recent lies were meant to undermine the credibility of the management team, question the financial stability of the company and detail the alleged dissatisfaction of their customers.  In the past, falsehoods generally focused on the performance of the company’s product–falsehoods that could easily be proved wrong in product demos or pilots.  The new breed of falsehood is worrisome in that people’s and company reputations are being sullied by executives of competing companies.

    I guess such behavior is to be expected in a highly competitive world, but I find the trend troubling. Existing customers may tip you off to such behavior, but potential customers are more reluctant to tell you about non-product related falsehoods which competitors may be spreading.  How can you make sure that competitors are not secretly undermining your relationship with existing or potential customers?

    Establishing open and honest relationships early with current and potential customers may be the best way to avoid being tarnished by lies. Have an upfront, frank discussion with the customer about wanting to know if competitors are saying things about you or your company so that you can have a chance to counter the argument.  You do not have to say that you suspect falsehoods are being spread, but you can say that you have nothing to hide and want to be sure that the customer has all the right facts before making any decisions. It is important to repeat this discussion about once a year, or more often if you find a competitor has been lying to other customers.

    Clearly, the size of the fight in the dog has to keep increasing to stay ahead of these less than honest competitors.  Customers generally appreciate frank and open relationships with vendors. Remember, however, to make sure that you take the high ground when it comes to "gossip" about competitors during lunch with valued customers.  Do not initiate any negative discussions, lest the customer think that you are also a member of the liar’s camp.

  • Creds

    What bothers me about a lot of start ups is that they do not have the creds.

    So many people approach me with a great idea, but no one in the world knows these guys.

    Then I suggest they get credentials–like someone who has done this before or someone who is well known in the industry to be on their board.

    They blanch.  How could you not think this is the greatest thing since kimchi?  Where is your vision?  You are  VC after all…how could you do this to me.

    The answer is–very easily.

    Get over your ego for starters.  It may be the greatest thing since kimchi, but who the hell understands this?

    Perhaps only a very few people….

    I reiterate…please find a guru who has the creds and can help you explain this to the world.

    Not next week, please.

    Today.

  • Admitting Your Mistakes

    One of my CEO’s, Dan Dershem of LeanLogistics, turned me on to a really interesting page on Bessemer Venture Partners web site.  It’s called the Anti-Portfolio and it details investments which they have passed on over the years and why.  The page is fascinating reading, not only because of the names listed–Google, FedEx(six times!) and Intel to name a few, but it also details the reasons why the partner(s) decided to pass on the investment.

    Bessemer is one of the oldest and, by most accounts, one of the most successful venture capital firms.  The experiences detailed are important ones for any investor and entrepreneur to know and understand.  I personally took three lessons away from the page:

    1. Move Outside Your Comfort Zone–we all have zones that define our areas of expertise and often have a hard time identifying disruptive technologies.  I often ask myself the following question when reviewing an investment: "If I was going to invent a new business model that would be cheaper and faster than anyone else in that industry, what would it be?"  If the answer compares favorably with the investment I am reviewing, then I intensify the due diligence.
    2. Understand Who You Are Dealing With–Are the guys across the table capable of being true revolutionaries in business or do they just have a good idea.  Almost all business plans I see have good ideas in them.  What I do not often see is the team to make that idea happen.  I try to spend most of my time trying to understand what is motivating the people involved with the business plan to see what makes them tick and how they will respond to adversity, which we all know is the primary diet of entrepreneurs in the first few years of operation.
    3. Don’t Run Too Many Spreadsheets–Very few good entrepreneurs want to give away a lot of their company for very little money.  Yes, that pre money valuation is outrageous, since the company has no revenue and few customers.  But if the product or service will truly revolutionize an industry, like I believe Kiva Systems will do in the warehousing industry, then gulp hard and write the check.  Remember, you did not have the idea in the first place and those smart guys were nice enough to ask you to be a strategic investor.

  • Elevator Pitch: Why Do So Few Get it Right?

    I am amazed that many entrepreneurs cannot tell me what their idea, business model, company or market focus is all about using only a few, simple sentences.  The same goes for their executive team in many cases.

    These are all very smart people who have worked hard to develop a detailed business plan or even a successful company looking for additional capital, but have neglected to develop the Cliff Notes version of their story. 

    I want to know the following about your company, I want to know it in one page, and I want to know it in plain English:

    • What do you do?  Start out with a simple explanation of your business premise, such "We provide value via easy to install and use on-demand sales force management or whatever technology to the consumer products/retail or some other market".
    • Who is your target market?  Please. Spare me the Gartner multi-billion dollar market estimates for your proposed target market.  You and I both know this is BS.  Make sure that you can precisely describe your ideal customers, their hot buttons and why they would want to buy your products and services.
    • What is your IP?  What unique capabilities have you created, patented or established in the marketplace?  Intellectual property is the core of your value creation and the basis for why someone will invest in you.
    • What are your solution offerings?  How have you translated your IP into valid service offerings that customers are buying?  Why are they buying?
    • Who are your competitors?  Please do not say you do not have any.  Everyone idea has competitive ones in the market, perhaps not as well developed as your idea, or one based on older technology.  How will your products and services stack up against these offerings and why will customers flock to your solutions?

    The elevator pitch requires a lot of rewrite and practice to make perfect.  Without a perfect elevator pitch, the entrepreneur can lose the interest of potential investors in the first five minutes of their meeting.  Trust me on this one.  I have seen it happen too many times.

  • Tackling the Small Business Market: Fool’s Errand?

    I just got off a long conference call with two CEO’s from software companies in my portfolio.  They had independently sent me emails last week bemoaning the difficulty of cracking the SMB(small and medium business) marketplace.  Both have products well suited to SMB needs and both have been working diligently against rational marketing and sales strategies to penetrate the SMB space over the last year.  Their lament was the same: they have had some successes, but no groundswell of new clients.  They were both questioning their channel and sales strategies for reaching and closing SMB customers.

    The SMB marketplace is, in a word, difficult, for many software companies.  Small budgets, few staff people, and minimal technology expertise among other factors make the SMB’s a tough sell for software and hardware.  SMB’s may be better candidates for structured services offerings than traditional technology product sales.  Offering a complete managed services solution with outcomes, such as sales leads, that a small business can immediately act upon may be preferable to trying to sell them a software package requiring training and execution time from overworked internal staff.

    Many well known companies have been able to sell products and  services to a large number of SMB customers.  ADP is very successful in the payroll outsourcing space; Skype is doing well with its VoIP offerings; MasterCard and Visa provide customer credit security and payment services as examples.  These are all critical processes needed to run a small business and are not easily done without in the SMB space. Selling additional services and products beyond these critical functional areas is definitely more of a challenge.

    There are four important factors to consider in developing a SMB marketing,sales and execution strategies for software products and related services:

    1. Partners–unless you are 3M, Coca-Cola or some other huge conglomerate with a large sales force that regularly visits small businesses, you will need to find partners to help you go to market by industry.  Many software companies link up with local VARs and other resellers, using percent of sale contracts to incentivize these companies to sell their products.  Small business consultants are also an important channel, especially if implementation or ongoing services are a key part of the sale. Driving that partner channel with call centers or "dialing for dollars" staff is a good way to ensure partner loyalty by providing them with qualified SMB leads.
    2. Software Design–software and maintenance/service packages are often designed with large businesses in mind.  Often, they have too many options and are too difficult to manage in the SMB environment.  Ideally, software and service packages should be designed for the SMB market directly.  If that is not possible, then piloting various service and software options with a number of SMB clients will help you understand what works best in their environment.  The biggest mistake many software companies make is to assume that their existing packages can translate easily into this market.
    3. Pricing–an interesting strategy, and one followed by Skype, is to make in network VoIP call free and charge for out of network calling.  Fred Wilson of Union Square Ventures calls this a "Freemium" business model, whereby the basic service is free but many clients opt to pay for the premium service.  Pricing is a very difficult challenge in the SMB marketplace.  You may be better off charging on a usage or transaction basis(like MC/Visa) for your software, and bundling services in a consulting contract, instead of the traditional license fee/maintenance contract.
    4. Software as a Service–Defining a TES (technology enabled service) model for your offering to the SMB space could be the most value creating option for a software provider.  Clients may be unable or unwilling to add staff to manage technology, but can be sold on the idea that you can provide a service that will give them the results they seek without a heavy investment on their part.  With ADP, the payroll checks show up each week, the owner gets full financial reporting, governments get their withholding, the W-2’s are issued on time, etc, etc.

    In sum, the best approach is to build your SMB market applications from the ground up, working closely with pilot sites to get the feature/functionality/ease of use/pricing/etc. right from the start.  Absent that approach, dedicating a team to redefining existing software and services for the SMB market, again working with pilot sites, is much better than trying to jam inappropriate offerings into the hands of unwilling buyers.

  • Where are the Best RFID Investments Today?

    Two investment areas interest me in the RFID space at present: software applications development and RFID related consulting:

    • Applications attract me because they provide the underlying analysis, optimization and management capabilities needed to organize high frequency RFID/EPC data into useful business tools.
    • Consulting interests me because business process redesign, implementation and maintenance to accommodate use of RFID/EPC data and applications are critical to driving ROI creations by businesses.

    From an applications perspective, TrueDemand is an example of a start-up in an RFID sweet spot–using RFID and EPC data to do real time forecasting, planning and management in one of the "last frontiers" in supply chain management–executing against optimal in-stock position from retail store delivery to the store shelf.  TrueDemand is developing applications which allow manufacturers and retailers in the CPG space to optimize sales for both promotional and everyday items by ensuring that the right amount of product is on the shelves, in the right stores and at the right time of day. The TrueDemand solution includes a priori messaging to key in-store employees to remind them of impending stock outs on the shelves, or to get promotional items out of the back room and into displays to meet ad drop deadlines.  If execution deadlines are near failure time, additional messages can be sent before actions are overdue to supervisors as well as manufacturer representatives to help them correct the situations so that stock outs do not occur.

    From a consulting perspective, xterprise is attractive as an investment because they are creating innovative solutions which use all the new RFID technologies and software to drive value creation in clients.  RFID is a technology that is changing the rules in supply chain management.  Xterprise is creating new processes(such as unattended receipt of goods, providing visibility into inventory in segments of a supply chain, providing real-time measurement of planned and unplanned supply chain events).  The new processes provide opportunities to drive efficiencies both in operations and in inventory management(for example, reducing labor to run a cross dock, and automating order-to-shipment quality checks and balances.  These new RFID supply chain execution applications will sit right under the existing enterprise systems and require a high level of adaptability for each client’s environment, making them excellent candidates for high-margin consulting engagements.

    Why is RFID hardware off the list?  At the moment, there are two reasons: major players such as Savi and AlienTechnology control much of the tag/reader market, and numerous tag start-ups with competing technologies and unproven track records.  Significant field tests are required to find out which technologies perform best in a variety of real world situations.  Early adopters, such as Wal-Mart, are engaged in the pilot testing now, and the results are not particularly encouraging, with read rates still below acceptable levels. Major corporate wide rollouts are still years away, making big hardware purchases unlikely over the next two years.

  • RFID Startups-What can We Learn from Past Failures?

    From the start-up’s perspective, the primary goal for the entrepreneur should be to understand where the sweet spots are in the value creation cycle and to clearly understand how they are going to achieve them.

    Using bar codes as an example, the now twenty-year long bar code adoption cycle began with the introduction of innovative technology.  First, labels and readers were developed, then software to clean and manage the data and finally applications that use the information to solve real business problems, such as shipment track and trace.

    Accelerating the cycle to more quickly reach the optimal value creation sweet spots will yield a larger variety of investment and/or exit options for the entrepreneur. As an example, for the early stage bar code label and reader companies, developing close partnerships with up-stream data cleansing, applications and consulting companies helped keep the earlier technology tied to the later solutions, enhancing the value add for all parties.

    In the case of RFID, the clear sweet spots today are complete auto-ID solutions(hardware,software,process change, etc.) that have solid ROI for a customer based on technologies that will not become obsolete in a few years.

    From the investor’s perspective, the trick is not to tie your investments to a technology or a company that is destined for the dust bin.

    In the early stages of innovation, many often superior technologies and companies lose out to mediocre, but workable solutions because the superior players fail to gain market acceptance.

    • How can you tell if a technology is likely to not win adherents?  The primary test is whether the major, early adopter customers–such as Wal-Mart and Proctor & Gamble for RFID–support the technology platform.  If key customers are moving in a different direction, you can be sure that their suppliers will have to follow.
    • How can you tell if a company is likely to fail in the long term? Applying the NIH(Not Invented Here) test is one way of seeing whether the start-up can quickly adapt to the fast-changing market conditions inherent in an innovative technology environment.  The NIH test involves determining if the start-up is actively looking for ways to partner with hardware, software and consulting partners who collectively can deliver ROI enhancing solutions to customers. NIH prone companies often feel that they can do it all themselves and somehow capture an out sized amount of value being created in that market space. It is a risky strategy, one that more often than not fails in the execution.

    Investors should ask a few questions on go-forward strategy early in the process to ensure that the potential investment is not headed down the NIH path so as to avoid misery in later years.

  • Promising RFID Applications: Products or People?

    Although a wide variety of uses have been proposed for auto-ID technologies, three key applications are proving to be most popular with early adopters of RFID solutions:

    • High value product and asset monitoring in the supply chain is the area commanding the most attention at the moment.  Pfizer, for example, is using RFID to track and authenticate individual bottles of Viagra as they make their way through the supply chain.  Fighting counterfeit ethical drug production has substantial and quick ROI payoffs in terms of reducing lost sales and identifying counterfeiters for prosecution.
    • Vendor performance compliance, with Wal-Mart in the U.S. and Metro in Europe both pushing for higher levels of RFID enables shipments, is creating a fast growing market for niche solutions around supplier tagging applications. Levi-Strauss is piloting item-level RFID tagging in its own stores to reduce inventory taking times from days to under an hour.
    • Transportation security management, pioneered by major ports and third-party logistics companies, uses RFID to both ensure shipment integrity and enhance customer service via real-time shipment status monitoring. The Port of Singapore, for example, is RFID enabled for secure container tracking and monitoring across all aspects of port operations, from initial receipt of product to final loading on container ships.  DHL is integrating RFID into the "repair and return" supply chain to secure high-value items, such as HD TV movements to service centers.

    Other possible applications that may emerge in the next few years include:

    • Defense related asset tracking, being explored by the DoD, NATO and their suppliers.  Emerging new chip designs with higher data storage capabilities can be used to tag expensive aircraft parts, for tracking and management purposes.  Boeing, for example, is tagging over 1,000 high-value parts on the new 787 Dreamliner with chips designed to contain the complete history of part usage and repair.
    • Vehicle manufacturers are an obvious deployment opportunity, given the huge flow of parts and returnable containers in their supply chains.  Recent AMR Research surveys indicate that nearly 50% of vehicle manufacturer respondents to RFID adoption questions said that a lack of clear ROI, high tag costs, security issues and other priorities for supply chain investments meant that RFID tagging was not far enough up their investment lists to be a priority in the next few years.

    Finally, people monitoring may turn out to be a major new application of RFID tagging in the coming years.  China has orders out for over 3 billion tags by 2009, as it implements its new identity card program.  Similar programs are under serious consideration in Europe and the U.S. to embed passports with RFID chips in an effort to thwart terrorists.

    From an investor’s perspective,the focus should be on whether the company has a well-tested solution to a known industry problem with a high ROI payoff for the customer. Betting on unproven solutions to problems with uncertain ROI just is not going to the basis for a successful launch in the next few years.  With limited solutions gaining acceptance, this is not a time to gamble by investing in fringe applications with limited markets.