@altgate

Open Source Law & How To Reduce Startup Legal Costs

A frequent question I get asked by new entrepreneurs is some version of, "do you know a good, cheap lawyer to help me with ___________?"  It turns out that the best thing you, as a non-attorney startup founder, can do to reduce legal costs is to learn a lot about the topic so you don't have to pay a lawyer $500 per hour to teach you.

How do you get smart fast?

A couple months ago I blogged about WSGR partner Yokum Taku's personal blog where he doles out free legal tips and even shares document templates and other advice.  I highly recommend it.  Well, what started out as a trickle is now a flow.  Here are a few other law firms or partners that are posting "open source" startup legal tips:

• Foley Hoag on Massachusetts noncompete law.
• Foley Hoag on Startups.
• Technology Startup Law Blog by Sam Wu described as, "a down-to-earth legal resource for startups, emerging growth companies and venture capital firms."
• The Startup Lawyer by Ryan Roberts a corporate lawyer specializing in startups.
• Yokum Taku's blog (Wilson Sonsini Goodrich & Rosati Partner)

I'm sure there are a lot of others that I don't know of yet.  If you've got 'em, post 'em here in the comments.

"Minority Report" OS Is Real

Oblong Industries is the company behind a new operating system they've dubbed g-speak (presumably for "gesture speak") and describe as the "world's first spacial spatial operating environment (SOE)."  What's particularly unique about this new technology is how it found it's way to market (well, I'm assuming it has already made it to market in a secret military application...more on that below).  It found its beginning at MIT in the 1990s at the Media Lab and then the producers of the movie Minority Report hired one of the developers (John Underkoffler) as their science adviser who is now Chief Scientist for Oblong.  According to Underkoffler:

"The movie was actually based on work that we were performing at MIT," Underkoffler says. So it wasn't really science fiction.

"It was only masquerading as science fiction. Now, it's science fact," he says.

Not surprisingly, the project to develop this technology has been quietly funded by defense contractor Raytheon.

But not everyone is jumping on the bandwagon just yet.  Last year at a conference on media, several interesting questions were raised including:

• Gestural interfaces sound swell, but what if you are disabled?
• Aren’t brainwaves more practical and less tiring for controlling an computer in the near future?
• How do gestural interfaces work when you’re in a small space?

I for one think this will be (is?) great.  Yes, it won't be perfect and there will be shortcomings, but should we have abandoned the GUI introduced by Xerox and Apple because of carpal tunnel?  Of course not!  So my only question is how long until we can use this thing and add "g-finger" to the list of ailments we have to deal with?

Lastly, below is the video of g-speak in action that will blow your mind.

g-speak overview 1828121108 from john underkoffler on Vimeo.

Google Redraws Michigan Border

What's up with this map from Google Analytics?

A Global View

Google Analytics is an amazing service.  But of all the slices at the data they have, the one that I find most interesting is the map overlay.  The screen shot above shows the location of visitors to Altgate in the last month.  Not surprisingly, 80% come from the US, but what I find incredible is that people in 83 different countries visited!  I checked and since I installed Google Analytics earlier this year, visitors came from 123 countries (which is about 2/3 of all countries). That's globalization. 

To the many Altgate readers:

 

Business Ethics

"Nothing tests your ethics like being a startup CEO."

Someone said this to me recently and after laughing out loud I thought, you know, that's really insightful.

Few are outright lying, but every early stage startup CEO is repeated stretching the truth or conveniently omitting facts to make things look better than they really are.  This is particularly true in the very early days when you are trying to hire key employees, raise money and land customers.  And it usually takes the form of describing what the company/product/etc. will look like in 3-4 months and implying that is how it is today.  The trick, of course, is to do this in such a way that it comes across as optimism and doesn't cross the line to either "out of touch" or, of course, fraud.  Here are a couple of tips on how to avoid the latter:

1. Find a foil.  If you're a startup CEO, odds are you're an optimist.  What you need is someone on your team (CFO is a great place to find these folks) who will keep you honest.  And be explicit...tell them you need for them to be your fact checker and buzz kill if need be.


2. Come clean.  Before you finalize anything based on your best sales pitch (e.g. hiring, raising money, signing a contract, etc.) set aside a time to come clean and reset expectations appropriately.  It's sort of like the speech Obama gave in Grant Park the night he won the election.  He was already resetting expectations.  For example, if you're raising money, it's best to sit down with your new investor sometime before close and say, "I think we'll win, but if we don't here are all the things that will be the potential cause." 


3. Remember it's a slippery slope.  Everything is relative and we're always judging the current truth based on the last "truth."  If a booking isn't "when you receive the signed contract" instead of "he told me he faxed it," then it's not far to "he told me he's going to fax it."  This is the take away from one the of the first cases they teach to new MBA students at Harvard Business School (the case is The Parable of the Sadhu) and it's a good thing to always keep in mind.

And my last point goes pretty much without saying that, at the end of the day, it is far better to lose the hire, the funding or the sale than it is to lose your ethics.

Venture Capital Is Broken

 

Earlier this week I spent several hours in a couple of meetings with Adeo Ressi, the founder of TheFunded. Adeo is a very cool, very smart guy and it was both enlightening and fun meeting with him.

In the first meeting, Adeo was presenting some findings to the finance and entrepreneurship faculty at Harvard Business School.  His message was that venture capital is broken and that the entire system needs to be re-evaluated.  He cited some interesting data (hopefully he'll publish he just published his slides which are after the jump) such as:

• For first time ever, less money is coming out of VC via exits than is being invested (actually a lot less).
• A handful of deals (Google, Ebay, etc.) account for 25% of total VC returns over the past 20 years.
• Deal structure is incredibly non-transparent (he posed a funny question, "if you own 2% of the Common stock of a company that sold for $100MM, how much do you get?"  The answer, of course, is you have no idea, but probably little or nothing).

TheFunded - Canarie

View SlideShare presentation or Upload your own. (tags: investing vc)

Later, we were talking about a post on TheFunded ironically describing the type of company that VC funds invest in ($100MM year 5 revenue, $5MM series A, etc.).  Then, almost as a joke, I saw a post on a VC blog explaining why they only invest in companies that can achieve $100MM of year 5 revenue.  It all reminded me of a paper I read by Bain Capital and described in this MIT Sloan Management Review article:

In "Building a Great Software Business in Booms and Busts Alike: An Empirical Analysis of the Operational Performance of Formative Stage Companies, " Bain Capital Ventures professional Jeffrey Crisan and managing director James Nahirny analyzed financial results from 1990 through 1998 for 304 publicly held software companies.  Their baseline criterion for labeling a company as successful is what they call the "Rule of 126"--that is, these software companies achieved $100 million in revenue and earnings before interest and taxes (EBIT) margins of 20% within 6 years after company formation.  Companies were considered failures if they had never had a profitable year and had never reached $40 million in revenue.

According to the Bain Capital authors, there were about 60 of these successful companies in the 8 year period they looked at. Last I checked, there are at least 4,000 venture capital funds, that in chasing these "successful" companies, invest in thousands of companies each year (in the US over 1000 last quarter alone). 

A couple of months ago I wrote about how most venture funds are set up to chase these big deals (they are large funds over $100MM with a several partners and they look to invest $10MM+ into each company they fund) and can't manage smaller companies.  So it's not surprising that a lot of "unsuccessful" companies get funded (false positives) and a lot of "successful" companies get passed over (false negatives).

So what's the conclusion?  Well, as Adeo said, "I'm just the canary in the coal mine."  There is a lot that's going right with venture capital, but there too is a lot that is broken.  To fix it takes some real innovation and critical thinking.  All of us (entrepreneurs, VCs, limited partners, service providers, academia, et al) have a part to play.  If there is any lesson to learn from the current financial crisis it is that we should act soon to fix venture capital and not wait for the bottom to completely fall out before doing something.

LearnVC Aggregates Venture Capital How-Tos

LearnVC is a recently launched website that aims to accelerate the learning curve for entrepreneurs raising money.  The site has some original content but mostly it links to and references other authors on the topic like Guy Kawasaki, Brad Feld, et al (hey, where's my link!).  LearnVC helpfully categorizes content into different "guides" by user type including "new entrepreneur," "experienced entrepreneur," "future investors" and students.

Overall, I'd say that LearnVC is a helpful addition for first-time entrepreneurs, but for experienced entrpreneurs I still recommend TheFunded which now has nearly 10,000 CEOs as members and is a great way to connect with experts on a topic.