Yaniv Nizan's Personal Blog

Closing Costs - Critical Lesson

This is a post I was putting on the bench for some time but I think enough time has passed for it to go live.

One of the invaluable lessons I learned as one of the founders of EyeView was about closing costs. Simply put, Closing costs is the minimal amount of money you will need to close the company. I'll go into more details about how to calculate it but let me share the lesson first.

After raising a first round of $1M, it almost seemed like EyeView can never run out of money. We were young and inexperienced at that time so that sum of money seemed like it can last for a very long time. Reality was different. Once you move from a garage based operation to actually having employees and offices the money start to vanish quickly from your bank account. Our case was no different. We arrived very quickly to a situaiton where additional funding was needed.

One advantages to having a VC back you up is that you have a pretty good idea where the extra funding can come from. However, that extra level of comfort comes with a price - you don't know if you are getting a fair deal or not. As inexperienced as we were we decided that we should shop around before taking the initial offer from our VCs. In retrospect, this was a bad move especially as we overlooked two critical points. One false assumption that we made is that the offer we received from our existing VCs will be waiting for us after we shop around - this was not true. The other mistake was ignoring our closing costs in our assessment of how much time we have before we will have to default to the original offer.

The end of that story was that we realized our closing costs in the middle of a round and didn't have time to close the external round. We had to come back to our VCs with almost 0 negotiation power and the initial offer that we weren't sure about got a lot worse. The round we raised wasn't a down round but we lost much more equity on that than we needed.

How to calculate closing costs

I'm sure there are more thorough ways of doing the math but the following rough estimations could save you 90% of the trouble. Assuming your notice period for employees is 30 days and the accomulated unused vacation time is 14 days (since it's unlikely that your employees used their vacation balance / PTO balance), you need to calculate 1.5 months worth of salary for any non-founder employee. For 6 developers this would roughly be $100K. To that you want to add the notice period on your office rent contract multiplied by your monthly rent and any other significant commitment you might have such as hosting, freelancers and vendors.

What to do with that number

So after you calculated that, you might have some dollar figure in your hands let's say $150K. This is actual money you need to put aside. Painful as it may be, you don't really have that money as you already comitted to pay it. If you don't put it aside, my advice is to consistantly deduct it from any cash balance calculation you are doing and to make sure every time you calculate how much time you have before you need more funding, you don't relay own that money.

 

Top 10 Challenges of Intrapreneurship

Being an Intrapreneur can be very challanging. Here are the top challanges for taking an idea and turning it into an Intra-startup based on my experience as the Intra-foudner of INTENTclick.

1. Develop and qualifying your idea - there are many ideas out there but the process of taking an idea and making it into something that is going to worth your time and energy requires a lot of effort. Moreover, it requires speaking to a lot of people and getting invaluable feedback that will help you evelove the idea. Doing so inside a company requires a lot of courage.

2. Locking management commitment - unlike with external ventures an Intra-startup doesn't raise capital. However, in order to start executing on your ideas as your full time job inside a company and to be able to get additional resources you will need to get management buy in. The process is very simillar to pitching to a VC, at the end of the day it's all about making the busienss case for your venture.

3. Not giving up - preseverance is a big piece of the puzzle in entrepreneurship but it's actually harder for an Intra-founder to push through endeavors as the alternative of going back to the comfort of the corporate world is relativly easy.

4. Crossing the chasm - once you have reached a few market successes you need to start rolling your product out. Intraprenuers are faced with 2 alternatives - going through the existing sales department or developing it's own sales and marketing.

5. The internal sale - Sales orginzations are success driven and tend to focus efforts where the success is easy and rewarding. New products usually represent the exact opposite as they require more effort and are initially harder to succeed with.

6. Market Cannibalization and Territorial Conflicts - Developing an alternative sales organization can be very challanging as it presents the risk of internal competition between the two organizations. Doing so requires a clear differentiation between the markets that each organization is pursuing.

7. Corporate alignment - Startups usually have to figure this one out only when they are getting acquired but an Intra-startup has to constantly check it's alignment with the overall corporate vision.

8. Hiring employees - Intrapreneurship is very rewarding but at the same time it is very demanding and requires a pesonal sacrifice. This is also true for anyone who will come to work on your venture so you need to make sure they are able to enjoy the rewards by allowing them to identify themselves with the venture.

9. Maintaining focus - keeping an eye on the target is key to succeeding with any venture. An Intra-startup is exposed to a great deal of distractions from various internal sources which makes it all that harder.

10. Aiming High Enough - comparing my role as Intra-founder of INTENTclick to CEO in a VC backed company. The latter one is forced by his investors to aim high while an Intra-founder sets the bar for himself in many of the cases.

 

 

Entre and Intra - preneurship by a founder and an Intra-founder

Intrapreneurship is a form of entrepreneurship in which the entrepreneur is innovating within an existing company. Unlike in a startup company where the entrepreneur would raise funding from individuals often called angels or from venture capital firms, intrapreneurs would instead convince the company they are working for to execute on their idea and turn that into an intra-startup.

I had the opportunity to try both types of entrepreneurship, as a co-founder of EyeView I played the entrepreneur role while as the intra-founder of INTENTclick and it's Managing Director I get to play the intrapreneur role as INTENTclick is part of Kontera.

The one challange that people usually associate the most with being an intra-founder is internal politics. There is always a concern that somebody will steal your idea, take credit for it or try to use your success for his benefit. While entrepreneus don't normally have this problem, they do share the same concern that somebody will steal their ideas everytime they try to get feedback or pitch to someone. As explained in one of my former posts - asking to sign NDA - this approach will set you up for a failure. My observation is that there are a lot more good ideas than people who are willing to take the risk and execute on the ideas. The same thing applies to internal entreprenuership. If the idea is big enough to be a stand alone business, the real challange is on the execution. The long road from turning the idea into a reality will require the intra-founder to get as much feedback as he can and convince a lot of stake holders to support him so hiding the idea is not an option. At the same time, the exercise of getting the buy-in of all the stake holders ahead of time will attribute future success to the intrapreneur so no one will be able to steal it from him.

Another big difference I noticed is the organizational culture. With INTENTclick, the culture was partially inherited from Kontera with some influence from founding and management tream while with EyeView, the foudners had a much bigger role in setting the organizational culture. Note that not every corporate or company allows another organization to grow inside of it. As an intra-founder you need to consider what culture you want in your intra-startup and factor that in the decision to innovate from within a given company. 

The other set of challanges with intrapreneurship that is somewhat unique is the constant need for the intra-founder to align it's small boat with the mother ship. Startup companies usually have to do that only after they get acquired by a bigger company and then the merger between the two companies is much sharper and causes the alignment to be quite drastic. In a way the intra-startup is constantly going through the experience of being purchased by the bigger company.

As intrapreneurship is less known, I see it as my mission to get the word out there and make the case for all intra-founders that are building great intra-startups. If you feel you are an intra-founder - you can join the linkedin group.

 

Thoughts on Mediamind acquisition

Earlier this week Mediamind (formerly EyeBlaster) was acquired by DG for $414 million in all cash transaction. As noted by several Industry vaterns, the main motivation for DG with this move is to enter the digital advertising market. While the acquisition makes perfect sense in retrospect I'm wondering how many experts was able to predict such an acquisiiton before it happend. You have to give the credit to Gal Trifon who found an oppotunity to sell by not looking under the light and chasing the usual suspects (Google, Microsoft, ...).

This brings another interesting observation that there is a difference between selling a small company and selling a big company. Small companies can be bought by a bigger company from the same industry (mainly for their technology). Examples in that category - 5min Acquisition by AOL, Dapper acquisition by Yahoo or Teracent acquisitoin by Google. At the same time, if you were able to grow your comapany beyond a certain size like Mediamind did you will be better off looking for your buyer by positioning yourself as a category leader and looking for a buyer outside of the market. Another example of this kind of acquisition is the acquisition of Omniture by Adobe where Adobe - a company that provides technologies and tools for creative agencies acquired omniture who are a category leader in the e-commerce analytics space.

 

Quick notes on SEO

As I’m learning more and more on SEO these days, I thought I will share some of the basic concepts for those who are less familiar with it:

Page Rank – this is a number between 1 and 10 that Google assigns to each domain based on a few parameters. A higher number means your page is more likely to appear higher in the search results compared to a page that has similar relevancy. Here are a few of the factors that google will take into consideration in determining your page rank:

• Domain Age – younger domains can’t get high page ranks
• Back links – This refers to sites linking in to your website
• Traffic – the more the better

Keyword domains – this is a method of repeating the desired search phrase in the domain name often with hyphens between words (e.g. www.auto-insurance-cheap-quotes.info). This method is often used by affiliates who want to target specific search terms and get in the top 10 results and then sell the traffic to a company that can actually provide the product or service. Here is a video by Google on this subject:

 

Back link brokers – since google highly appreciates back links as part of you SEO rank, there used to be a whole business around selling and buying those links and some websites would just have a page with tons of outgoing links in them so they can sell them. Google made some changes to its algorithm to ignore websites who have too many outgoing links and also started factoring in the page rank of the website linking back in the algorithm so these days you need to get back links from high ranking websites in order to rank higher.

No Follow – another popular way to get a lot of back links was to post comments and other types of user generated content and including a link in the contribution. No Follow is an HTML attribute telling Google algorithm to ignore the link in the comment. Posting a back link in a website that has this is pointless but it’s very easy to detect by viewing the source of the web page (CTRL + U on most browsers) and looking (CTRL + F) this up.

Some common misconceptions:

• The content has to be readable to humans to rank high – not true and in fact most of the pages appearing in the top results in popular affiliate categories would make no sense if you read them closely
• The .com domain is the best one to have – not true for SEO – it actually makes no difference for Google and other extensions (.info, .org, .biz) are more likely to be available. It does, however, make it easier for users to get back to you if that’s your goal.

This is obviously just the tip of the iceberg. There is a lot more content about this topic online. You can assume that if somebody has mastered SEO, he will appear high on google.

 

 

The Platform and the Egg

Not too long ago I was considering starting a new company that will offer a platform as it's main product. With another team member, I invetigated the market, clearly identified the problem and validated the users will be willing to pay to solve this pain. The solution to this problem required a lot of vertical applications, each one of them presenting a much smaller opportunity so building a company that will provide the platform was far more interesting. 

During the usual process of pitching and getting valuable comments from investors, industry experts and potential customers I received a very good advice from Amichay Oren. Amichay advised that the almost all successful platforms came only after a successful core application. To support this claim, he gave a few good examples - facebook, apple appstore and force.com.

This leads to a very interesting chicken and egg type of question. Is it the platform that comes before the app or the app that comes before the platform?

In a recent post, Chris Dixon also commented about the subject and touched some of the reasons why platforms fail or succeed. In his opinion, having a core application already built on top of the platform helps potential application developers mitigate the main risks of tying their destiny to the one of the platform. From this reason, it is a lot easier for a company to first have a strong core application and only than go after the platform business.

As for me, I ended up not persuing this path from other reasons but I know that if I had been persuing it, finding a good core application would have been the key to that business success.

Lean Startup - Pivoting all the Way to the Exit

A lot was said about Pivoting and the Lean Startup approach. From my experience, very few startup companies end up in the same direction they started with. The reality is that startup companies work in rapidly changing markets and one of the only advantages they have is their ability to change course quickly and spend as little as possible on their way to finding the right course. More than lean startup is about succeeding cheaply, it is about failing cheaply and than doing it over and over again until you succeed. In order for that to work, you need a closed loop of feedback. This is the key component and you will have that only if you expose your product to the market early and often. Lean startup works extremely well with Cloud, SAAS and Web2.0 apps - these type of startup companies can expose their product to the market with very little development effort and can experiment with many product variations easily.

Eric Ries, who also writes the blog "Lessons Learned" sums up the concept in his speech in the last web2.0 expo. Here is the speech captured in a video.

 

 

Are Founders Late For Meetings?

I recently read a blog post by Adi Pundak Mintz in the Gemini Blog (I'm assuming the post is also on his personal blog). Adi basically advices founders not to be late for meetings with VCs. This sounds pretty basic - the meeting is obviously very important to the founder so why would he be late???!!! However, if Adi wrote this post I expect that in his experience founders are indeed late.

So why are founders late? From my experience people being late is not really a matter of miscalculating the time it takes you to get from point A to point B but rather assessing the potential risks and taking action to reduce those risks. This sounds very high level so let's look at a simple example - let's say you have 45 minutes before the meeting starts and it will take 30 minutes to get there but there is an email that you have to write before the meeting. Obviously the traffic on the way represents high risk which can increase the driving time in up to 15 minutes. If you drive, arrive 15 minutes before and email from the coffee shop or the VC's office, you will be significantly reducing the risk of being late. When you look at it this way, it makes more sense that founders will be more likely to be late as entrepreneurs have to be optimistic and risk takers by nature.

Having said all that, I do believe that the best founders are not late for important meetings. Why? because building a successful startup company and getting funding has a lot to do with properly managing risks. Analyzing what assumptions you made are the most risky ones and what can be done to reduce those risks is key for successfully utilizing your limited resources. Further more, in order to secure investment or even convince team members to join you, you will have to show that you are managing the risks by presenting a plan with risk reduction milestones.

My advice - don't let the risk manage you but rather manage the risks and don't be late for meetings.

Where to Find Ideas for Companies

One of the most challenging phases in starting a new company is finding a good solid concept. You can start by looking at the "need" side. Finding a pain to cure or something that is broken and can be fixed is a key for any good startup. However, often by taking this angle you end up coming up with a few ideas in totally different markets and just qualifying them becomes a nightmare of learning completely different technologies and different markets without any incremental value.

So the recommended path is often to focus on a single market in which you have a network and domain expertise and check if it's a good candidate for innovation. What I mean by a good candidate for innovation is that the market went through a significant change in people's behavior and in the enabling technologies but no one has yet connected the problem with the technology that can solve it so you can be the first one.

Well, in a recent meeting I had with Yuval Cohen, Founder and CEO of Neebula he pointed that sometimes that's not enough. If we take the Operating Systems market for a second it's clear that users today are using their computers very differently than they have when Microsoft launched Windows 95 but the operating systems haven't changed much. However, it's very unlikely that someone will beat Microsoft in it's home field and win just by having a better OS. What Yuval pointed out is that many startup opportunities will only be possible when the big giants are collapsing. Until than, the giants usually have very little incentive to innovate. They already control the market and will rather just focus on further locking their customers in and expending into different markets. It's only when those companies collapse, an equal opportunity market is formed and each vendor is trying to get an edge so it's easier to penetrate this market with new innovative technologies.

 

Anti Portfolio - We Turned Google and eBay Down

One of the things that are always hard for first time entrepreneurs is getting used to getting rejected by VCs. It's very easy to take it personally and think that the rejection means that your business is not good or worse that the founder as an individual is not capable. I got a similar feedback from Liat Aaronson who is heading the Zell Entrepreneurship Program at the IDC. Her point was that when she asks students what is the most important attribute for entrepreneur a typical response at the beginning of the program is "creativity" while at the end of the program the response along the lines of "thick skin".

So with that thought in mind I really liked what Bessemer Venture Partners (www.bvp.com) did in their website with the section called Anti Portfolio. Its a great tool to keep in mind that even successful companies like Google and eBay got rejected by many VCs. Every time you are looking for extra motivation after a VC gave you some rough time you are welcome to look at it and remember that VCs have to make quick decisions based on little information and make a lot of mistakes.

My favorite one was: "As for Compaq, I told him there was no real future in transportable computers".