Friday, March 09, 2001

Nasdaq 2000:

Last year, the Nasdaq index hit 5,000. Today, just 12 months later, it flirted with 2000.

What does this mean for an entrepreneur? Everything, and nothing.

Everything, because the supply of funding has dried up. VCs have to nuture their previous startups that can't go public. Angels are suddenly poorer (and in some cases, poor!). Corporate investors decide to stick to their knitting. And even doctors and dentists decide to splurge on espresso machines instead of seed investments.

Nothing, because the chances of any particular startup going public are so small as to be irrelevant. If your company is successful, it will probably be acquired for its potential or its cashflow, neither of which depend on the capital markets.

In fact, if you can start a company on a lean budget, this may be the best time to begin. The lack of funding has deterred the casual competitor, and you may reap a windfall if you sell your company for undervalued stock and the market rebounds.

Of course, that's easier for me to say, since I haven't invested in the market since 1998. It would be far more difficult to maintain perspective had I used my business school loans to buy dot-com stocks on margin.

Thursday, March 08, 2001

Timing is everything:

And if you haven't learned that from the past couple of years, you haven't learned anything.

Here's a terrific example: Palm Computing and Handspring

Palm had great timing, and terrible timing. The key to Jeff Hawkins and Donna Dubinsky's success at Palm wasn't just "the big idea." People sometimes forget that Palm's first product, the Zeos, was a serious flop, along with Go, Eo, the Newton, and every other PDA of that vintage. What set them apart was that they learned from the failure, and had husbanded their resources enough to bring out the Palm Pilot. They had great timing.

Unfortunately for Jeff and Donna, a lack of cash forced them to sell their company to U.S. Robotics for a paltry amount of stock. Bad timing. U.S. Robotics, in turn, managed to sell itself to 3Com when its shares were near an all-time high. Good timing for USR, bad timing for 3Com. 3Com's shares never really recovered, as accounting irregularities sank 3Com's stock, making Jeff and Donna's stock worth even less. However, the USR acquisition turned out to be good timing for 3Com, since the Palm Pilot became a huge hit, driving almost all of 3Com's growth and profits.

By then, however, Jeff and Donna had left 3Com to start Handspring. Great timing. Jeff and Donna raised money from Kleiner Perkins and Sequoia, and launched Handspring in time for the 1999 Christmas season. Unfortunately, production and customer service problems dogged their launch, a result of the compressed time frame. Bad timing.

Handspring recovered however, since this time Jeff and Donna had left plenty of safety margin. By June, Handspring was ready to IPO. Good timing. Handspring went public before the general tech stock slide, and shot up to $100 a share. Even though the stock slid from that height, Donna was able to sell 100,000 shares (a mere .22% of her stake!) for $4 million. Good timing. Jeff hasn't sold yet (bad timing), but don't feel too bad for him and his 40 million shares, which are still worth close to $1 billion.

The moral of the story is that even an entrepreneurial home run, like Palm/Handspring, is apt to have been affected by timing, both good and bad. You need to put yourself in a position to benefit from good timing, and leave yourself sufficient safety marging so that bad timing doesn't wreck your plans.

Wednesday, March 07, 2001

MBA vs. NBA:

Entrepreneurs often beat themselves up for their lack of "success." Sometimes they're right to do it. But often, it's because they're comparing themselves against an unrealistic competitive set.

For example, a budding retailer might compare herself to Jeff Bezos (or maybe not, given the current market!). A hardware entrepreneur might look at Michael Dell, and a budding software mogul might look at Bill Gates, or, god forbid, Larry Ellison (though if you feel inadequate because you don't a) own a Russian fighter jet, b) race in dangerous sailing competitions, or c) hire an endless stream of attractive young assistants, you've got bigger problems).

The problem is, these success stories are six-sigma events--way outside the standard deviation. According to Forbes, there are 298 billionaires in the US (probably less by now--editor's note). In contrast, there are 384 players in the NBA.

Let us consider the NBA, the world's most glamorous sports league. I've seen commentators cluck cluck about how terrible it is that thousands of underprivileged African American boys dream about making it to the NBA. It's like a lottery, they say, only the tiniest fraction succeed.

How reasonable is it then, for the millions of entrepreneurs and dreamers who someday want to be billionaires to compare themselves to the mere 298 billionaires?

So don't beat yourself up just because you drive a Corolla (which I do), and don't have over a million dollars worth of liquid assets (which I don't). But I wouldn't ever take away anyone's right to dream.

Tuesday, March 06, 2001

Bibliography for Entrepreneurs:

The toughest task for a budding entrepreneur is figuring out what's important and how to do it.
The toughest task for an experienced entrepreneur is explaining what's important and how to do it to a budding entrepreur.

The fact is that entrepreneurial learning is experiential--you can't really learn the importance of inventory controls until a disgruntled employee steals $50,000 of equipment. Trust me. I've gone through half a million dollars worth of the finest business education available, and I had to learn 99.999% of entrepreneurship on the job.

Books won't teach you how to be an entrepreneur. Accept it. However, if you realize that fact, and approach them with a grain of salt, here are a few books that you might find entertaining--and even useful.

High St@kes, No Prisoners, by Charles Ferguson.
Ferguson made his "fuck you" money when he sold FrontPage to Microsoft, and this book shows it. Ferguson pulls no punches, and shows you the seamy underside of Silicon Valley: the lying, cheating, and stealing. Read it and appreciate what you're up against.

Burn Rate, by Michael Wolff
Wolff details where the bodies were buried during the Jurassic days of the Net, back when people thought that content would make money. The account of how he sold his bookmarks file for millions of dollars to a gullible publisher is classic.

Startup, by Jerry Kaplan
A terrific first-person account of one of the biggest VC disasters ever (only exceeded by the current bubble-bursting debacle): pen-based computing. Hundreds of millions flushed down the toilet. What's uplifting is that the idea (and most of the people involved) were ultimately successful, a testament to the Valley's skill in reinvention. I wonder what Kaplan will write about the Egghead/Onsale disaster?

Here are some other books that, while entertaining, are utterly useless for entrepreneurs.

The New New Thing, by Michael Lewis
The story of Jim Clark, Netscape's founder. Folks, don't try this at home.

Nudist on the late shift, by Po Bronson
This is how East Cost folks see the Valley. Don't mistake for reality.

The First $20 Million Is Always The Hardest, by Po Bronson
Great title, fun book, but as dated as Larry Ellison's first Network Computer venture. Also, makes Stanford Product Design students seem a lot sexier and more glamorous than they really are. I speak from personal experience.

Monday, March 05, 2001

Saving your way to prosperity:

Essential Lesson #42 for aspiring entrepreneurs: DON'T SPEND MONEY! Not your company's, not your investors', and certainly not your own. Here's why:

Every "investment" has a payback period.
If someone tries to justify spending money by saying, "It'll pay for itself," ask her the length of the payback period. The instant you write a check (or swipe your credit card), that money is gone. That's fine if you get paid back in a week. In today's uncertain business climate, payback periods are always longer than you think, sometimes infinite. Better to do without.

Spending money has "hidden" costs.
Spending money is even more expensive than it seems. Not only are you spending post-tax dollars (which means that you'll need to earn close to twice as much to compensate), every transaction generates overhead as well. Every time you spend, you need to create purchase orders, book expenses, and audit the transaction. And if you don't spend your money up front on good accounting, you'll spend it later on wasted time, shrinkage, and migraine medication.

Purchases stretch your "stomach" for expenses.
Just like eating big meals stretches your stomach, spending the big bucks stretches your stomach for expenses. Once you start, it's hard to stop. Both you and your employees become inured to six-figure expenses, and when that happens, you can kiss your cash reserves goodbye.

Yes, it's harder to find alternatives to spending money, but it's like eating your vegetables: It'll make your company stronger in the long run.