Different Sorts of Energy Companies

There are many types of “green” companies or companies that help save energy. I have two contrasting companies in my portfolio that illustrate this well.

The first is Virticus (www.virticus.com), whose products and services allow owners of lighting solutions to reduce energy and maintenance costs by 30-50%. They sell to parking lot owners (e.g. shopping centers) and cities (for street lights). The Virticus communication and control system enables the management of lights individually and collectively. It is a really cool solution that has begun to get traction in the marketplace. This kind of combined software, hardware, and service solution can make a rapid and substantial difference in energy consumption.

The second is Modumetal (www.modumetal.com). I have written about Modumetal’s technology and potential before. One of the founders of Modumetal, John Whitaker, gave a recent interview (http://www.pfonline.com/columns/0210end.html) about their novel, nanolaminated Thick Thermal Barrier Coating (T-TBC) technology and its application for higher operating temperatures to improve diesel engine performance, give better fuel efficiency and lower emissions and noise. The Modumetal T-TBC will insulate critical engine components such as piston crowns, valve faces, and cylinder heads. This is expected to enable higher operating temperatures and protect against abrasion and temperature-accelerated degradation in diesel engines. It is innovation like this that is likely to have huge impact on energy consumption.

While neither of these are the kind of companies that one typically thinks of when you hear about energy or green companies. But these two companies point out that we should change our thinking.

More Startups Die of Indigestion Than Starvation

I am often asked, as I was today, what are the biggest mistakes that startups make that cause failure. Among them is a lack of focus that can be characterized by the phrase: “more startups die of indigestion than starvation.” It is hard to raise money. Therefore common wisdom would indicate that “starvation” is the biggest risk. However, years of experience show that this is only a part of the truth. Very often when a startup runs out of cash, the root cause is a lack of execution against its plan that was brought on by trying to do more things than their plan or funding allowed.

Usually this is done for the best of reasons. For example, a large customer will ask for more features than were originally planned. Or, as the product develops, it becomes clear that the product can do lots of things that customers really do want. Or it will be harder to develop the product, so the company will try to do something different. Or the original marketing plan is harder to execute that originally contemplated, so the company will try to build a different products. Or …

Bottom line: the company will try to do more than it possibly can, given the funding it raised.

And, understand, these words are easy to say, but hard to live. They always have been. In certain economic cycles, lots of VC funding has helped keep companies alive, but not necessarily better outcomes for investors or entrepreneurs. In the current economic cycle, markets are unforgiving. So, I have the following recommendations:

  1. Be realistic on you initial plan. See counsel from experienced entrepreneurs or business people.
  2. Be a great cheerleader externally, but keep a strong sense of realism about what is really happening with the business. A good, strong independent board and advisors help. But you must be willing to listen.
  3. Stick to the plan. Not blindly, but be careful not to churn plans.
  4. Don’t stop thinking about new ways your business can meet new customer needs, or ship new innovative products or technologies. But.. rather than trying to alter your plans, keep a notebook with each of the ideas. Review those ideas with your board and advisors and have a process that you agree to before going off plan.

While all of this may seem a little to regimented for a startup, the alternative leads to “indigestion” that can be fatal.

Comments?

Home AV Control

You have to be kidding! OK, I’m a geek and during a recent remodel, put in a new AV system that one of my friends dubbed “geek heaven.” Up until the point where I needed a control system. The firm that did my custom installation said I needed a $10,000 Crestron control system, which was between 25-30% of the cost of the system – a number I considered ridiculous. And besides, I really didn’t want a proprietary solution which would be both difficult to extend (as standards advanced) and hard for me to program by myself (as I wanted changes or added equipment). So.. I decided to do my own.

With that I learned both how difficult the CE manufacturers make it to control their equipment and how little middleware exists to make this a doable solution. Granted, my system was pretty complex, using a 4×4 HDMI (1080p) matix switch, BluRay, a Media Center PC (with 8GB fast memory, 1.5TB hard drive, and HDMI (1080p) native output), a 1080p projector, 4 video end points, and lots of speakers.

The CE manufacturers should all be ashamed of how difficult they have made it control their equipment. Many now have web connections to their equipment, but don’t use this connection for control.

So.. what did I wind up doing? Because it was a complete remodel, I had wired everything with extra cat5 cable for control. Therefore, I was able to put either RS232 or IR control to each component. This was helpful, allowing me to bring control – necessary but not sufficient.

After lot’s of work and research, and trying to use a individual components and software, I threw in the towel and decided to use a Philips Pronto Pro system: TSU9800 (living room/home theatre), TSU9400 (bedroom), and RFX9600 (serial controller in the equipment rack). While more expensive than trying to integrate my own, they had the middleware and software with the control codes available. And it uses WiFi, Ethernet, and a variant of java script. And the ProntoEdit software is pretty straightforward and functional (with LOTS of room for improvement). Even still, I never got the RS232 control to work, so had to try to do everything via IR, which means no feedback on power sense or volume levels.

Even still, the CE manufacturers don’t expose all of the IR codes via the remotes. If you intend to take this on, you will need to know about Remote Central (www.remotecentral.com), which is a community with lots of codes, formats and discussion boards.

In the end, I’m generally pleased with the result, but the process was no fun at all. And even in the end, I still haven’t been able to control the lights, the solar screens, or fireplaces.

Maybe someday, this will work the way it should. If any CE executives read this blog, please work harder to satisfy your customers.

Avatar

I had a trip cancelled on Thursday at the last minute. Since my calendar was clear, I did something out of character – I decided to see a matinee movie instead of working. So, I decided to see Avatar in 3D/IMAX. After going to the Pacific Science Center in Seattle and being told it was sold out (for 3 days!), I went to another theater (Lincoln Square in Bellevue) to see the movie.

I was blown away! First of all, I didn’t expect that the 3D would be much more than a gimmick. The previews disabused me of that idea! By the time I watched the preview for “Alice in Wonderland,” I understood that the new 3D (compared to what was done a generation ago, primarily in horror movies with cardboard glasses) was for real. It not only increased the immersive nature of the movie, but was integral to telling the story by the director.

As you know, Avatar, is a sci-fi tale set in a distant world. The story was very typical (but good) for the genre. But the experience was exceptional. The combination of the IMAX, 3D, and sound caused the me to feel like they were there, which caused an emotional connection to characters, the plot, and world Cameron created.

Not only was Avatar a movie worth seeing, but it also shows me part of the future public entertainment. I really didn’t expect to like 3D so much. But in the IMAX format, with exceptional sound, Avatar shows the immersive potential of films in a theatre, taking the suspension of disbelief one step beyond. I’m happy to have been part of this transition. I will certainly see more films in IMAX/3D

Modumetal and other category creating companies

I’m often asked about what I look for in startup companies. There really are two answers to this question.

On one hand, for most of my investments I seek a good solid company, with a great management team that can build a good revenue stream in an uncrowded market, which can be acquired at a good premium.

But the ones that get me really excited are those few, rare opportunities to define a completely new category with a world-changing technology. At any point in time, I like to have at least one such company in my portfolio and the current leading candidate is Modumetal (www.modumetal.com). Modumetal owns a category called nanolaminate composite alloys. In essence, they have found a way to make laminated metals that can take advantage of properties that occur at a nano scale. As you can read on their web site:

Modumetal is a new class of nanolaminated materials that will change design and manufacturing forever. Modumetal is going to change the way that engineers make parts, not just by affording the ultra-high performance of its nano-materials, but also by a process that we call Modumetal by Design™. This process allows engineers to bridge design and manufacturing to realize large-scale finished parts from nanoscale building blocks. Modumetal is a revolutionary nanolaminated alloy system that is stronger and lighter than steel AND can run longer and hotter than nickel-alloys AND is more corrosion resistant and costs less than stainless. Modumetal will replace today’s metals, ceramics and composites in applications, starting with military armor – proceeding to cars, planes, buildings and consumer goods. It is the next generation material that represents a sea change in the age-old tradeoffs between cost, weight and performance.

It is still early in the life of the company, so there is still a great deal of risk. The excitement of being part of company that can change the way things work may not be the most disciplined way to do angel investing, but it sure is what I enjoy. Stay tuned.

Startup Company Boards

Startup companies need good boards. But they often don’t have them.

There are many reasons. First, there really aren’t that many experienced people willing to serve on a startup company boards. And those that are experienced, skilled, and bring a lot of value, generally want to be compensated, which startups can’t really afford.

VCs will serve on boards, but generally when their fund owns 15% or more of the company, so their compensation comes from the fund and the upside from a huge amount of stock.

In contrast, individual angel investors usually only own a very small (<2%) of a company and there is no ready mechanism for their co-investors to compensation.

So.. what makes a good board member? Many startup CEOs believe that the most important factor in choosing a board member is industry experience. I disagree. Industry experience is valuable on an advisory board, but needs to be resident in the company. Some degree of industry experience is, of course, beneficial. But, the following experience is more important on a board:

  • Experience on other boards for high-growth companies;
  • Having been through financings of various sorts;
  • Experience in acquisitions and IPOs to understand the inflection points and needed metrics;
  • A good rolodex relevant to the company;
  • Good chemistry with the CEO and other board members; and
  • A willingness to be direct and outspoken about the company, even if that position is unpopular with management and the board.

To get good board members, a startup company must be willing to compensate board members (as they do management). I’ve spoken with a number of angels and angel groups around the US and found that board stock compensation seems to vary widely. On the West Coast (primarily the Bay Area) and Boston, compensation seems to follow the VC model – no additional compensation is required. However, in much of the rest of the country, options are generally routinely given.

I’d recommend the following package for a pre-A round company: 1% of fully diluted stock, vesting over no more than 2 years. Shorter vesting is generally a very good idea for board members in order to make sure that board members don’t try to act to save their board position rather than do what is right for the company. Of course, if the company is already financed and has suffered the dilution to do so, then the percentage would be less.

I believe that the Angel Capital Association, the Kauffman Foundation, and/or a university business school should conduct a survey on this.

Techflash posting.. for pay angel groups

In response to John Cook’s thoughtful post: http://www.techflash.com/seattle/2009/10/angels_to_charge_or_not_to_charge.html, here is my reply. John – thanks for raising this topic.  It is a timely posting.  Historically, VCs haven’t ever charged entrepreneurs because they are paid management fees from their limited partners.  And individual angels don’t charge because they are investing their own money and don’t need to.  This has become an issue as angel groups have sprung up, and hired managers to manage deal flow and help entrepreneurs.

 

So who are the managers?  Some angel groups (like the Alliance of Angels) are investor-led, volunteer organizations.  The leadership of the group writes checks to startups.  (I’m personally in over 25 deals.)  We work closely with entrepreneurs and appreciate that, in many cases, they have given up lucrative jobs, mortgaged their homes, and invested virtually everything in making their company successful.  These are the entrepreneurs/companies we want to back and don’t want them to take any cash out of the company and put it in the pockets of middlemen who will “introduce them to investors.”  At the AoA, our executive committee is comprised of our most active angels – the ones that are actively investing in new companies.  I, personally, am less likely to invest in a company that is represented by an advisor who takes a fee that is dependent on raising money.  Our business model is simple – we put ourselves on the same side of the table as the entrepreneur: invest in the success of their company, help them thrive, and win only when the company does well.  It is a long-term commitment.

Other groups are led by “advisors” who only coordinate and don’t generally write their own checks.  These are the groups that want their money up front.  A friend of mine, who was a founder of Tech Coast Angels in San Diego, told me that one nationally syndicated organization not only charged entrepreneurs $8000 for the privilege of presenting there, but then would ask for $25,000 to $50,000 in consulting fees to help them hone their business plan and presentation. 

 

I’m glad that you have raised issue.  The AoA is in its 12th year.  We pride ourselves on helping entrepreneurs succeed and have a track record to prove it.  Startups that make it through our screening process get to present to more than 50 qualified angels at one time, and approximately 30-50% wind up getting financing.  I urge all entrepreneurs NOT to pay egregious fees to get in front of any investor.  It’s not necessary.  Just reach out to the ones who won’t ask you to pay – they are typically more aligned with your interests anyway!

Paying for presenting to Angel groups

I’m not sure I could or would want to be part of an angel group that charges entrepreneurs for the privilege of presenting/pitching their company.  It seems very odd that a bunch of high-net-worth individuals would ask an entrepreneur, who has most likely mortgaged their home and used their life savings to start their company, to pay them to look at their deal. 

 See the following link: http://www.avc.com/a_vc/2009/10/paying-to-pitch.html

Comments?

Google & the Future of Search

I just read the Business Week article on Google (BW, October 12, 2009, p44) and believe it misses the key point – the threat against Google is that its search just isn’t very good.  Unfortunately no one is yet much better.  Someone will be, and it may be Google itself, but I believe it is just as likely to be another startup.

First, a little background.  I was the first General Manager of Microsoft’s search group in 1995.  That was at the beginning of search and almost all of the players lost their way.  Microsoft focused on its “shows,” believing that content was king.  Yahoo believed it was a portal.  Alta Vista couldn’t decide what it wanted to be.  Etc.  I knew at the time that finding what you wanted on the Internet would be a daunting challenge.  It would be hard to distinguish your search intent from a key word or two to deliver a result that both high precision (missing no positive searches without lots of false negatives), while prioritizing the search with the responses that really met your intent.

What Google has done exceptionally well is keeping its search simple – its interface is clean, uncluttered, and easy to use.  Comparing it to Bing, it is easy to see why it remains on top.

What it does poorly: giving results that match what its users are really looking for – too many irrelevant results.  Why?  It’s core page ranking thesis.  Google believes that the most popular links are the ones that are most relevant.  This is true sometimes, but equally false at other times.

So.. where does this go?  I believe that some very clever work will be done that allows for more precise search results based on a better algorithm than page ranking.  Who will do this work?  My bet is on a startup, where “NIH” isn’t a factor.

Professional Angels: the new early stage VCs

As I’ve blogged before, the market conditions are driving early-stage investment capital back to basics.  VCs have always fostered great entrepreneurs with great ideas.  But the model has changed profoundly and permanently (see my earlier blog: “Why the VC Investment Model is Broken”). 

So how do great entrepreneurs build their business in 2009?  Professional Angels.

Most professional angels are members of angel groups.  (See http://www.angelcapitalassociation.org/ for the largest trade association.)  In these groups, members generally act as individuals for their own investment, but team on the key aspects of deal sourcing, deal screening, due diligence, investment pooling to ensure that there is sufficient capital overall for the company, and then monitoring the deal afterwards (including board representation).  In this regard they act like an early-stage VC fund, but the decision making is on an individual basis.  In the Seattle Alliance of Angels (www.allianceofangels.com) these groups have grown from an average size of about 2-3 investors to 6-12 investors in the last 4 years.  Such organization makes life easier for the entrepreneur, since they only need to negotiate with one person (the “lead investor”) and they get more money.  From the angel investor point of view, there is more leverage on the deal, more shared due diligence, and the knowledge and wisdom that comes from the entire group.

Professional angels in groups also behave differently than the individuals.  Most, if not all, now reserve for follow-on rounds (even though the entrepreneur’s business plan might call for this “being the only round of financing required”), just as a VC would do.  For example, the Alliance of Angels did 44 transactions in 2007, with 15 being new companies; 29 were therefore follow-on rounds.  In 2008, this pattern continued with the AoA doing 36 investments, where 19 were new, so 17 were follow-on.  This behavior allows an angel group to carry a company through from inception to cash flow positive in many cases.  No VC or institutional funding is required for this sort of deal.  This is a new phenomenon that will help shape the market going forward.

The implications of this are the following:

1)      Angel groups and funds can and do provide the capital needed for a capital-efficient company to make it to cash flow positive.

2)      Entrepreneurs and investors are positioned for more rapid exits, since the valuation needed for a successful exit is often much less.  If a startup takes in VC money, it will often require an exit over $150M for a successful exit (http://blog.drosenassoc.com/?p=7).  These exits are rare and the company often either fails or is sold for the liquidation preference, so the entrepreneur does not have a successful outcome.  On the other hand, if the total capital is low, even an exit of $20-40M can be hugely positive for both investors and entrepreneurs.

3)      Companies can now be built in a more capital efficient way.  With better tools, open source, Amazon Web Services, stimulus money, SBIR grants, etc. small amounts of capital can now go a long way.

Professional angels are filling the void created by VC funds getting larger and startups being more capital efficient.