New venture outsourcing blog

Even if you think you’ve decided already, the final decision may not be up to you!  Venture capital firms are continuing to push their portfolio companies to outsource, which just another indication of how important it can be to improving valuations, time to market, and productivity of a startup.

Ann Grimes, who now works at Standford, wrote Venture Firms Seek Start-Ups That Outsource in the Wall Street Journal about six venture backed startups in 2004 who were using outsourcing: Solidcore Systems Inc., July Systems Inc., 24/7 Customer, ServGate Technologies Inc. (acquired by Cirond Corp. in 2006), ReaMetrix Inc., and Open-Silicon Inc.

These companies and their investors were all quoted in the article saying that the additional value provided by globalization and outsourcing were on the rise.  They fully anticipated (correctly) that the outsourcing trend would gain momentum as communication & other infrastructure barriers were removed.

John Shinal wrote in VC firms push for outsourcing that the VCs are not just accepting this or monitoring it from the outside, they’re aggressively pushing it on their portfolio companies!

“There isn’t a board meeting that goes by that we don’t ask, ‘Why aren’t you being more aggressive (with software development) in India and China?’ ” said Jim Breyer, managing general partner of the Palo Alto venture firm Accel Partners, which has backed more than 200 companies.”

The majority of startups that receive investments from the Menlo Park venture firm Kleiner Perkins Caufield & Byers have operations in India, Kleiner partner John Doerr recently told a group of Indian entrepreneurs in Santa Clara.

Now, nearly all the business plans that [Peter] Barris and his colleagues evaluate for the firm’s new venture fund include an offshoring component. “It’s not an unusual event anymore,” said Barris.

It should go without saying that a VC who’s got any kind of agenda, including an outsourcing agenda, that the startup firm doesn’t want to explore is a bad fit.  There are very good reasons why outsourcing for startups isn’t appropriate, but for well prepared startups the list is getting shorter every day.

As we mentioned in our previous post about outsourcing providers moving up the value chain, the trend of improved focus on opportunity-oriented outsourcing is likely to continue.  I would urge startups that are inclined to keep everything local to ask themselves why the trend seems to be so strong?  Perhaps your business is different from all the others… but probably not.  Look at this chart from R&D magazine to see that the number of outsourced functions is pretty broad now.  It’s not just customer service and tech support.

More likely, you just haven’t found the right partner yet, and as you look be sure to keep your eye out for firms that specialize in helping startups like we do.  As we all know, startups are defnitely a different breed of company!

I’ve recently had the pleasure on serving on a panel of judges evaluating business plans. This time the presenters were all social enterprises - business ventures with a double bottom line (societal and financial returns). Their ‘products’ ranged from new web portals to architectural goods and often subsidized or supported important causes like vocational training, reduction of disease, or caring for the environment.
Below are some of the common questions and feedback the presenters received:

-Who, exactly, in your customer?

-How much money are you asking for?

-What would you use this capital for?

-How does this money turn your enterprise into something lasting/sustainable?

-Who is missing on your team?

-Are you charging the right amount for your product/service (would customers pay more? do competitors charge less?)

-Who are your competitors?

-What keeps others from doing this / what is your intellectual property?

-Would it make sense to scale back operations to build a stronger business?

-How would you scale this business: geographically? number of offerings? franchise?

-How hard is it for someone else to do this?

-What is keeping you from getting started: funding? team? R&D?

-Have you talked to customers? What do you know about your customers?

-What is the minimum amount of funding you need to prove your concept or make your first sale?

-Who are potential partners?

-So what part of the supply chain / distribution network do you fit into?

-Are you selling to businesses or consumers?

-What is your exit strategy / plan for sustainability / way to repay investors?

-Are you looking for a loan, a grant, an investment for equity, or a set of donations?

-What are your next steps / milestones?

-How do you measure success? How do you know if what you are doing is making a difference?

Send us an e-mail or leave a comment with questions you’ve heard as you have pitched your venture.

Picture yourself walking into work and getting the worst email imaginable: Google announces they’re coming after your target market!

You want to be sure this doesn’t happen to your company and seventeen years of experience with entrepreneurs has taught us how.  The secret is to already have your product, customers, and strategy sewn up before they even think about it!

What were you doing in 1999?

Imagine yourself there.  Microsoft is still the top dog, everyone and their cousin is starting a company, and pitching VCs for money is as common as a job interview.

A good friend of mine joins a two person team and they’re sitting with one of the heavy-hitters at Sequoia.  Their idea is great - they’re going into a space that is a clear home run and very likely a perfect acquisition target for Microsoft.

Are you beginning to see yourself in his shoes?  You know what comes next - during the pitch that’s been rehearsed almost a hundred times they get to the “Why us?” slide.  The founder, who is a really smart engineer with a touch of naivete proudly proclaims, “I’ve been working on this for quite a while now, and we have a three man-year lead on any other competitors!”

Now I would like you to experience the feeling of looking into the VC partner’s squinted eyes as he says, “A three man-year lead?  That’s a Microsoft minute!”

I’m sure you are wondering whether they got the term sheet - but that’s not the moral of the story.

The point is: you don’t have time.

Little by little you’re building your team, find an office that’s not too big but not too small, put up your website, and inch your product along all the while.  Have you noticed that even as you accomplish these things (which is no small effort!) you’re starting to feel even more vulnerable to competition than when you first started?  The reason is because the reality is starting to sink in - the pace of building a company is not as fast as you need it to be. 

If someone, anyone really, with a decent engineering team heard about your idea and decided they wanted to - you’ve got a minute, maybe two - before you need a new idea.

That’s why we started Inventure Global.  You see, time-to-market isn’t just a VC catchphrase.  It’s reality.  It’s important.  It’s the only thing that can really put distance between you and your competitors.  As you already know, the sooner you get to market, the sooner you capture the mindshare of your customers, partners, and build real barriers to entry that can help you withstand a late entry from an existing team.

Our firm specializes in getting you from prototype to product as quickly as possible.  We already have the team you need.  You can build your own team alongside ours, use us to augment your current team, or use us until it makes sense to build your own team.

Why not start moving today?  You already know waiting isn’t the answer.

Contact us and see how we can get your company to market faster - today. 

In case you’re wondering - my friend’s company didn’t get the term sheet!

Starting up is hard work.  But is Edison’s 99% perspiration enough to grow and sustain your venture?

Our own tireless entrepreneur Chris Harris examines this at:

Inspiration Versus Perspiration

Wil Schroter’s Blog on the Go Big Network

Our involvement in the Venture Capital / Investment community is hardly a secret on this blog - our group partners with pre- and post-funding companies to help with excellent execution.

The folks at InsideCRM have compiled a list of The 20 Worst VC Investments of All Time, their commentary is insightful and an interesting look into the side of the industry that rarely makes headlines. Of course, high risk / high reward investing means that some companies will succeed spectacularly, some will yield small profits, small losses, or break even, and some will hemorrhage money. The difference between spending wisely on necessary parts of your business model and squandering a institutional money becomes obvious in these examples:

Think Ikea not Aeron if it doesn’t increase your sales:

“Webvan’s “major purchases included $1 billion for warehouses, enterprise servers and more than 100 Aeron chairs.”

Know your customer:

“…advertisers didn’t see the appeal of the low-pay demographic AllAdvantage offered. This company represents $135 million in venture capital down the drain.”

Raise enough to start making money:

“…promising solution simply didn’t have the cash to hang on until the software could be launched.”

More facts and insight at InsideCRM, thanks to them for a great entry!

* the cliche about 20/20 hindsight seems to apply particularly well - retrospectively these are bad investments, at the time of funding they obviously seemed like wise, profitable endeavors to many smart people. In my opinion, this emphasizes the importance of a relentless focus on execution while you meet milestones - or getting the partners and team to be able to!

Earlier this evening I gave a talk to a group of bright, young, aspiring, entreprenuers - all part of the UCSD business plan competition.  I was asked to cover the fundamentals of entrepreneurship in about an hour!  Happy to support their impressive efforts, I agreed to take on the most difficult talk I’ve ever given (a two years of a full time MBA isn’t be enough to cover this topic).  Here are some of the highlights:

-work with capable partners

-build an excellent, interdisciplinary team

-get started now

-thoroughly analyze your competition

-get started

-be able to talk about your ideas but don’t give away the secret sauce

-be passionate about your technology and the way you’re making meaning in the world

-get going

-cool technology and good business aren’t always related

-know your customers

-make some progress on what you’re proposing

-focus groups, surveys, or online analysis can work wonders

-make use of advisors, mentors, and professionals

This fits in the bin of “so I have this (great) idea, is it worth pursuing?”

The entrepreneurs and inventors we work with are often trying decide how much time and energy to invest in their venture or whether it is worth investing any at all. Here are some quick tips we’ve found to be particularly applicable to web 2.0 and other online startups, but also apply to any good old fashioned brick-n-mortar:

1) Customer Feedback is Vital - It is one thing to predict how your customers might behave, it is another to know how they will behave based on experience, sales data, surveys or other interactions. The side benefit is that you will learn a tremendous amount and be able to strengthen your offering by engage your (potential) customers early.

2) Get a letter from a potential customer - especially if you are talking to partners or investors. There is little more impressive than a well prepared entrepreneur who has considered the posibilities, decided on a strong product/service offering, talked to customers, and has documented their feedback. Nobody is asking for a signed purchase order, but how about a non-committal letter stating that they would be interested in potentially, maybe, purchasing ____ from you.

3) Write a Business Plan - this is not optional. The greatest value of a business plan is to you! It is absolutely a vital tool to formalize your idea, figure out what it takes to get it done, an set out a plan to get there. This doesn’t have to be formal, doesn’t have to be 50 pages nor written by a Harvard-MBA. There are many great resources to help you get started if you, like many, feel overwhelmed by this…
4) Build a Strong Team - advisors, mentors, management team members, board members, consultants, vendors, and other are important to your success. Recruit the best you can, and get started at the lowest cost possible. A key determinant in the success of new ventures is the team (strong teams can overcome many challenges)
5) Get Started - the most important piece of advice we dole out on a daily basis is: ‘get started’. Edison talked about his mix of inspiration and perspiration, but more commonly, how many times have you heard “I thought of that X years ago”. What separates success from not is, sometimes surprisingly, getting good work done. This includes research, building your product or service, selling it, expanding your customer base, and generally making headway!

more to come…what do you think?

So I am fortunate to get to work with a number of founders as they get their companies off of the ground. One thing common to about 50% of the pitches I hear is mention of an exit strategy.

These typically fall into one of three categories:

1. I’ll be acquired by Microsoft, Google, Pfizer, or my friends over at XYZ Big Public Company within the next few years
2. I’ll have an exclusive deal with in a few months, then they’ll want to buy me or buy lots of my products
3. I’ll have a quick IPO, make a boatload of money, then buy a boat…

I have yet to hear a technology entrepreneur say to me “I’m hoping to run a successful, growing company for the foreseeable future”.
Perhaps, like most entrepreneurs, the exiting bunch are being optimistic - or perhaps the conversation needs to shift slightly to reflect the reality of running a growing company:

“Life is a journey not a destination”

As I’ve said before, I consider myself very fortunate to be able to see many business proposals and plans and to able to help entrepreneurs build vibrant businesses from good ideas.

Today I had a chance to reflect on the many presentations I have evaluated over the past months. Instead of focusing on the overwhelmingly positive aspects of this work, and the incredible passion of the entrepreneurs, I thought it would be useful to share some common pitfalls:

1) Undervaluing the importance of THE TEAM — who is on board currently? Who do you need to get on your side? How will you recruit and retain them?

2) Overestimating the size of the ATTAINABLE (or ACHIEVABLE) market. This isn;t the same as the overall market. It doesn’t matter to me that the pet food market is over $10 Billion — I want to know how many of your software-controlled pet food dispensers you can realistically sell…not all pet owners, but those that are tech-savvy, not so rich as to have pet-sitters or use pet hotels, etc.

3) Stating an EXIT STRATEGY. We all know that companies a) get acquired b) become wildly successful through IPO or c) licensing out their technology to make tons of money. What has never been stated in a presentation I’ve seen are the most (statistically) likely outcomes, the company goes under or keeps operating successfully without a, b, or c happening. Since we know that a, b, and c exist, putting on a slide doesn’t provide new information — the most promising entrepreneurs hope to build a successful business for the near future and realize that plans will change, and the eventual outcome is beyond the scope of an initial plan.

4) 10X return on investment in 2 years (similar to breaking even in 2 months). Both are possible, just not likely. Don’t overstate your financials. The numbers should be realistic and represent both top-down and bottom-up approaches (that is from the achievable market size down to your product and from your product to sales forecasts).

5) Poor LISTENING . When its time for feedback, or Q&A, or networking after a presentation, pull out a pad and a pen, listen and take notes — very little else turns people off more than defensive presenters eager to prove that they are correct and you just don’t understand. While these may be true, this isn’t a good way to make a lasting impression.

Stay tuned for more learnings from our experiences building successful companies with passionate teams….

well, maybe something that would be helpful to the entrepreneurs we’re working with and that read our blog.

The April 30th Wall Street Journal has an excellent speical section entitled “Small Business: The Journal Report”.

Highlights include:

“In Search of Traffic (about SEO)”

“Here, There and Everywhere (about virtual office space)”

“Early Options (on Seed stage funding - mentions the Tech Coast Angels here in Southern California”

“It Seemed like a good Idea (on the downsides of Guerrilla Marketing)”

“Calling All Customers (on cell phone marketing)”

and some others…

 

I hope you find this reading enjoyable 
and informative…