Schlocky Crap Peddled As Investment Research. Ten Points of Suspicion

As a former Wall St. analyst, it’s easy to spot really bad research reports marketed as “investment research”.  The problem is that it’s not as easy for the non-investment layman to recognize bad investment research.  As an entrepreneur, you know your own market niche, but what do you know of industries and market niches where you are not involved?

Ten years after Eliot Spitzer demanded changes from the investment banking industry,  it would appear that very little has changed.  That’s an opportunity lost.  Among the most odious reports were those that were produced by the analyst at the firm which was the lead underwriter of the issuer of the Initial Public Offering (IPO).  We recently received a report published by a very large bulge bracket investment bank that exhibits many of the worst characteristics of bad research.

Everyone likes a bullish report as it most directly impacts personal wealth through stock option programs.  However, intellectual honesty requires that inflated balloons need to be identified, and discussed.  We have often written up a company as a “Sell”, and we can tell you that it significantly impacted our relationships with company management and impacted our relationship with institutional accounts that owned the stock.  The best book we’ve read on the perils of shorting a stock, and being right, was written by hedge fund manager David Einhorn called Fooling Some of the People All Of the Time.

The lessons for a startup company from this bad research are simple.  When you put together an investor presentation, don’t do what the author of the bad research report is doing: Don’t misrepresent the truth and don’t spin the truth.  It looks obvious, crass, and most importantly, investors can see through the crapola.  Very frequently, you will take a meeting with a VC where you are educating them about your space.  Since they don’t know anything about it, they will ask other VCs who do know.  When the truth comes out, your opportunity with that VC is over.

Here is a small sampling of the items from the bad “research” we recently received.

We will keep the name of the issuer and the lead underwriter of this “research” confidential.  We don’t have a short position in the name, but we are evaluating the best time to short the stock.  The best time will probably occur sometime over the next 3 months.

First, an investment research report is supposed to have a section devoted to analyzing the competition, and the report will typically fit the subject into a 2-D competitive landscape.  In a “Buy” recommendation report, you “expect” that the subject will be favorably reviewed in comparison to the competition.  However, when the competition is not reviewed, AT ALL, one should be suspicious.  When the subject is positioned at the top right of the competitive landscape chart, and positioned equally on the functionality scale against some of the largest software companies on the planet – one should be suspicious.

Second, when the marketing pitch of the subject is the ONLY information presented in this “independent” “research” report – one should be very suspicious.  Not only does it look bad, it looks like the work of an inexperienced amateur.  When you know that the analyst is not an inexperienced amateur, but is an experienced analyst earning $1mm per year, then there is really very little room to go on the ethics spectrum.

Third, when the word “disruptive” is used in reference to a software market niche that is almost 20 years old, one should be suspicious.  Making the job easier and more productive is the goal of well-designed software.  This is not disruptive and revolutionary.

Fourth, when the marketing message of the company uses key words that are also used by its competitors; you can no longer describe the company’s technology as unique.  In fact, if a competitive review had been accomplished, the analyst would probably have noticed those marketing key words were being used by the competitors.  Alas, he didn’t.

Fifth, as a Canadian, we’re all about hockey sticks.  Unfortunately, hockey sticks and revenue or earnings profiles don’t make for a happy ending.  The revenue and earnings profile of any company is typically monotonically linear; lowest in Q1, and strongest in Q4.  Non-SaaS enterprise software companies follow this trend very nicely.  In fact, everyone knows that the bulk of the revenues typically occur in the last two weeks of any quarter.  We also know that every company tries to smooth out the transactions in a quarter by attempting to close deals earlier in the quarter.  However, once a software company goes public, every customer understands that their large transaction, at the margin, could represent whether the company does really well in a quarter, just makes the quarter, or completely misses the quarter.  Although this is less true for a very large company like Oracle with multiple products, multiple divisions, and multiple groups, it is true of a one product company – like the subject company.

Therefore, when you see the revenue/earnings profile of a non-SaaS enterprise software company look relatively flat over Q1, Q2, and Q3, and then spike up into Q4, so that Q4 is equal to the sum of the other quarters – times 2 or 3, then one should be suspicious.  In other words, when the expected revenue in Q4 is double the amount in Q3, but the earnings in Q4 is 7x the earnings in Q3, you should be suspicious.  Moreover, we don’t know of ANY enterprise software company that can produce this kind of result – consistently over many years.  If you see this, you should be suspicious.

Sixth, we have it on good authority that the subject company reported a loss in Q4 of 2008.  Imagine our surprise when we saw the research report that showed a substantial positive Q4FY08 earning margin – meaning profit.  As my French colleagues used to say, “Quelle surprise!”

Seventh, we have it on good authority that the CEO of this software company was determined to get a $1billion valuation at the IPO.  Software companies that take on a $1b valuation target as an end unto itself have a very, very bad history.  It’s similar to a startup thinking that if you get funded you’ve achieved the goal.  It almost always leads to self-destructive behavior and extremely bad executive management decision making.  We can provide numerous examples in the technology world.

Eighth, we have it on good authority that the average sale by the company to a client is 50% higher than reported in the research.  Company management may be setting the expectations bar low, as does another well-known tech company named after a fruit.  In any enterprise software company, the much larger follow-on sales occur after the initial sale.  However, when the service and support organization only does “service and support”, rather than additional product sales, like any company should be doing, then it’s very difficult to generate follow-on sales at the same customer.  Note to Startup: ensure that every individual team member in your service and support org is always selling.  Live the letters: ABS – Always Be Selling.  Compensate the sales and service team on finding new sales opportunities.  Only part of the job of the salesperson is to find new opportunities.  The other part is to close on those opportunities.  The closing part is far more important than the finding part since the finding part should be generated by the marketing dept.  (I know, we’ve hit a nerve, so let’s discuss this at a later date).

Ninth, doubling your sales force does NOT mean that you will double your sales.  Moreover, if you begin to add sales people in Q1, then it will take them a minimum of 6 months to ramp up and begin selling.  After 12 months, the rule of thumb is that 25% of those new sales people will not be able to meet quota, so they will be gone or close to being gone – which is why you found them in the first place – they left their previous company because they saw the writing on the wall.  The next 50% are a toss up – some ramping up while others are waning.  The top 25% are getting the job done.  In other words, doubling your sales force does NOT mean that you can double sales.

Tenth, a small IPO means a small float.  The float is the number of shares available for sale on any given day.  The float does not include stock held by insiders, or those groups holding in excess of 5 percent.  We’ll use some made up numbers as a heuristic device.  If the total number of shares outstanding after the IPO is 100 million, and the company sold 10 million shares in the IPO, then most of that stock has been placed in institutional accounts.  (The best customers get the “best” stock).  If any institutional owner was allocated 100,000 shares in the IPO, that stock is also removed from the effective float since the reason that they got 100,000 shares was because they agreed to hold the stock for at least 30-60 days.  Therefore, if the total stock traded on any day is 100,000 shares, then the stock has no liquidity because there is no float.  Institutional accounts trade stock in blocks of 10,000 shares or more.  In order to build a position of 100,000 shares, the institutional account trader must buy blocks of 10,000 shares over the next 10 trading days, and must try to do so without moving the market.  This is really hard to do.  As an analyst, valuation metrics take over – but that is another lesson.

Bonus.  If there is ANY sign that the revenue of sales growth is slowing – then watch out.  If the analyst at an institutional account finds that competition actually does exist, that the software technology is not disruptive, that key marketing words are not unique, but also used by competitors, and that the revenue/earnings profile looks really hard to achieve, then it becomes more likely that institutional accounts will try to shed that stock, and lock in a profit.  If all of those institutional accounts try to unload the stock at the same time, then the lack of a float predicts that the fire on the Hindenburg will look like a tea party at Satan’s picnic.  As one of our friends has put it, “IT WILL BE A DISASTER.”

As a startup, you want to generate excitement about your product/company to prospective investors.  But, as Austin Powers would say:”Behave Yourself!”

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If HP is Headless, Then Is Dell Brainless? Acquisition Lessons for a Startup

We can’t take credit for asking that provocative question which references the battle for 3Par –but it leads us to the following question: What can a startup learn from this battle of the titans?

The lesson is simple: know your positioning in the value chain of your market niche, in order to understand your value.  Everyone knows their competitors and knows their competitive positioning from a product feature lens.  However, every market niche has a value chain of products and services that make up a solution.  Do you know your position in the value chain?  If your value is unique, then your value is whatever the market will bear.

For example, every market analyst we have read or heard over the last week has said that 3Par is not worth $2 billion, meaning that everyone is assuming that the winning bidder for 3Par will overpay for that asset.  Even 3Par doesn’t believe that it is worth $2 billion – otherwise, it wouldn’t be announcing that it is accepting Dell’s offer every time Dell bids – only to find that HP is bidding higher.

The value of a company and its product is not necessarily equal to the price paid.  Hence, the fundamental equation that any startup needs to be mindful of:

Value of the acquisition/company = Revenue projection of the acquisition + Harm caused to your competitors.

The last part of the equation is less precise, but if the value of harm to competitors is greater than zero, then VALUE is greater than revenue projection. Moreover, the assumption that price paid is equal to the revenue projection is wrong.  Typically, an acquirer wants the revenue projection to be much greater than the price paid.  We don’t know of too many companies that make an acquisition unless they believe that their bigger organization can significantly improve the sales and distribution of a target company.  Hence, the success of an acquisition is not simply equal to the sum of future revenue/earnings stream.

For the purposes of this blog post, let’s assume that Dave Johnson (SVP Corporate Strategy at Dell, and formerly had the same role at IBM) has had regular meetings with his engineering and enterprise sales staff, who have convinced him and the executive team that 3Par is a strategic and necessary asset.  Remember that the competitive battlefield includes IBM, Cisco, and EMC (which OEMs its solutions to Dell).  It’s not just HP.  The solutions they sell make up the value chain within their respective market niches. Therefore, denying a competitor a piece of a comprehensive solution is very important as well. One can’t put a hotel on Boardwalk unless you also own Park Place.

All week long, we’ve heard that HP has more cash than Dell, so HP was going to “win” the battle for 3Par, or at least significantly hurt Dell’s cash position.

The misinformation revolving around the respective cash positions is really quite humorous.

HP has $14.7 billion in cash, while Dell has $11.7 billion in cash.

HP wins – right?

Well, not so fast.

According to the most recently quarterly financial report, as of July 30, HP has $7.8 billion in short term notes payable, and $12.2 billion in long term debt on quarterly revenues of $30.7 billion.  In other words, HP has a Net Debt position of $5.3 billion.

In addition to reported cash, Dell has $0.7 billion in short term investments, $1.6B in short term debt and $3.6 billion in long term debt on quarterly revenues of $15.5 billion.  In other words, Dell’s Net Debt position is actually a Net Cash position of $7.2 billion.

We’re certain that Brian Gladden (Dell’s CFO) can phone five investment bankers within 60 minutes and tell them that he wants to sell $2 billion in debt by the end of the week.  Does anyone believe that five investment bankers won’t respond by noon of that same day saying, “we want to lead that transaction”?  Moreover, even if Dell sells $2 billion of bonds to fund the acquisition, it will still have a significantly larger net cash position vs. HP’s net debt position.

Hmmm.  That changes the viewpoint on the “lack of cash” story a bit, doesn’t it?

So, what can a startup learn from this battle of the titans?

First off, an acquirer knocking on your door may present you with a bid for your company that secures the future for you and your family.  There is no need to be cute – take the bid, sell the company, think about the next company.  If you are a great CEO, and your employees own equity in the company, they will follow you to the next company.

Secondly, we like Dell’s bidding replies.  Dell bids $18, HP bids $24, Dell bids $24.30.  HP bids $27, Dell matches at $27.  HP bids $30, Dell bids…..not yet known.  The bidding replies by Dell actually look thoughtful and considered rather than reactionary.  Hardly a brainless response.

Thirdly, if you know your competitive positioning, but don’t know your value positioning, then smart and creative investment bankers will be just as irrelevant as smart and creative lawyers.  3Par has the engaged Qatalyst Group to manage the bidding process.  Qatalyst is the “A” team of investment bankers, but even they don’t know the value of the deal.  Qatalyst is run by legendary technology investment bankers George Boutros and Frank Quatronne.  If you’ve never heard of Boutros and Quatronne, then look them up.  I guarantee that you will be impressed by their influence in technology circles over the last 20 years.

If you can’t hire the “A” team, and can only get a “B” team or “C” team, make sure that these teams understand your value position as well as your competitive position BEFORE you engage them.

Lastly, this may not be as relevant to a startup company, but we were hoping that Dell was smart enough to have begun acquiring up to 4.9% of the 3Par’s stock, BEFORE launching its bid.

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Rethinking Competitive and Complementary Positioning

Who knew that 3Par was such a hot commodity?

Not anyone on Wall Street or the IT research group community.  One week Dell is bidding $1.13 billion for a company valued on the NYSE for $605mm, and the next week, HP is bidding $1.5 billion for the same company.  Everyone is still surprised since 3Par was barely profitable on approximately $200 mm in revenues.

When a startup prepares its presentation for investors, it typically prepares a “Competition” table/chart.  This identifies the major competitors, and identifies the major strengths and weaknesses of the competition.  Almost invariably, the chart is defined as a magic quadrant chart with the startup located in the upper right – the best location.

Everyone knows that this chart is wildly optimistic “crapola”.  We don’t know of too many startups that are so “disruptive” and “revolutionary” that they can start off in the upper right quadrant.  Even nuclear fusion doesn’t fit since the cost of generating power will be prohibitive for many years, and will keep its “ability to execute” rating quite low relative to its “visionary” rating.

Very few startups will define a market position within a “Value Chain” chart which tries to define how a product/service fits into the existing value chain.  This chart defines the strategy of the company.  In other words, every company exists within a value chain of competing/complementary products, which itself sits within a community of complementary/competitor market niches.  One sees competition when viewing a company through a traditional product lens on a traditional 2D competition chart.  Viewing a company through a value chain lens, one can focus and identify a “crease” in that value chain in order to position and sell.  Hopefully, that crease is large enough to generate $1billion or more in revenue.

Therefore, the real insight occurs when a company views its product/service as part of the existing ecosystem, not simply as a product/service with features and benefits.  This view allows a management team to understand that opportunities exist for their company to be acquired by complementary vendors within the ecosystem.

For example, before last week, 3Par was viewed through the product/feature lens as a networking storage company that was trying to simplify storage by bringing virtualization, thin provisioning and automated storage management to the data center infrastructure.  It was having moderate success as an independent company, but it had “hit the wall” at the high end.

The “Cloud” has been a major theme for the last few years as it revolves around the worlds of converged and virtualized infrastructure – including storage.  As a result, a standalone technology company like 3Par is really like an island in the middle of a large ecosystem trying to sell its own independent product vision.  Being relevant requires the vendor to define a “story” and a roadmap of the future to the customer.  In order to define and articulate that roadmap, a vendor needs to own the various pieces of that stack.  In this case, both Dell and HP sell a lot of equipment to smaller organizations that value simplicity and convenience – so they purchase their equipment and services from the same organization as a bundle.

By itself, 3Par is an outlier.  As part of a larger organization, a vision and strategy roadmap can be articulated within a value chain – which becomes part of the “complete solution” portfolio of the enterprise salesperson.  If 3Par management had focused on that value chain, we believe that it would have focused on developing partnerships that promoted its position in the value chain, rather than focusing on selling features and benefits through a product lens.

Finally, kudos to Dave Johnson at Dell.  Very quickly, Dell is changing and creating its own story in the storage landscape.  While it is hard for any single person to be responsible for a turnaround at a company as large as Dell, we think that enterprise CIOs will now be thinking about Dell as a legitimate vendor of network infrastructure equipment and services.

Why?  For the first time in a long time, Dell appears to be aware of its surroundings.

Dell’s next target?  We’d be looking at Xsigo (funded by Kleiner Perkins, Khosla Ventures and Greylock), while others are looking to Isilon and Compellent.

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Richard Piotrowski CFA is a former #1 ranked securities analyst, and the Managing Partner of Outram Research LLC, which focuses on assisting startups and prospective turnaround companies to define their value chain, as well as define an executable product, partnership, competitive and exit strategies.  You can follow Richard on Twitter: @Angelpitchdoc.  He can be reached at, or at his blog:  Also check out our website:

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What Can A Startup Learn From The Departure of Mark Hurd?

Last week we wrote on open letter to Michael Dell suggesting that he call Mark Hurd (ex-CEO of HP), and bring Hurd to Dell.  Since we wrote that note, some additional revelations about Hurd have come to light; namely, that Mark Hurd was very strongly disliked by HP staff, and morale is not that high.  Some even called him “Hurd the Turd.”  According to, Hurd’s “Disapproval” rating is 66% – 17 points higher than Michael Dell’s disapproval rating.  Hurd’s “Approval” rating is 34%, while Michael Dell’s approval rating is 51%.  Should this revelation disqualify Hurd from Dell? Rating of Large Tech CEOs

Well, the revelation is not really a surprise since we had suggested last week that part of Hurd’s “magic” was his ability to integrate acquisitions – which is code for cutting costs and significantly reducing staff.”  Moreover, everyone understands that the rating on Glassdoor is driven by those who have an “axe to grind” and it’s pretty clear that Mark Hurd’s cost cutting has adversely impacted a lot of former employees of the acquired companies, who were no longer receiving stock options from a company with a rising stock price.

Therefore, let’s look at a possible Hurd arrival from another angle.  What exactly would Mark Hurd bring to Dell – other than replacing Michael, and getting Michael off of Cramer’s Wall of Shame?

An acquisition strategy?  Dell hired Dave Johnson from IBM to do that.  IBM’s reputation as an acquirer was very well known and admired.  Dave ran that group, so what else can Hurd add here?  Not much.

A cost cutting strategy?  Dell has been aggressively cutting staff for several years as it attempts to play catch-up to competitors like HP and IBM.  Is there anything here that Hurd can add?  We don’t think so.

An integration strategy?  Dell was trumpeting its successful integration of EqualLogic in 2008 and Perot Systems in 2009 at the analyst meeting in June.  It remains to be seen how Dell will integrate other large synergistic platforms, but there doesn’t appear to be a red flag here.  Following Hurd’s integration plan of ruthlessly cutting people and costs is certainly a signpost of a successful execution path.

A sales strategy?  Dell is in the middle of a multi-year re-birth, and the process is ongoing.  According to various sources, it is about 50% of the way accomplished – which is not good news to any potential stock holders hoping for a surprisingly positive quarter.

Moreover, the sales team is the one group that is most harshly scrutinized, as it’s the easiest to measure performance.  If you don’t make your sales numbers over 2 or 3 consecutive quarters at a startup, many CEOs (and their VC financiers) will “recommend” that you find a new employer.  One local CEO tried to find the right sales people – 25 times – over a period of five years.  Ten of these sales people left on their own as they didn’t appreciate the frequent changes in their responsibilities and remuneration, and the rest were terminated for lack of performance.  The search for the “right” sales team at this “startup” continues.

A consumer strategy?  This area was “MIA” at the analyst meeting last June, but we doubt that Hurd would accept a lesser role at a peer company other than Oracle.

Therefore, what would Mark Hurd bring to Dell that is significantly better than what Michael Dell has done since he returned to the helm?  Frankly speaking, we don’t know.

Therefore, Michael Dell should call Mark Hurd to wish him “well”, but at this point, we are going to admit that we were wrong in suggesting that Michael Dell should call Mark Hurd in order to bring him to Dell.

We think that Dell can do much better, Dell deserves much better, and if Michael decides to step aside once again, Dell needs someone much better than Mark Hurd.

Lastly, what can a startup learn from the departure of Mark Hurd?  Jim Barksdale (the former CEO of Netscape) was quoted that he wanted Netscape to be a “good” place to work, but not necessarily a “nice” place to work.  Barksdale wanted his organization to have the sense that the next day could be the last day, so exceed your own expectations at whatever you do – as the survival of the company as well as your own survival, depend on it.  A startup needs performance from everyone in order to survive.  The departure of Hurd has revealed that HP was a good place to work but not necessarily a nice place to work.

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Richard Piotrowski CFA is a former #1 ranked securities analyst, and the Managing Partner of Outram Research LLC, which focuses on assisting startups and prospective turnaround companies to define an executable product strategy, competitive strategy, and an exit strategy.  You can follow Richard on Twitter: @Angelpitchdoc.  He can be reached at, or at his blog:  Also check out our website:

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Open Letter to Michael Dell – Call Mark Hurd


It’s time for a bold move.  Pick up the phone and call Mark Hurd before he signs a non-compete and takes home $40mm plus in severance.  While the media bemoans Hurd’s departure, identifies a possible replacement, and talks endlessly about the impact on the share price, your own recruiter could swoop in and do the “deal of the decade.”

Mark has the DNA desperately needed by Dell.  As someone who lives in Austin, we can tell you that Dell has major problems within the Austin community.  Few people are “proud” to say that they work for Dell.  They do so with resignation of the negative reaction.  Therefore, it’s time to get in front of that perception and bring Mark Hurd to Austin to run Dell.  Despite the fact that he did not live up to his own standards for truthfulness in filing expense reports, we doubt that he will make that mistake again.

Among the criticisms of Dell is that it remains tied to the PC, needs to introduce new non-PC product lines, and needs to make acquisitions to support the growing services business.  Dell has made those moves, but the impact has been negligible.

Hurd’s magic is his ability to integrate the numerous acquisitions he has made.  We’re sure you are well aware that Mark has done several very large deals while at H-P; notably, EDS ($13B), Mercury Interactive ($4B), 3Com ($2.7B), Opsware ($1.6B), and Palm ($1.2B).   Each one of these acquisitions has been integrated quickly, and has been accretive.  The H-P process is to cut costs quickly and cut people.  This has been accomplished while keeping morale high – which is a welcome byproduct when the stock price rises.

The EDS transaction was done at 60 cents per $1 of revenue, while Dell’s acquisition of Perot Systems was done at $1.60 per revenue dollar.  In other words, Mark was proactive in acquiring EDS, yielding the relatively inexpensive price.  Dell’s acquisition of Perot seems far more reactive.

At the last analyst meeting in June, the consumer strategy was completely missing – even though Ron Garriques was showing his products at the “meet and great” the previous evening.  The discussion revolved around the Windows 7 upgrade cycle, and the benefit of Perot on Dell.  The investment community was not impressed as the stock was down twice as much as the market that day.

Dave Johnson, the former head of M&A from IBM, participated in the meeting/discussion, but he couldn’t reveal his strategy – for obvious reasons.  However, a CEO like Mark Hurd would make he and Dave a “dynamic duo”.

Bottom Line: Call Mark Hurd.  If for no other reason, just to say, “Good Luck”.

P.S. If you can’t get Hurd, we hear that Mark Papemaster from Apple is available, and knows how to build a popular mobile phone.

P.P.S. Being on Cramer’s Wall of Shame is an unnecessary indignity.  Do something bold and get off that wall.

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Richard Piotrowski CFA is a former #1 ranked securities analyst, and the Managing Partner of Outram Research LLC, which focuses on assisting startups and prospective turnaround companies to define an executable product strategy, competitive strategy, and an exit strategy.  You can follow Richard on Twitter: @Angelpitchdoc.  He can be reached at, or at his blog:  Also check out our website:

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Will Traditional Angels Take Advantage of the Current Entrepreneurial Gold Rush?

Several months ago, we began the process of meeting with various local angels, an investment bank, a couple of local VCs, a VC fund focused on Texas ETF companies, as well as numerous startups looking for funding.  Our thesis was that the funding industry had changed over the last few years so that the amount of money needed per startup was much less than previously required.   (An assertion made by David Rose at the Austin Entrepreneurs Network Funding Forum in April 2009).  Based on our observations of the Austin market and at various funding meetings, we extrapolated from David’s keynote that traditional angels had made themselves uncompetitive in the funding market as they moved closer to traditional VCs in becoming more “organized”, and requiring the startup to show customers, revenue, and traction before they would invest.  This process was classified as “risk reduction.”  It was obvious that the pendulum had moved to the far side of the arc.   Traditional angels are known as notoriously poor early stage investors, as evidenced by their poor returns (Angel clubs typically screen over 600 deals per year, and only only 15 to fund.  Of those only 2 are profitably sold)  – so organizing into groups and reducing the amount invested per angel was a logical risk reduction strategy.  Membership to these “exclusive” clubs was also evidence of your high net worth status, and provided an opportunity to access “startup lottery tickets.”

We concluded that the main implication of these circumstances (smaller amounts needed for a startup and angels becoming uncompetitive) was that startups would need to bootstrap their operation for as long as they could, gain some customers, revenue, and market validation, and then sell the technology/company quickly so they could move onto building their next idea.

In other words, the frequency of liquidity events and exits for the startup would significantly increase.  Since the monies needed to show market validation and then business model validation was lower, the valuation needed at exit would be lower.  This meant that a company could entertain a liquidity event much sooner, and an IPO was completely unnecessary.  Moreover, the impact of the Great Recession strengthened the “hand” of the larger tech companies that were very cash rich.  The result would be that these cash rich tech companies would acquire smaller companies and technologies, and more importantly, acquire groups/teams of engineers (who “played well together”) at a “good” price.

The thesis of frequent exits and acquisitions was the conclusion of Super Angel, Dave McClure, in a piece he published this weekend, called “Money Ball for Startups.”  He should have called it “Powerball for Startups”, as it would have more appropriately articulated the concept that a quick and profitable exit for any startup would be the equivalent of holding a winning lottery ticket.

The other point advanced by Dave was something we first heard from Mike Maples Jr., namely, that angles needed to make investments in startups earlier in the process.  Mike Jr. called this becoming a Super Angel.  The main implication is that angels needed to move back to their traditional location in the center of the funding spectrum, and take on more risk – something that they had been moving away from.   Dave is absolutely correct in his assertion that the largest majority of VCs won’t know the impact of your product/service, and won’t know how to validate it.  Super Angels Marc Andreesen and Ben Horowitz have made a similar point.  If you’ve ever spent time “educating” a VC about your product/market/space, even when you can show a large number of customers and a nice revenue ramp, you will immediately appreciate the comment.  Therefore, the trend to smaller startups with faster liquidity events would have an enormous positive impact on the entrepreneurial activity by all sorts of entrepreneurs/dreamers that have an idea for a product/service.

Dave also put some numbers to the business creation, validation process.

1)     Product: Amount invested: $0 – $100K.  3-6 months to develop a basic Minimum Viable Product (MVP) that’s functional and useful for at least a few customers.

2)     Market: Amount invested: $100K – $2M.  6-12 months to test marketing and distribution channels, understand scalability & customer acquisition cost, conversion to some non-zero revenue event.

3)     Revenue: Amount invested: $1-$5M.  6-24 months to optimize product/market fit and get to cash-flow positive.

We don’t think that the amounts needed to invest as large as indicated above, but there is obviously a lot of wiggle room depending on the team/market/product/service.  As a result, there is an enormous opportunity for angels, who can validate an operating team and/or technology, and provides them with an opportunity to invest earlier in the company formation process, and look for a quicker exit.  We’ve met with a few local companies that have made some very nice progress and could definitely consider that quick and profitable exit.

Think of this as the next “Entrepreneurial Gold Rush.”

The real question to the angel community: Do you know what you are doing, and hence, have the confidence to invest early?

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By Richard Piotrowski CFA is the Managing Partner of Outram Research LLC, which focuses on assisting startups to improve their funding pitches to the Angel and VC investors.  You can follow Richard on Twitter: @Angelpitchdoc.  He can be reached at, or at his blog:  Also check out our website:

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What Are Your Metrics?

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By Richard Piotrowski CFA

Last week, we wrote about whether your startup is focused on discovery and learning, rather than on business plan execution.  We referenced a local startup that has significantly changed its UI four times in four months.  We know that the founders of this startup are smart people, and they were probably changing aspects of their landing page UI in order to capture more metrics, learn about their users, and test the ability of various distribution channels to scale.  At least, that is what we’re going to assume.

What type of information is management trying to capture with all those significant UI changes?  We could produce a “laundry list” of items – which everyone should recognize since you can find these metrics in dozens of blogs: logging visitors via which links, how does registration change when people are pushed to one landing page over another, did the users take advantage of a specific offer on one page over another, how do you get users to return, etc., etc. etc.

Simply stated, the real goal of the building a software product is to acquire customers – and do so as quickly as possible while you are obtaining customer feedback and improving your product.  Period.

The field of Applied Econometrics (our academic field of specialization) is focused on multi-variate analysis of data through hypothesis testing of equations and their respective components. Early on, we learned that a hypothesis test must be very well defined in order to generate a sufficiently interesting response.  What most people don’t realize is that “null” response provides as much information as a positive response.  In other words, either you didn’t define your hypothesis test correctly in the beginning, or that null response is actually telling you something that should lead to an action.   When the hypothesis test is not correctly defined, one will generate an indeterminate response.  It’s the analysis of the indeterminate response that leads to better hypothesis testing, and it’s that analysis that straddles the line between art and science.

The question we would ask: Is there a “method to the madness” of running tests and iterating?  What the metrics you need to have beyond the obvious ones above?  What is the plan for the tests, and how does the testing program drive customer acquisition, and hence, drive revenue?

  • What are the expectations for any test before the tests are run?
  • Did the test achieve 10% of expectations, or 90% of expectations?
  • If only 10% was achieved, then what was learned that would lead to a minor tweak, or should one consider moving on to the other plan?
  • How are you defining your tests to determine which marketing/distribution channels drive viral customers?
  • What was the profit margin of the customers gained from one method?  What did you expect prior to testing?  Was it high or low?
  • How do you drive viral marketing once you get customers and traction?
  • Can you continue to deliver profitable customers as you expand your customer base?
  • What was your expectation of profitability as you created this test?
  • How do the tests connect back to the financial statements beyond revenue generation?
  • Was the implementation successful in generating customers delivering a high margin result, or a low margin result?
  • In other words, what was the cost of the revenue to profits?
  • Were the tests designed to take advantage of the viral marketing on mobile platforms?

All of these concepts revolve around multidimensional analysis, and the ability to reduce the multiple millions of combinations, to the few that drive a successful testing program since the key to building a long term business, is building a profitable business.

Or….you can do what everyone else does, and learn by the seat of your pants – as you burn through your cash.

Richard Piotrowski CFA, is the Managing Partner of Outram Research LLC, which focuses on assisting startups to improve their funding pitches to the Angel and VC investors.  You can follow Richard on Twitter: @Angelpitchdoc.  He can be reached at, or at his blog:  Also check out our website:

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Is Your Startup Focused on Discovery and Learning?

We love the concept of disruption.   Habits are altered, patterns are modified, the world is changed.  As a Wall St. analyst, we heard this claim from a company every single day.  Unfortunately, as is the case with many buzzwords, the claim that a company has developed a “disruptive” technology, or solution, is frequently……..bogus.  Moreover, everyone that reads the business plan knows it’s bogus.

Sorry, folks.  No need for a crowd of prospective investors here.  If a company truly has a new disruptive and revolutionary idea, then there won’t be any marketing data to support that market opportunity, and few people will understand the opportunity.  Yet, you’d be surprised how many of these plans contained detailed market data from well known market research organizations illustrating the size of their prospective market.  If a market doesn’t exist, how can it be analyzed to show an angel investor or a VC investor that an opportunity exists?

The short answer is that it’s very hard.  The longer answer is that you do need to have customers to prove your thesis that a market opportunity exists.

It is often said that no business plan survives the first interaction with a customer.   Therefore, if you truly developed a product or service that is unique, how to you execute on a plan without any market data?

Having existing customers helps a lot.  Of course, having a few customers doesn’t prove that a much larger market exists, and many more customers are waiting to find you.

The answer is that your startup needs to operate as an organization focused on discovery and learning, rather than focused on the execution of a business plan.  The currently fashionable method to operate a startup company is known as “lean startup” – as defined and promoted by its chief evangelist, Eric Ries.

According to this method, a startup needs to develop a minimum viable product as quickly as possible, release it, try to add paying customers, all the while changing the feature set of that product/service until that feature set intersects with the largest number of customers.  This startup will implement a lot of features over a short period of time, and execute numerous of A/B tests in order to find out how the customers respond to each individual feature.  The result is that this startup is measuring market needs by watching and responding to what customers do, not simply responding to what customers are saying.

A local well-known and well-funded startup is following the lean startup methodology.   It is running numerous daily A/B tests, introducing a many new features, and yet, its Support Board is full of comments such as “Please cancel my registration.”  In fact, some people are so angry that they want their registration purged from the startup’s database so that they don’t get its weekly reminders to try its service.

Question: Is this local startup listening to its customers and responding to what they do versus responding to what they say?  Is this startup operating as a startup focused on discovery and learning?

In the last 4 months, we have seen four major revisions of this startup’s user interface.  Significant features that users request are still in the planning stage.  Another feature is being rolled out so slowly, and is so deeply hidden inside the UI that it might as well continue to be in the planning stage.

We read a laudatory article about this startup on a blog that apparently received wide circulation.  As a result, this startup received interest from people located in cities far away from Austin.  Unfortunately, a funny thing happened on the way to the subscriber store.  Those far away users wanted the same feature as the local users.  They didn’t ask for a fancy slick UI – even though that fancy slick UI probably got them to look around the site.

Either this startup is responding to what customers are doing, or they are responding to what customers are saying.  Alternatively, they are following their own agenda for features and not focused on discovery and learning.  In other words, this startup says that they are following the lean startup methodology, but watching what they do and listening to what they say are two different things.

Several years ago, we visited a well-known but moribund software company with a 4GL product set that was dying a slow death.  After visiting with several senior members of management, we visited with the CEO.  He could see the look of dissatisfaction in our face, and knew a “Sell” recommendation was coming.  Then, as a throw away comment, he said, “You know, we have these two other products that we’ve been testing, and we’ve been gaining a few resellers here and there.  These resellers really like the products, and are gaining some traction with their business customers.  We’re allocating some resources to the products, but we have no idea about the market size, or the opportunity.  At this point, we’re just evaluating the market.”

We liked the product, and we agreed with the CEO that there appeared to be an opportunity to discover and learn.  We wrote up the Company as a “Buy.”  We didn’t have any market data, but we saw some encouraging sales.

The company was Cognos.  The products were Impromptu and Powerplay.

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Getting Paid To Have An Opinion

As a stock market analyst working for an investment bank, we were paid a lot for having an opinion about a lot of things related to companies and their growth opportunities – or lack thereof.  Since we had achieved a #1 ranking by institutional portfolio managers, we may have even been right once or twice.  As a VC at an Internet Incubator in the late 1990s, we were paid for having an opinion about the multiple hundreds of Internet startups that we visited.  As a CFO, we got paid for having an opinion about future growth opportunities of one company.

As a consultant, how does one get paid for having an opinion?

Quite clearly, one has to “ask to be paid” before one gets paid.  Yet, does one give away information and insight for free, while building a brand, or does one ask to be paid while the brand is being built concurrently?  Obviously, the latter is preferable to the former, but the success of the latter will be a function of the market for opinions – of which there are a lot today.

Over the last several months, we have met numerous entrepreneurs and numerous startup companies.  We have given them a lot of free advice.  Question: did any of them listen, or did they value that advice the same as the amount they paid for it (ie: value = zero, since cost was zero)?

A couple of days ago, we re-visited with one company that we first met two months ago.  At that first meeting, we understood that there was probably a very large market for the virtual online product that they had defined, and that their specific virtual product had merit.  However, we suggested that they needed to build a minimum viable engine that would produce their virtual online product before they would get funding from an angel investor or even a professional venture capital investor.  We also explained to them that the funding market was such that no one would write them a check for a few hundred thousand dollars in order for them to go into stealth mode, and create the engine for their virtual product.  We strongly recommended that they produce a minimum viable engine that would create their product.  All this “advice” was given “For Free”.

A month ago, we received an email indicating that a “prototype” was being completed that week.

Last week, we received an email indicating that they were ready for a follow-up meeting.

We attended this meeting two days ago.  The entrepreneurs didn’t show a prototype.  They showed the market research about their market, and the outline of financial projections.  They engaged a former CFO and marketing executive and paid them $6,000 to produce the work that they were revealing.

We were dumbfounded.

When we discussed the divergence of expectations at this meeting, the entrepreneurs revealed that they couldn’t produce their engine, or even a minimum viable engine, unless they raised the money which would allow them to work full time on the engine.  This was no different than the situation two months ago.

What’s the moral of this story?  Well, if we had offered our services as a “fee for service” consultant, rather than provide the advice for free, perhaps the entrepreneurs would have listened, and actually produced that minimum viable engine.  Perhaps not.  However, a few things are extremely clear – two months have gone by, they have spent $6,000 – money which they really couldn’t afford to spend – on market data and financial projections that are currently worthless until they get their minimum viable engine built.  The irony is that the entrepreneurs are now angry at us because we told them……get this, …….the truth!

Going forward, we will do a lot of listening, as we always do, and we will offer advice – but the advice will be for a fee.  Perhaps someone will actually take the advice – which is valuable.

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Being A Purpose Maximizer, Not Just a Profit Maximzer

I first saw this video about a month ago.

The moral of the story here is that organizations need to treat people like people, not just horses.  The best organizations are those that have a transcendent purpose, and provide their staff with opportunities that are challenging, that they can master, and allow them to make a contribution.

What is the transcendent purpose of your organization?  How do you make your organization a purpose maximizer rather than a profit maximizer?

Austin is home to several large companies that have lost their way a long time ago.   These are not the companies that will help to bring the economy out of recession.  It will be the smaller startups that have a transcendent purpose.

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