High Growth Venturing

End of an era

Katriina Otsamo — Thu, 31 Dec 2009 15:12:44 +0200

A business deal which originated last February is finalized. Uniform VP acquired a medical device product business. In future, we plan to become a player in sporting goods industry.

We no longer post to High Growth Venturing blog. We would like to thank you for reading our very biased entries. High growth venturing, or, in my terms, being a market leader in our segment, still is our passion. Thank you Pasi, our business is largely based on your vision.

Thank you for everybody who contributed to our blog, by writing or by discussing with us. I have probably learned from every discussion. Now I feel I am very well equipped with information of any kind of problem a start-up can meet.

***

Now when I became a start-up entrepreneur myself, I’d like to share a piece of financial information:

Finnish state has given a new statutory order of capitalizing research costs. It is not allowed anymore. Only development costs can be capitalized if there is revenue expectation which exceeds the amount of costs. They have also given examples what is research and what is development, see Finlex database.

The fundamental difference between American and Finnish startups is that American startups are equity funded whereas Finnish startups are bootstrapped, subsidized and heavily dependent on � how could I say it - accounting utilization. It’s legal but it makes Finnish companies non-comparable with others. The Americans expense as much as possible, the Finns capitalize as much as possible, just because they are not equity funded and they have to do it not to go broke.

How to build a startup in Silicon Valley style? Find answers in Oulu on Nov 9th!

Pasi Sorvisto — Wed, 28 Oct 2009 12:10:47 +0200

When discussing how to build your market understanding and how to build your business with entrepreneurs, there are lots of different opinions how to do it. But this latitude, there are not too many people who know how to do it in Silicon Valley style.

My friend Saku (at the University of Oulu) was a visiting scholar at Stanford University for a year, and since he returned back to Finland, he has been talking about the differences of mentality and culture between Silicon Valley and Finland. He got infected by the Silicon Valley style, and can’t get rid of the infection. Because I have the same disease I understand why.

Saku has been saying that while he was living in Silicon Valley, he saw tens of Finnish companies, and hundreds of other companies from all over the world pitching to business angels and VCs. In too many cases, it became clear that Finnish companies were lacking market understanding. They could not articulate who their customer is, what is the pain they are solving, or how do they provide value. I think this is common to Finnish companies because they focus so much on technology and their domestic markets, which is by the way 0,5% of the global market, and also our business ecosystem supports more building technology than building market understanding and business. And aggressiveness � people just don’t get it how fast you have to bring your solution to the market place in Silicon Valley.

I have to say that I can’t say it better. We have also been discussing how to enable more people to be aware about how the businesses are built in the Valley at the moment.

In there, a great proportion of startups are established by university graduates and researchers, and their average age could be something like 25 years. There are lots of reasons for why young people establish startups; they don’t have too many responsibilities in their life yet, they have nothing to lose, they can invest all their time to things that they are enthusiastic about (coding games etc.), and there is extremely viable business ecosystem around them. Besides being tech savvy, graduating engineers also start to see founding a startup as an interesting option, and so the number of startups increases.

A month ago in our meeting Saku said that he has an idea how to start tackling the problem; he would like to bring Eric Ries to Oulu (Finland) to give a presentation of his approach called Lean Startup. This fits perfectly to the operations of the Oulu Growth Lab which is part of Oulu Business School. What he did, he established an event which will take place in Oulu on November 9th [see link for the lecture Lean startup in Oulu , and a workshop for entrepreneurs Lean startup workshop for entrepreneurs]. Event is free of charge.

Eric Ries has been giving presentations and workshops in places like Facebook, Intuit, Hewlett-Packard, TechStars, O'Reilly, Stanford Technology Ventures Program, and other entrepreneurial events around the world.

According to him, today's high-tech entrepreneurs have at their command more than just the ability to invent new technologies. They have mastered the discipline and methodology required to harness those technologies in order to serve customers. Such a combination of new technology and new understanding is unlocking new opportunities. In order to maximize them, this generation of entrepreneurs combines extremely low costs with faster cycle times to produce what I call lean startups."

Ries describes that startups are established for learning. The importance of gaining market understanding is in-written to the Lean Startup approach and it is crucial for business success. It is not about starting a firm, but figuring out what is the right thing to do business-wise. The citation from Eric Ries's GigaOm blog post describes this well: "In parallel to this work by the �solution team� (engineering, ops and QA) there is a new kind of �problem team� (what we used to call business development, marketing, and sales) that is asking the bigger questions, such as: Who will our customers be? What problem does our product solve for them? How many of them are there? And how will we reach them?"

I do not want to sound rude, but it seems that Finland has many solution teams without market problems. The principles of Lean Startup are really relevant to Oulu region and Finland. We need to get students and startups exposed to this type of thinking that underlines the importance of figuring out what is the right thing to do business-wise, instead of focusing on doing the thing right, by this I mean perfecting the technology first. Startups are meant to be scrappy in the beginning, right?

Venture capital is important for the economy

Pasi Sorvisto — Mon, 28 Sep 2009 08:09:51 +0300

Last week I attended a clean tech VC conference here in Finland, and met some relevant, exciting entrepreneurs, and some potentially fundable ventures. Entrepreneurs were looking for funding for building winning businesses, and VCs were looking for investment opportunities.

At the event there were also attendees who were more or less just hanging around. I heard some of them talking about why we shouldn't compare our VC industry to others’, especially to U.S.’ or Israel’s. I was quite amazed: why shouldn’t we compare? There is no reason why we should not compare VC industries or entrepreneurial ecosystems. High-tech companies are competing at global business arenas, and basically all of them are competing in the open category with �rules for all�. There is no golf type of handicap system, or gender and weight categories like in boxing and wrestling. There is only open category.

I am bringing up this topic over and over again because I think this is extremely important. If I think of any entrepreneur, investor, politician, or public official, there is no single person who should not be aware of competitive advantages of entrepreneurial and financial landscapes around the world. For companies, market and customers should be top priority for their interest. But I think it is also important to build understanding from what kind of background new ventures join the global competition, and what kind of support they will get. It is about screening the competition.

National Venture Capital Association (NVCA) announced just recently �Venture Impact� report on the impact of venture capital to the U.S. economy. Here are the results at a glance (NVCA, 2009):

According to the report, venture-backed companies outperformed the overall economy from 2006 to 2008. Jobs at venture-backed companies grew 1.6 percent, compared to 0.2 percent in the entire US private sector, and revenue at those companies grew 5.2 percent, compared to 3.5 percent in the entire private sector.

Venture capital is not an ancient industry; it has emerged during past couple of decades. Samuel Kortum and Josh Lerner have described history and emergence of the current VC industry; look at the figure here.

We can see clearly that current VC industry emerged in early 1970’s, but peaked for the first time in early 1980’s. If you think about how young industry this is, and compare it to the economic impact, results are dramatic.

I have no evidence whether the results of NVCA report are accurate or non-accurate. It is absolutely clear that VC has not been only financial instrument for successful high-tech companies, but it is similarly clear that venture capital has been contributing on many successful ventures. For quite many, it has played a crucial role. By having a close look at Israeli high-tech success story, one can see that it has been highly dependent on emergence and evolvement of venture capital industry. There is strong scientific evidence supporting this claim.

Venture capital industry will transform dramatically in near future. How or to what direction, we have only guesses. The good news is that smart people will figure out new type of financing instruments which will work for high growth ventures. And it is important to remember that success is not only dependent on one financial instrument; it is much more dependent on a complete entrepreneurial and financial ecosystem, and competencies of entrepreneurial teams.

The fact is that economy is dependent on highly successful ventures; those are generators of new markets, new solutions, new jobs, and new logics for business. This is the core reason and justification for comparing our entrepreneurial and financial environment to others’. We need to understand what happens in the world, create new competitive landscapes for our own new success stories, and we need to understand what our competition is. It is much about building the market understanding.

References

Kortum, Samuel & Lerner, Josh (1998): Does Venture Capital Spur Innovation? NBER Working Paper No. 6846. www.hbs.edu/research/facpubs/workingpapers/papers2/9899/99-078.pdf

National Venture Capital Association (2009): Venture Impact - The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy. www.nvca.org/index.php?option=com_docman&task=doc_download&gid=482&Itemid=93

Building blocks for successful teams � evidence from business

Pasi Sorvisto — Mon, 07 Sep 2009 18:09:30 +0300

At the moment there is a lot of discussion in VC and startup blogs on entrepreneur’s motives and financial rewards in early stage ventures. Mark Suster’s entry �Should Founders Be Allowed to Take Money off the Table?� is one of the most fruitful openings, and there are several others, too. But Suster’s entry made me really think about these issues.

His entry led me to dig deeper in the motivational aspects of entrepreneurial teams and success of the business ventures. I have stated in many occasions that business and sports have many common aspects, and I wanted to test my own propositions, too. And here is something that I found.

I follow constantly TED Talks website and once again, I found an exciting presentation by Dan Pink on surprising science of motivation. Here are some highlights of his presentation.

Now I want to tell you about an experiment using the candle problem, done by a scientist named Sam Glucksberg, who is now at Princeton University in the U.S. This shows the power of incentives. Here's what he did. He gathered his participants. And he said, "I'm going to time you. How quickly you can solve this problem?" To one group he said, I'm going to time you to establish norms, averages for how long it typically takes someone to solve this sort of problem. To the second group he offered rewards. He said, "If you're in the top 25 percent of the fastest times you get five dollars. If you're the fastest of everyone we're testing here today you get 20 dollars." Now this is several years ago, adjusted for inflation. It's a decent sum of money for a few minutes of work. It's a nice motivator.

Question: How much faster did this group solve the problem? Answer: It took them, on average, three and a half minutes longer. Three and a half minutes longer. Now this makes no sense right? I mean, I'm an American. I believe in free markets. That's not how it's supposed to work. Right? If you want people to perform better, you reward them. Right? Bonuses, commissions, their own reality show. Incentivize them. That's how business works. But that's not happening here. You've got an incentive designed to sharpen thinking and accelerate creativity. And it does just the opposite. It dulls thinking and blocks creativity.

This is not the only study in which the results are like this. Results have been the same in many studies during past 40 years. Intrinsic motivators have been found more important than extrinsic. Dan Pink continues:

� If you look at the science, there is a mismatch between what science knows and what business does. And what's alarming here is that our business operating system -- think of the set of assumptions and protocols beneath our businesses, how we motivate people, how we apply our human resources -- it's built entirely around these extrinsic motivators, around carrots and sticks. That's actually fine for many kinds of 20th century tasks. But for 21st century tasks, that mechanistic, reward-and-punishment approach doesn't work, often doesn't work, and often does harm. Let me show you what I mean.

So Glucksberg did another experiment similar to this where he presented the problem in a slightly different way, like this up here. Okay? Attach the candle to the wall so the wax doesn't drip onto the table. Same deal. You: we're timing for norms. You: we're incentivizing. What happened this time? This time, the incentivized group kicked the other group's butt. Why? Because when the tacks are out of the box it's pretty easy isn't it?

If-then rewards work really well for those sorts of tasks, where there is a simple set of rules and a clear destination to go to. Rewards, by their very nature, narrow our focus, concentrate the mind. That's why they work in so many cases. And so, for tasks like this, a narrow focus, where you just see the goal right there, zoom straight ahead to it, they work really well. But for the real candle problem, you don't want to be looking like this. The solution is not over here. The solution is on the periphery. You want to be looking around. That reward actually narrows our focus and restricts our possibility.

He highlights that lot of our today’s (and future) work require creative type of capabilities; working with several options and not targeted on a single solution. This stresses model of financial rewards based system. Pink says:

Dan Ariely, one of the great economists of our time, he and three colleagues, did a study of some MIT students. They gave these MIT students a bunch of games. Games that involved creativity, and motor skills, and concentration. And the offered them, for performance, three levels of rewards. Small reward, medium reward, large reward. Okay? If you do really well you get the large reward, on down. What happened? As long as the task involved only mechanical skill bonuses worked as they would be expected: the higher the pay, the better the performance. Okay? But one the task called for even rudimentary cognitive skill, a larger reward led to poorer performance.

I was asking myself if this could be culture based phenomenon. It could, but Pink’s examples prove that results are not culture dependent. At London School of Economics scientist have gone through 51 studies of paid for performance plants, inside the companies. Their conclusion is clear:

"We find that financial incentives can result in a negative impact on overall performance."

As Pink says there is a mismatch between what science knows and what business does. Pink continues:

� what worries me, as we stand here in the rubble of the economic collapse, is that too many organizations are making their decisions, their policies about talent and people, based on assumptions that are outdated, unexamined, and rooted more in folklore than in science. And if we really want to get out of this economic mess, and if we really want high performance on those definitional tasks of the 21st century, the solution is not to do more of the wrong things. To entice people with a sweeter carrot, or threaten them with a sharper stick. We need a whole new approach.

So, what is then The Solution? Pink says the answer is based on intrinsic motivation:

It's an approach built much more around intrinsic motivation. Around the desire to do things because they matter, because we like it, because they're interesting, because they are part of something important. And to my mind, that new operating system for our businesses revolves around three elements: autonomy, mastery and purpose. Autonomy, the urge to direct our own lives. Mastery, the desire to get better and better at something that matters. Purpose, the yearning to do what we do in the service of something larger than ourselves. These are the building blocks of an entirely new operating system for our businesses.

I found also Paul Grahams new blog post �The Anatomy of Determination� very exciting. He and his team at YCombinator have spent a lot of time trying to learn how to predict which startups will succeed. Y Combinator is a new kind of venture firm that has specialized in funding early stage startups, and they help entrepreneurs to develop their case from idea to a company. YCombinator team learned quickly that the most important predictor of success is determination. At first they thought it could be intelligence, but found out that it's not the deciding factor. He says:

In most domains, talent is overrated compared to determination�partly because it makes a better story, partly because it gives onlookers an excuse for being lazy, and partly because after a while determination starts to look like talent.

I can't think of any field in which determination is overrated, but the relative importance of determination and talent probably do vary somewhat. Talent probably matters more in types of work that are purer, in the sense that one is solving mostly a single type of problem instead of many different types�

� Perhaps one reason people believe startup founders win by being smarter is that intelligence does matter more in technology startups than it used to in earlier types of companies. You probably do need to be a bit smarter to dominate Internet search than you had to be to dominate railroads or hotels or newspapers. And that's probably an ongoing trend. But even in the highest of high tech industries, success still depends more on determination than brains.

He points out that determination consists of three elements: willfulness, discipline, and ambition. For him, determination is about �willfulness balanced with discipline, aimed by ambition�. The good news is that at least two of these three qualities can be developed: you may be able to increase your strength of will; you can learn self-discipline; and most of us are malnourished with ambition. The challenge is once again what these concepts mean; those are as complicated concepts as determination.

Talent is without a doubt one of the top three factors, and Graham says that third one is how much you like the work.

If you really love working on something, you don't need determination to drive you; it's what you'd do anyway. But most types of work have aspects one doesn't like, because most types of work consist of doing things for other people, and it's very unlikely that the tasks imposed by their needs will happen to align exactly with what you want to do.

--

Dan Pink and Paul Graham have found out the same result that has been found also in sports, especially in team sports. If you talk to top athletes, despite the fame and (possibly) huge financial compensation of their work, they always talk about how much they love their sports, how much they desire and work to become better and learn more, how committed they are with their team, and how important is the spirit of the team.

Success in sports is highly dependent on talent of the people but even more about their intrinsic motivation and determination. Once again, business and sports have very much in common�

References

Mark Suster: Should Founders Be Allowed to Take Money off the Table?
http://www.bothsidesofthetable.com/2009/09/02/should-founders-be-allowed-to-take-money-off-the-table/

Dan Pink on the surprising science of motivation. TED Talks, August 2009.
http://www.ted.com/talks/dan_pink_on_motivation.html

Paul Graham: The Anatomy of Determination. September 2009.
http://www.paulgraham.com/determination.html

Entrepreneurship and Finance Challenged

Pasi Sorvisto — Sun, 02 Aug 2009 08:08:29 +0300

Since our VC event in the end of May my partner and I have got a lot of questions from entrepreneurs and finance professionals. People have been asking questions like �What is the state of the VC industry and high-tech entrepreneurship�, �Is this really a great time to start companies�, �Does VC really work; is there real upside for entrepreneurs to get VC funded�, or �Aren’t VC and high-tech dead�

Those are important questions which have generated vivid discussions.

Link between downturn, entrepreneurship, new ventures, venture capital, disruptive business models and technologies, new emerging markets, and turbulence between all of those generate an exciting mix. I have noticed it is not easy to give short and clarifying answer. Only the transformation of VC industry takes quite a bit time to be explained for those who are not familiar with VC industry.

Few days ago I got back to a video interview that I have seen many times. It is a video in which Charlie Rose had a conversation with entrepreneur and software engineer Marc Andreessen, a co-founder and chairman of Ning and an investor in several startups including Digg, Plazes, and Twitter. He is best known as co-author of Mosaic, and founder of Netscape, and he is on the Board of Directors of Facebook and eBay. He has also recently raised new $300 million VC fund with his longtime investing partner Ben Horowitz.

He gives quite a thorough answer to most of raised questions. You should really take your time and check this interview. You can find it here.

Big Picture

Aki Karjalainen — Sat, 04 Jul 2009 12:07:32 +0300

During my work career I have been fortunate to work with lots of different kind of entrepreneurs, professors, researchers, VC´s and public financiers. When I have discussed entrepreneurship and growth venturing with them, I have found out how many different views and approaches there are.

In many discussions, the entrepreneurs, researchers and public financiers have been talking about the business and product details such as technology, R&D processes, marketing, market entry strategies, possible pilot sites and so on, which amazes me. For me it does not make sense to concentrate on details if the big picture is not clear. With the big picture I mean business fundamentals and essentials of a company, which include answers at least to the following questions:

a) Who are my customers?
b) What is the market pain I am solving?
c) Why are the customers buying my product or service?
d) How am I different from my competitors?
e) How do I produce and deliver my product?
f) How am I going to make money out of the idea?

It is essential to define clearly answers to these questions when having a new business idea, even though the answers may change while launching the business. When the answers are found, it is time to start digging deeper, go into the details. From my discussions I have found out that VC’s are quite good at crystallizing what they need to know about your business before making the funding decisions. They have learned it by trial and error in their previous investments. Because of that, one of the best ways to start thinking about the new business idea is to have a look at the VC presentation templates available and use that approach to build the big picture of your business. When the big picture is clear, all that needs to be done is to find, build and acquire necessary parts and solutions for your business. It will not be easy, but it will be rewarding.

Like most people know, Finland is lacking of growth ventures. From my experiences I can say that there are lots of great inventions and products that could be huge global businesses. But for some reason the Finnish entrepreneur’s mindset is not targeted to become a global market leader. I think that this is caused by our own business environment, which is not optimized for startup companies.

Sometimes it seems like outsiders treat and think the entrepreneurs and companies as �subjects’ or �raw material’ that needs to be molded or shaped, and use their expertise to be successful growth venture. Most people think that without this molding or shaping it is impossible to be a global success. When this issue is brought up everyone says that it is not true, but still most of their actions indicate otherwise. One of the key reasons to become an entrepreneur is independency and ability to influence on your own work. The Finnish entrepreneurs quickly learn how to operate in this environment or think that they can not become global growth ventures without the help of many different organizations. Of course this is not true. Luckily great but rare Finnish exits have been made by companies that haven't been dependent on business development organizations.

The biggest lesson I have learnt so far has been that despite the details that are necessary to be sorted out, the business fundamentals and business case need to be clear and always on mind. The business case helps to make decisions between different options and choices and tolerate the insecurity entrepreneurs need to face when targeting global markets. Moreover, I have realized that market understanding is more important than I previously thought. All the answers (customer needs, competition, partners etc.) that are needed for building a business case have to come from the market place. I also believe that most people can build a growth venture. All that is needed is passion, will to learn new things and courage to desire big things that may not be accepted in the social environment.

Who is professional in venture financing, and why is funding issue so hot

Katriina Otsamo — Mon, 29 Jun 2009 15:06:18 +0300

I bumped again into twisted world of Finnish venture funding. Instead of an effective early stage funding mechanism, venture capital, there are tens of different types of funding instruments, one example of which is subsidy that must not provide competitive advantage. Complex venture financing environment also sustains a variety of services. Numerous are those service providers who sell their services by using word �funding�. Funding is sexy, you know, funding means shifting the attention from rather unsexy selling to something less difficult � somebody else paying your costs. And that is exactly how �funding� is seen; not as an investment that must pay back itself but rather a piece of income in bootstrapping strategy, to survive from today till tomorrow.

Numerous are also the events where all kinds of public subsidies and loans and grants, even bank loans, are represented one after each other, and at the end of the event, a small slot is reserved for a venture capitalist or similar investor � if there is time left. The sequence is absurd. Funding portfolio is not a collection of pieces from here and there. Funding issue is very much of strategic nature and coherence is important. How else can you leverage your scarce resources effectively?

Equity based funding creates the heart of funding portfolio, all the other instruments are only complements, not substitutes, for that. And to get equity funding, the business must make sense. Otherwise the investor (entrepreneur himself) loses his money. Consistently, introducing any other complementary funding element makes no sense unless the equity, or revenue, side is taken care of.

Organizations that provide other funding than equity investments have their own agendas; they must fulfill their own objectives to make their business eligible. They really are not there to watch over the entrepreneur’s best interest. Events where those kind of funding instruments are introduced serve for financiers themselves (marketing), and those entrepreneurs who have no problems with equity funding, and consequently, their business. For them, non-equity funding is a good option if it doesn’t interfere with their business decisions and sets no strings on their future business and plans. Most often, you don’t see those entrepreneurs in the events. You see those who have problems with equity.

However, it is not surprising that providing funding consultation to entrepreneurs appeals to service providers. Great value propositions can definitely be designed on funding issues. Delivering the service is more difficult part as providing competent service is really not that simple. First of all, there should be an incentive: no funding equals no salary for the consultant, and vice versa � otherwise there is no real incentive. Secondly, building a funding portfolio and a roadmap requires deep understanding of 1) the business, and business model, itself, and 2) true nature of different kinds of funding instruments. Preparing a funding roadmap does not mean copying and pasting all the different instruments that possibly are available because many of them can lead the entrepreneur 180 degrees to wrong direction (see above what I said about their own objectives).

Even though I am in this business myself, personally I would never have the nerve to claim that I provide funding consultation if I had shallow knowledge on the subject. I could never do that to any entrepreneur in any business because I want to be professional. After carefully listening to the best of best people in venture financing, I realize I am nothing more than a beginner � and I hold a 10-year-old degree in finance.

Luckily many of the funding consultation services are free of charge. Otherwise, the customers, i.e. entrepreneurs, might require some return for their money. My dear friend and colleague Pasi has repeatedly introduced the issue of damages so that entrepreneurs who lost their business (or, lifetime savings, or family) due to bad funding consultation would be entitled to compensation. He also reminds that rare are those areas of life where there is no liability at all of one’s actions. Business development is such an anomaly. Pasi’s perception sounds funny but it’s relevant. However, if the emphasis of service providers’ funding consultation was focused in the best funding ever, your customer’s money, sales for you, less damage would be done and the question of compensation would be obsolete.

Finally, I have to say, many seasoned entrepreneurs seem very well versed in funding issues. They have the courage of saying no to funding which is not aligned with their business objectives. I truly admire that. At the same time, it makes me aim higher � I don’t want to be that jerk that provided non-competent, bad quality, cheap advice to an entrepreneur who obeyed it and lost his business.

Part 3: Team composition sets the results

Pasi Sorvisto — Mon, 15 Jun 2009 17:06:34 +0300

Examples of my previous posts Winning teams are built and Myth and reality of teams have shown that team issues can be more important than we think. Let’s do one more tour in team issue; do these theories and practices count also in public organizations?

Government policies can drive highly successful change, there is no doubt. Israelis have proven this by establishing successful high-tech, high growth business ecosystem. It started as a policy led operation almost 20 years ago, and it has generated highly successful VC industry and high-tech companies, professional business development services, and path to build companies into major markets. It was a systemic building process which entailed building several elements at the same time. They reformed almost entirely their existing business and finance ecosystem, and instruments related to that.

Dr. Jenni Airaksinen brings in her newly published doctoral dissertation some exciting examples of the challenges related to reform of public institutions. Airaksinen’s research finding shows that core process of administrative reform is �maintaining the cohesion of the elite�. According to her, public authorities have ended up into the situation where there is remarkable gap between rhetorics and reality when dealing with need for reform processes.

Airaksinen says: �The most evident patterns of behavior in the reform process were pronounced pursuit of consensus, compromise seeking and avoidance of conflict. � Limitedness is even more problematic in multi-actor, network-type situations, where different interpretations of situations are not confronted but concealed in the fear of conflicts. � The acceptance of struggle as a part of administrative reform requires that the individuals of the decision-making elites are ready to function on groups, where anxiety is allowed to be present at times. � Negotiation is however not possible in the situation where the fundamental objective of elite-group is to prevent individuals of the group from exposing to anxiety. If this is accepted, it is likely to lead to small steps, bad compromises, and fragmented applications of reform in practices.�

Her findings get me back to the Niccolo Machiavelli’s famous book The Prince from year 1532. One of his most famous quotes was: �There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.� Airaksinen and Machiavelli have both captured the core enabler for successful reform: team members, their commitment and incentives for change, play crucial role in building successful reform. All comes back to the team.

Here is something to think about for entrepreneurs, financiers, public officials... actually for all of us. Teams make sense and teams make difference. Big question is how to build and manage teams to succeed?

Despite all aimed strategies and goals, the real strategies and goals are set when selecting members of the team and setting guiding principles it.

In other words, by selecting team members who are committed to fight for their own position instead of fight for team and goals at all costs, who are looking for status quo instead of taking risks and betting for big win, who are working inside comfort zone instead of working outside the comfort zone� By selecting such a team, despite all rhetoric and aims of high goals, we are actually creating obstacle to achieve goals . Practice and scientific evidence speaks for this emphasis. And I believe in this is true.

For the next recruitment process, I hope this is something worth to think about.

References

Airaksinen, Jenni (2009). Hankala hallintouudistus (In English: Troublesome Nature of Administrative Reform). Doctoral Dissertation. University of Tampere, Finland. http://acta.uta.fi/haekokoversio.php?id=11177

Machiavelli, Niccolo (1532). The Prince.

Who is most likely to become funded by Silicon Valley VCs

Katriina Otsamo — Thu, 11 Jun 2009 11:06:38 +0300

Silicon Valley VCs made some remarks on Finnish high tech start-ups when they visited us. Here you can read about the elements we need to have in place to be qualified for applying funding from there.

Note! There are some presumptions: we need to fulfill the regular VC funding requirements, like scalable business model. Secondly, these VCs were high tech investors. Finally, this is not exhaustive list but just interesting highlights.

Finnish clientele is not enough. Sales in Finland are not a proof of business model. We need to have a customer abroad, and VCs want to call him.

We need to make sure our business is veritably international. In Silicon Valley investor’s eyes, revenue in Finland is like selling to friends. The best thing is to acquire a customer abroad � not necessarily in the US but maybe in Germany, or the UK - and make sure that customer likes our product so much he’s not going to hang up when the VC calls him.

If we are looking for funding from best entrepreneurial environment in the world, Silicon Valley, US market must be considered as the primary market. That is because VCs are local players. They will also want the immaterial property to be owned by a US company.

However, Finnish start-up entrepreneurs have no reason to feel they are disabled because they are from Finland. Only if we look just locally it is disadvantage. We should bring in technology wherever it is, bring in people wherever they are from, and look outside of our locality.

They say Finnish entrepreneurs are too humble.

More aggressiveness is needed regarding the business idea and the plans. Our built-in motivation should be like �I’m gonna build the biggest company in the world!�, or, �I don’t care it’s recession/holiday/anything, I am gonna build a great business!�.

VCs said that with best start-up entrepreneurs, they really feel the energy - entrepreneurs just can’t wait to start! They have internal drive, and, actually, those kinds of entrepreneurs even push VCs.

Compared to those entrepreneurs, Finnish entrepreneurs seem to be conservative and thoughtful directed; �this is how I’m gonna use the money, I’m gonna show revenue, I’m gonna make sales in a proper way, it’s gonna be good� � what VCs really want to hear is the drive of youngness! Entrepreneurial spirit comes from naivety - you just don’t know you don’t know. We need to make a big leap towards aggressiveness so that we’ll be able to compete with entrepreneurs from rest of the world.

At the same time, Finnish entrepreneurs put too much emphasis on describing the execution plans, not the market opportunity. After all, for VCs, it is the vision what sells.

Founders create the DNA for the company � passion for solving a problem is a great starting point.

Motivation of the founder is important. Although we are taught to analyze exit possibilities in business plans and presentations, quick exit is not the right motivation. We must want to solve something. Secondly, CEO must be magnetic personality because CEO must bring in money and people.

Many VCs value domain expertise. In this market situation, a lot of time will be used to DD around the teams. What skills, what experience they have. Most important thing in a resume is that what is not in the resume.

VCs invest in team, or market opportunity, or technology. There are no VCs that move around freely; VCs usually stick to one primary reason. We should look for those VCs who see our strengths important. We don’t have to have all three dimensions perfect in the beginning.

On the other hand � VCs say they see so many deals it’s almost too much work. It’s not possible to change the DNA so totally that it’s worth doing it. So let’s be careful with the DNA right from the start.

For me, right type of DNA would be market orientation and compelling value proposition as fundamentals of all business, or willingness to receive coaching and aim higher. Or, build the biggest company in the world!

The ideal deal looks like huge market, huge market, and huge market.

It is very much about market and what’s happening on market side. The ideal investment possibility would be that customers are looking for technologies that current players are not providing. We need to convince VCs there is a huge market opportunity. Secondly, we need to start exporting our products early. That’s the best way to get the real market validation to our ideas.

On the other hand, unique and compelling technology can be it for some VCs. Like Checkpoint was on every Sun computer that made up internet, winning technology is a turn on for them.

What I liked, was the fact that VCs are not too cold-blooded after all � they actually can tolerate some flaws in your business plans. They said: If you are really logical you are not in this business � meaning that they want to trust in their gut feeling, too! VCs are looking for entrepreneurs to help them to solve a puzzle to make great business: together they are creating the picture of opportunity.

Let’s tell them if we have research based, protected and proprietary technology

VCs love it. Recent years, too much emphasis on technology has been considered as a bad thing in Finland. However, these gentlemen wanted to see a huge marker potential combined with great technology. Theoretically, the best case would be if we could prove that our technology will be the winning one. I don’t know how to do that.

But, I would imagine that you might have weaknesses in describing the market potential. Market potential is always full of assumptions. VCs themselves help you to figure out the best potential. Instead, you cannot have weaknesses in your technology, or any obscurity who owns the technology.

Most of us are first-timers, but luckily they don’t even suppose we are serial entrepreneurs.

To my relief, VCs said that we don’t have to be serial entrepreneurs to become successful in high tech start-ups. If you happen to be one, and you still want to do the thing again, it’s an advantage. Not a necessity.

In an environment like Finland, where you feel the fear of failure, we tend to think only successful entrepreneurs as serial entrepreneurs. VCs reminded that also failured entrepreneurs are serial entrepreneurs. In Silicon Valley, they see failure as a learning process.

More important part is that we are persons who know how to operate in start-up environment. It means working in small companies, producing solutions to market need with almost with no staff and budget.

When shall I give my presentation to VCs?

To say it shortly: As soon as I can effectively communicate a huge business opportunity. I should also be able to demonstrate that I can sell my software not only in Finland but maybe in UK/Germany/anything, too.

But, we shouldn’t choose our first-choice VC as our first audience. It’s better to give the presentation to somebody else who is able to give honest feedback so that we can make the changes the presentation, or business plan, might need.

Extra hint for policy makers in Finland:

Put more emphasis on your research based technology. Good idea is not enough, but good idea around great (research based) technology. In general, Finns should create departments within universities where domains merge, like bio and IT, or business and engineering.

Introduce students to venture capital. In Silicon Valley, schools are aware of venture capital and business opportunities; venture capital is something about what is talked about in the campuses. VCs actually are around the campus.

Remarks are written down in a panel where Dave Epstein (Crosslink Capital), Curtis Feeny (Voyager Capital), Prashant Shah (Hummer Winblad VP), and Don Wood (Draper Fisher Jurvetson) briefly analyzed their experiences in Finland. Possible interpretations are mine. Thank you VCs.

Part 2: Myth and reality of teams

Pasi Sorvisto — Wed, 10 Jun 2009 13:06:18 +0300

Team work has also caught scientists’ attention. Diane Coutu’s article �Why Teams Don’t Work?� in Harvard Business Review May 2009 is based on interview of leading scientific thinker and expert on teams, Professor J Richard Hackman from Harvard University. Here are some highlights of the interview.

� Teams are often seen as safe places where people can be highly creative and productive. However, research consistently shows that teams underperform their great potential.
� Teams need to be set up carefully to ensure that they have a compelling direction. Small teams whose members stay together for long periods of time perform best.
� Perversely, organizations with the best human resource departments sometimes have less effective teams. That’s because HR tends to focus on improving individual rather than team behavior.
� Leading a team requires enormous courage because authority is always involved, which arouses great anxiety in the team. Great team leaders often encounter resistance so intense it can put their jobs at risk.

According to Hackman, people generally think that teams that work together harmoniously are better and more productive than teams that don’t. �But in a study we conducted on symphonies, we actually found that grumpy orchestras played together slightly better than orchestras in which all the musicians were really quite happy. That’s because the cause-and-effect is the reverse of what most people believe: When we’re productive and we’ve done something good together (and are recognized for it), we feel satisfied, not the other way around. In other words, the mood of the orchestra members after a performance says more about how well they did than the mood beforehand.�

People tend also believe that the more members are in the team, the better results will be achieved. This is also fallacy. Hackman continues: �A colleague and I once did some research showing that as a team gets bigger, the number of links that need to be managed among members goes up at an accelerating, almost exponential rate. It’s managing the links between members that gets teams into trouble. My rule of thumb is no double digits.�

But maybe the most typical problem with the team is that at some point team members become so comfortable and familiar with one another that they start accepting one another’s foibles. As a result performance decreases. Hackman says: �Except for one special type of team, I have not been able to find a shred of evidence to support that premise. There is a study that shows that R&D teams do need an influx of new talent to maintain creativity and freshness � but only at the rate of one person every three to four years. The problem almost always is not that a team gets stale but, rather, that it doesn’t have the chance to settle in.�

Diane Coutu also asked how to prevent team from becoming complacent? Hackmans answer was: deviants. �Every team needs a deviant, someone who can help the team by challenging the tendency to want too much homogeneity, which can stifle creativity and learning. Deviants are the ones who stand back and say, �Well, wait a minute, why are we even doing this at all? What if we looked at the thing backwards or turned it inside out?�

As a conclusion Hackman sets out five basic conditions that leaders (in companies or other organizations) must fulfill in order to create and maintain effective teams:
1. Teams must be real. People have to know who is on the team and who is not. It’s the leader’s job to make that clear.
2. Teams need a compelling direction. Members need to know, and agree on, what they’re supposed to be doing together. Unless a leader articulates a clear direction, there is a real risk that different members will pursue different agendas.
3. Teams need enabling structures. Teams that have poorly designed tasks, the wrong number or mix of members, or fuzzy and unenforced norms of conduct invariably get into trouble.
4. Teams need a supportive organization. The organizational context � including the reward system, the human resource system, and the information system � must facilitate teamwork.
5. Teams need expert coaching. Most executive coaches focus on individual performance, which does not significantly improve teamwork. Teams need coaching as a group in team processes � especially at the beginning, midpoint, and end of a team project.

References:

Coutu, Diane (2009). Why teams don’t work? Harvard Business Review, May 2009. http://hbr.harvardbusiness.org/2009/05/why-teams-dont-work/ar/1

Part 1: Winning teams are built, not born by themselves

Pasi Sorvisto — Mon, 08 Jun 2009 16:06:55 +0300

Team work, team building and team dynamics are hot topics in today’s business and sports world. Tons of books and articles have been written about teams; how to build those and how to improve team work. Team work has been described as a �Midas touch� which makes your company to succeed in business. Team dynamics and spirit have also got special attention in HR departments; think about how many times in your career you have attended to team related workshops, events, recreational days etc.

Because of my coaching and business background, many people think that I am one of those team fanatics preaching the power of teams. To make myself clear; I am not. Teams are fundamental element in many areas of our everyday life. Most of us are members of teams in our job and recreational activities. But, as we all know, all teams are not equal in their ability to produce results.

My passion is to build understanding what the facts and fictions are regarding teams and team work; especially what are the key elements which generate positive results and how to put those in practice. I think that too little attention has been paid to what the reality of the team work in perspective of effectiveness and efficiency is. Still team is the core issue when establishing both new business or renewing existing operations and organizations. A main question is: do we setup the end result already when selecting members of the team?

I have been following NHL playoffs past couple of weeks with great enthusiasm. I have not been only following the results, but also thinking about game strategies, team composition, etc. Detroit Red Wings is once again playing in the NHL finals and going for the 12th Stanley Cup. It is not going to be easy because Pittsburgh Penguins has extremely good and hungry team.

I admit that I truly admire Red Wings consistent ability to succeed year after year. Scotty Bowman (former head coach) era and following years after him have been amazing journey for Red Wings. They have not been a one hit wonder; they have been a serial success. Becoming one hit wonder can be very much dependent on luck, becoming serial winner requires much more.

What is interesting regarding Red Wings team is that it is the most �European team� of the National Hockey League. In their official roster they have eight Swedes, two Finns, two Czechs, two Slovaks and one Russian player. From North America they have nine Canadians and five U.S. players. No other team seems to have as multi-national team and to have as many Europeans in their roster as Red Wings. And going back in time, their roster seems to change controlled way, little by little, over the years. Sustainability and controlled but constant team building seems to be their trademark.

How did they end up building this kind of team or team building culture? Their extremely multi-cultural and multi-lingual team has lots of different background experiences, mental frameworks, visions, and �hockey senses� how to play winning hockey. Doesn’t it generate big difficulties to communicate, manage and collaborate within such a team? Or, could Red Wings success recipe be their vision on how to build and manage highly talented, multi-national and multicultural team, and the ability to build practical strategies for building and managing team?

I don’t believe Red Wings has magic dust or any mystical powers in building winning teams. They have discovered something that their competitors have not, or they are at least better in executing. I think their recipe for building success is based on many elements, and commitment to build winning team is number one issue.

In practical level the most important part of recipe might be the culture and top management’s ability to recruit people which makes strategic fit into their vision of winning team. They are very picky, cautious, and determined in recruiting. They really look forward to getting those people in the team who they believe in. For those people, they provide a real opportunity to play for the championship, to be part of a great team, and an environment to bring their best for the team. Red Wings has also very sophisticated way of preparing new entrants; they test new team members and spend lots of time for preparing them to the culture and values of team. They coach not only how to play, but also how to be essential element of the team.

When discussing the competitive advantages of Detroit Red Wings, Manchester United, FC Barcelona or other serial success teams, there is no question that those tempt talented and successful people. It is always in professional sports and in business that winners attract the best talent and lots of financial resources. But that is not enough; you have to attract also other stakeholders around your team, like sponsors, fans, service providers etc. Major part of the secret sauce for team success might be vision and strategy how to build the team and how to manage all the resources, not only internal ones.

[To be continued]

References:

Detroit Red Wings (2009). Team Roster 2008-09. http://redwings.nhl.com/team/app?service=page&page=TeamPlayers&type=roster

Falling in love with Bay area style entrepreneurship

Katriina Otsamo — Fri, 05 Jun 2009 18:06:31 +0300

In the beginning, I used to think that West coast Americans are power people, marketing and selling minded, thinking big and acting according to that, thus nothing like us modest and honest Finns. Now I realize the real pomposity might live in other place than Silicon Valley. There, they worship entrepreneurs. In Finland, entrepreneur is only a means to achieve something greater, like employment rise, or country’s competitiveness, or just resource for big corporations. Macro issues.

In a pompous world, no one wants to be an entrepreneur. Everybody wants to be either a financier, or a policy-maker, or a consultant giving advice to entrepreneurs. All is based on the presumption that there are entrepreneurs who make the foundation for the economy. Entrepreneurs create need for funding organizations, and business services, and the whole economic system in market economy. In the pompous world, people use words like innovation system, boosting serial entrepreneurship, non-profit business development services� I have a personal problem with macro phenomena because for me, entrepreneurship is about individuals, passion, great personalities, smart people, taking some risk for a change. High growth venturing doesn’t mean renewing the economy for me, it means being able to get VC financing for my company, making my company great, and sharing the profits afterwards with my investor.

And why am I sitting here and writing about dreams, not reality? Due to my business education that has not been giving me kicks lately. Despite my desire to become a real product business entrepreneur, I miss a clear domain. As an engineer, I would have one. Lately, I have been working with medical technology companies which have indeed taught me a lot about that industry but the real substance is still missing.

Some people say that engineers are not optimal entrepreneurs because they sometimes lack business sense; I would love to offer my business sense as soon as someone else provides the techie skills. Silicon Valley VCs put it bluntly: in a start-up, you really need only two guys, the techie and the guy who builds the business. Last person should be a magnetic one; he’s the one who raises the money and attract the best people. In Finland, they say that in order to be able to succeed, you need to be a serial entrepreneur. In Silicon Valley, you don’t need to be serial entrepreneur but a passionate person who has worked in small companies (to realize that you have to create solutions to market needs without staff and budget).

SV VCs put it this way: It’s fine if you have successful serial entrepreneurs who are willing to do the thing again. If you don’t have that kind of persons, you don’t have to aim for serial entrepreneurship because it has no value as such. VCs said that entrepreneurs need some level of naivety, meaning that they don’t yet know what they don’t know so that they are free to aim higher (�to build the biggest company in the world�). Fear of failure was one thing they paid attention to here in Finland. Silicon Valley can handle much better failures that other regions; that is one of the fundamentals of its greatness. From a VCs point of view, entrepreneurs who already succeeded, won’t need your money, and if you can’t invest in those who failured, you only can invest in first-timers � and that is not how it should be.

When I find my techie soulmate, I have a clear plan. We dig ourselves to the market to be able to describe the market opportunity clearly. We identify our first customer abroad and carefully listen to its’ feedback. We put together a business plan and an investor presentation. We represent it not to our first choice investor but somebody else, gathering information on VCs’ opinions. If we get encouraging feedback, we rewrite the plans according to that. We represent it to another VC. If he gets excited, we are going into right direction, and we can think about investing more heavily on our business, and, if getting funded, start disciplined execution.

Until then � thank you for every person who recognizes himself from this personal entry. I have enjoyed discussions with you.

VCs’ presentations are now available for the conference attendees

Katriina Otsamo — Wed, 03 Jun 2009 09:06:58 +0300

Rebekah at Right-Hand Partners has now sent the conference presentations to the attendees. In case you had any problems with receiving or opening the files, please contact me and I’ll help you.

Thank you entrepreneurs and business angels!

Katriina Otsamo — Thu, 28 May 2009 10:05:14 +0300

Our Silicon Valley VC conference last Monday was a huge success. We got messages from you till midnight. Several of you said that the conference was exceptionally fruitful and of high quality level.

I’m sure there will be a series of entries we will write about the themes at the conference. Prashant Shah talked about what VCs want to see in investor presentation packages; Dave Epstein gave a rare overview how VC companies actually proceed internally with potential portfolio companies. Curtis Feeny provided us with a complete term sheet package (black on white, he said with a grin), and Don Wood reminded again that home country of entrepreneurs really doesn’t matter these days � and that many successful companies were founded by people in their twenties.

A former Finnish VC mentioned that Curtis Feeny’s term sheet presentation was worth big money even for VCs themselves, not to mention entrepreneurs. However, all the VCs reminded that they are actually on the same boat with the entrepreneur, each party getting compensated when/if the company is successful.

Thank you VCs! It was a great pleasure to meet you, hear your opinion about VC market and high tech start-up possibilities, and experience the professional way to work.

Thank you Rebekah, you made this happen. �They have to put both legs into their trousers every morning like anyone else� makes me smile every time I remember it. Entrepreneurs, use professionals like Rebekah. She’ll get the best out of you and still always stand beside you.

Ps. We will share the materials with the participants when Rebekah makes it home. Check out this site again.

Where are all the companies who needed funding last year?

Katriina Otsamo — Fri, 08 May 2009 11:05:09 +0300

It started in the end of last year when I read at AlwaysOn that somebody had said that only particularly clueless people ask for introductions to VCs these days. Now I read that �Launch: Silicon Valley� event is not about pitching for funding; it's about generating visibility (for companies that have recently released, or are about to release, their product or service). Why has it become so undesirable to express that you either want or need funding? And, where are those interesting companies who last year wanted and needed early stage funding but did not raise it so far �and they are still going? How can they sell to keep themselves alive if even established corporations cannot sell these days?

I do understand that if you already have raised some funding at a certain valuation and because valuations are so modest now you try to avoid raising additional funding. I am talking more about the very early stage companies who are bootstrapped, and no product in the market, so far. You cannot bootstrap eternally, especially if you did some consultancy work (or anything occasionally revenue generating but not your core business) to fund the pre-seed stage of your company because that market has probably been driven down. If you accept a regular job you have no time to put into your own startup. What I fear most; is current generation of startups going to vanish totally?

On the other hand, quite often you read that now it is an excellent time to establish a startup. Lots of qualified individuals available, time to build your solution to the market need that either saves or earns customers money, grow with the tailwind of economic recovery, and then make the American exit, that is, sell during the high times, compared to European way to invest in the high times and sell in downturn. And yes, this is sarcasm, but not totally made up, see Sitra’s report on this, page 29.

Badly enough, startup entrepreneurs hear this message but at the same time they are not willing to raise capital due to modest valuations, or they just don’t want to look clueless, or they believe that even seed stage investors require to see seven-figure revenue even to discuss an investment opportunity. Without capital, it is hard to get any business grow even if there are plenty of other resources available. Think about it this way: ok, you lose more ownership than you had lost some years ago, you have to be capital efficient, but you get other benefits: time to make your product, lower employees’ salaries, get benefit of opportunities that emerge in the economic recovery. And, if you manage to get funded now, think yourself as one of the most potential ones.

When investment volumes come down, fewer companies get funding. It creates buyers’ dominance in the market. Especially in this situation, entrepreneurs may obey too faithfully every word one maybe-investor has said. Venture capital is about trade; valuation is result of negotiation, risk can be traded into higher expectations of profit, you exchange expectations, not commodities. If somebody doesn’t invest in pre-revenue stage, there are others who do. Some investors are capable of bearing more risk than others; some might simply like you so much that they fund you. Once, an experienced Silicon Valley professional said [about a Finnish CEO&founder] that �yeah, he is one of those guys who always get funded�. So there are people like that, also in Finland.

So, entrepreneur, stand proud. If you want funding, go for it. Remember, first feedback is not exhaustive feedback. According to Artturi Tarjanne from Nexit Ventures, VCs are professionals seeking high growth ventures, so they also need you. You might have something they desperately want, especially if you carefully listen for their feedback and pick up the most relevant pieces. Some of it you can forget. And if you business doesn’t fly, you just choose another idea and you probably won’t make the same misjudgment you made last time.

Ps. By the way, I truly think VCs can give you the best business advice. Others who might give you business advice are not related to your future success because their earning logic is based on other things than your success. Paying a presentation fee for a VC broker is not wasted money even if that particular presentation doesn’t bring you to an actual investment. You get very good, and tough, sparring, too, because VCs are not there to please you.