Joe Caruso's blog

An article in today's Boston Globe by Scott Kirsner entitled "Can Massachusetts Produce the Next Google?" sends a great message.  We are not building big companies, not because we can't, but because we're not trying.  We're all thinking too much about short-term financial gain.  We need more role models where "success" is not a quick flip to make a quick buck, but rather building something with legacy potential....

His article prompted me to dust off an article I had written last year for Mass High Tech, entitled "Build Big Companies, not Big Exits".  Scott and I are beating the same drum (and hopefully entrepreneurs will listen, and alter their aspirations slightly).  

Here's the full text of my earlier article:

In recent years, there has been a lot of talk about how vibrant the environment for technology startups is in Silicon Valley compared to Boston. We hear how “they” have a much more active venture/angel infrastructure and how “they” build great companies, while our startups sell out in their infancy.

People in the high-tech community lament that Boston used to be THE center of high technology success — Digital, Data General, Wang and others of a bygone era are frequently mentioned wistfully — but in the last 20 years we have stopped growing major companies… while “home run” successes like Microsoft, Cisco, Google, Amazon, eBay and the like have been limited to the West Coast. In fact, we do have EMC, Analog Devices, Staples, Akamai, Biogen, Boston Scientific and emerging successes like Constant Contact, A123, LogMeIn, ACME Packet, EnerNoc, ZipCar, iRobot and others. We have lots of companies to be proud of, but apparently not as many world-renowned companies as Silicon Valley has created.

While much of the Silicon Valley/128 comparison is factually correct (there are more venture capital dollars in Silicon Valley; there are more deals; there have been more IPOs, etc.), the tone of the discussion makes it sound like Boston/128 has failed. I call it the “Rodney Dangerfield” effect: The Massachusetts technology community just doesn’t get any respect anymore.

I’ve been an angel investor for a number of years, and I have heard lots of commentary and seen many shifts in strategy and mindset in the venture capital and angel communities. It is time for another shift. I have a simple solution to the dearth of “home run” successes in Boston. I propose that we eliminate the question “What is your exit strategy?” from all investor interrogations of startups. Instead, let’s concentrate on how one builds a successful business.

I’m not sure where the emphasis on exit strategies from the get-go began. It was probably an MBA course that said all business plans must explain how investors will achieve liquidity, or perhaps it was from a period when venture capital funds had a heavy mix of 8-year-old illiquid companies. Somewhere along the line, describing your exit strategy before your company really got started became a must. But think about it: How many successful exit strategies are there?  Go public or sell the company. Are there others? 

Here’s the problem. If we aim for an exit from the start, we’re likely to get what we aim for: an exit, often through a sale to another company, perhaps one from the West Coast. On the other hand, if we aim to build great companies, we’re more likely to build the kind of company that does the acquiring.  

The metaphor of “exits” is an apt one.  If we’re thinking about exits when driving on a highway, then we slow down each time we approach one, asking “Is this the right one?” However, if we’re driving across the country focused on a goal of, say, seeing the Grand Canyon, we fly by the exits along the way, eager to reach our larger goal.  If we hear reports that the road to the Grand Canyon has developed a lot of potholes, we can turn off along the way. But let’s not have our goal be to turn off along the way.

Like all metaphors, this one is not to be taken too literally. There often are companies not designed to go all the way to the Grand Canyon, but if we plan on only driving a few exits, we’ll end up designing a lousy car, one that’s not reliable, not designed to go long distances, and one not capable of high performance.

As a longtime angel investor, I’m not insensitive to the need for liquidity.  I just think that focusing too much on liquidity too early on can sell our startups short. Let’s try this for a few years. Maybe we’ll find we stop wistfully talking about the good old days, and start talking about all the great, world-class companies that are growing in Massachusetts — once again. 

I am quite fond of getting to the essence of things... often by "dumbing down" to a simple phrase or metaphor, to make a concept easily understood and communicated.

When I saw the blog by Martin Zwilling @startupPro about the new book Nail It then Scale It: The Entrepreneur's Guide to Creating and Managing Breakthrough Innovation it resonated with me, because it's been a message I've tried to give to entrepreneurs for years, but in a less elegant manner.

I haven't read the book.... but in my simplistic way, I've latched on to the conept implied by the title.  These guys have distilled nicely the essence of bootstrapping, capital efficiency, voice of the customer, and a bunch of other important concepts in one..... and all in five words.

Figure out a business model that works on as few dollars as possible... THEN raise a bunch of money to scale it.  If you raise a bunch of money first, you'll spend it all on "nailing it", and won't have any left to "scale it".

There have been a number of indications the last 9 months that things are getting frothy in certain aspects of the startup world.  Some crazy valuations... angels chasing deals and writing checks w/o ever meeting, or in some cases w/o even speaking with the founding team.

I personally have seen some deals in the $100M and $200M valuation range... deals where there has been some traction... some revenue.... but investors seem to be chasing the hot ones without letting valuation get in the way....Although full disclosure: in one of those deals, I do think the valuation will be justified in a few years.

Another more notable indicator arrived in my inbox today.....a raw startup, whose plan shows growth from $0 revenue to $1.4 BILLION in revenue in four years .... with over $250 Million in profit in year four (that's not Gross Profit... that's not EBITDA... that's NET profit over $250 million in year four).... and more interesting.... cumulative losses before they become profitable are only $700K.

While there is some chance I'll be kicking myself for not diving in (I probably would have passed on Twitter, YouTube, Facebook, Groupon and a few more winners), but I have begun doing something I haven't done in a while... passing on deals just because of what I perceive as inflated expectations.... including price.

Entrepreneurs are letting the recent Groupon/Dropbox success affect their expectations.... and in many cases investors are doing the same.

This is one old fart who (hopefully) won't get sucked in.

(by the way, I DID get sucked in in 1999... about six months too late...so I hope the whole movie isn't a re-run... only the trailer....)

A few years ago, while driving to Maine for a long weekend, I received a call from a woman looking to raise money for her early stage venture. She said she offered a line of luxury cat furniture. "Excuse me?", I asked. "Luxury cat furniture" she repeated.. going on to explain that hers was not ordinary cat furniture, but furniture designed with fashion, style, and comfort in mind. This struck me as so ridiculous that I started to giggle..forcing me to mute my cellphone while she explained her competitive advantages and unique market positioning. I had to pull to the side of the road to regain my composure. As nicely and professionally as I could, all the while biting my lip to keep from laughing, I explained that it was not a market I understood, and I preferred to avoid consumer products as being too alien to my background to take the risk.... and wished her well.

A few weeks later I ran into a friend of mine who used to own a regional chain of pet supply stores, and described for him my humorous encounter with the "cat furniture lady". He went on to explain with enthusiasm how cat furniture was the single highest margin product category he had in his years of retailing pet supplies, and how it represented the most passionate, loyal segment of his customer base.

Boy, didn't I feel like an idiot (a not-infrequent feeling :-). Lesson learned? - at least ASK an expert his/her opinion before jumping to conclusions. Having said this, I am NOT suggesting automatically relying on the "expert", since I have other examples where supposed experts have expressed disdain about a company that was ultimately successful. The larger lesson: get input from experts, let their knowledge temper your judgment, but don't blindly follow their advice.

Thought for the day:   Everybody is ignorant, only on different subjects. -- Will Rogers

How do you know you have a dependable team?  When you no longer feel the need (nor even have the inclination) to "check up" on each other.  I view dependability the way a trapeze artist views (and needs) a dependable partner.  When he/she leaps off the trapeze bar and throws her arms back, she KNOWS someone will be there to catch her, without having to look over her shoulder first.  Business teams should have that same characteristic.... you just KNOW your fellow team member will fill his/her part of the assignment.

I have also used a slightly different metaphor to make a similar point: there are some people, who, if on January 1 say they'll meet you at 8:00 AM on March 14th, you just know they'll be there... without need to reconfirm... and there are others who say "I'll meet you at 2:00 PM today", and you half expect them to cancel/not show up/or be late.

Regardless of the metaphor you prefer, if your team does not share the trust and mutual respect implied by these examples, then you should have a frank conversation among yourselves and change the team.

Thought for the day:  Trust is the foundation of all good relationships. -- Brian Koslow

I sometimes come up with metaphors that pop to mind in the moment, but don't become part of my conscious memory. (as you age, you, too, will experience this trait :-). I recently had an entrepreneur tell me how in the six months following his successful fundraising, he frequently recalled my story of the nurseryman selling trees, and how instrumental the metaphor was in getting him over the "hump" of valuation. I didn't remember the conversation, but he said it had served as an important reminder that led to a successful closing. The story?

Earlier in the year he had been having a difficult time raising money. I explained that one of the factors might have been that he was overpricing the deal (no, that's not always the reason for not reaching closure, but I knew what they were asking, and sort of "knew" it would not be where the VC's would end up). His retort: "but we've made SO much progress in the last six months... we're clearly worth more than we were asking when we started raising money".. to which I explained: You're just like the man who owns a nursery.. and has a rare tree for sale for $500. He goes the whole year without selling it, but the following year says "it's taller now... so it's worth $600"... and sure enough, five years later he has the same tree in stock at an asking price of $1,500.. never having sold it. Clearly, while the tree was "worth more" each year, it was never worth what he was asking. Don't be offended if the market doesn't agree with your personal assessment...either wait until the market smartens up... or change how you are positioning the company.... or broaden the scope of your efforts.... or accept the reality that if you want money TODAY, you need to accept what the market is willing to pay TODAY. Don't let emotions get in the way of assessing reality.

Thought for the day: It's better to change your opinion on the basis of information than to change your information on the basis of opinion -- Dr. Mardy Grothe

We used to have a dog... Gretchen...... a wildly enthusiastic puppy with boundless energy and enthusiasm.  Each night, we'd tie her to our wood-burning stove in the kitchen (she wasn't house trained, and we wanted to minimize the "damage" her eager roaming might cause).  Each morning when I came down to the kitchen, she would come bounding toward me, until brought up short by the leash.  It took only a few days for Gretchen to learn that she could only move about five feet from the wood burning stove.  On subsequent mornings, she would jump out of her bed, and sit about 4.5 feet from the stove..... just the amount allowed by her leash.  As Gretchen became house trained, we stopped tying her to the stove.... but kept her bed next to the stove.  Every morning for the next ten years, Gretchen never jumped past her 4.5 foot "fence"...even though she was free to do so.  She knew her limits.... or at least what she THOUGHT were her limits.

I’ve used that story many times to encourage employees to not be bound by historical limits….and have used it with CEO”s to make sure their own early policies and management style didn’t send signals to their employees that there was a leash restricting their potential.

Thought for the day:   Whether you think you can or think you can't - Either way, you're right.-- Henry Ford

A friend of mine, Clint Battersby, passed away last week.

He was young... at least by my standards (53)... having fought a losing battle with cancer.  We had talked occasionally since his diagnosis... and got together once when he was physically up for it... He had an amazingly philosophical attitude towards his situation.. Always talking about "making the best of it".. and always talking about life's priorities - his wife Maria, his kids Alexandra and Andrew, and how his faith was helping him deal with things.

During my last conversation... a few weeks ago, his tone changed.  When I asked how he was doing, his only comment was "life sucks".

Something for us all to keep in mind when we are feeling stressed.  Whenever we think "life sucks".... compare it with Clint's life this last year... and life looks pretty wonderful.. or at least something we should all appreciate more.

Thought for the day:  Not life, but good life, is to be chiefly valued. --  Socrates

Every potitician I've heard speak the last few years has shouted the mantra of "Jobs, Jobs, Jobs"..

A few years ago the US government spent $1 Trillion dollars to stimulate the US economy, with one of the primary objectives (other than preventing financial meltdown), to stimulate jobs (The American Recovery and Reinvestment Act).

Much has been made of the 3 million jobs created (and/or "not lost".... a term I'm not sure has substance).

WHAT IF, instead, we had invested $1 Million in each of ONE MILLION new companies.... yes, that could have been ONE MILLION new companies.

How many jobs do you think those one million companies would have created... my guess is, at least ten million in the short term... and who knows how many in five years.

Food for thought.

Thought for the day:  A lone amateur built the ark.  The Titanic was built by professionals. -- Unknown

As year two of BREW approaches, I continue to be asked "how did BREW come about?".... 

Here's an entry I made on the BREW blog last year.... 

"While there is a deep underlying set of factors that led to BREW (my career, interests, philosophy, DNA, etc. :-)…. The seminal moment, like that of many startups, was serendipitous and, perhaps, a trifle mundane.

Bill Warner and I had just agreed to get involved in Jason Cascanis’ Open Angel Forum, and were discussing the next event being in October, with Jason flying in from California to participate.  Bill asked if Jason would be interested in being a mentor for Bill’s unConference...suggesting we could schedule the Open Angel Forum about the same time… and mentioned that Jason might also be interested in seeing the Mass Challenge event occurring several days later.  I chimed in with the idea of trying to schedule a few other events that week….to fill in the gap between the unConference and MassChallenge.

…. I then begin thinking about how much we have in the way of things LIKE Mass Challenge and the unConference….with little recognition even from our own community of the richness of what we have in the area…. I latched onto the idea of “a something” that would be like a “weeklong First Night”… several days of activities, centered around a single theme.

The next day Dharmesh Shah suggested I needed an attention-getting name to promote the idea… and suggested BREW - Boston Region Entrepreneurship Week.

Sounded catchy to me… the thought of October… BREW… Oktoberfest… why not have a beer company come up with an "Entrepreneur’s Brew”...have a party…. Etc.

I started a LinkedIn Group, invited several dozen thought leaders… with a view to brainstorming and soliciting ideas.  50 people signed up.  George McQuilken blogged about it… 100 people signed up.  Scott Kirsner blogged about it .... another 100 people signed up… and it began to take on a life of its own…."

The inaugural year was gratifying.  Thanks to some great help from Bobbie Carlton and Christine Sierra, BREW expanded to the whole month of October... almost 100 events... 20% of which were created strictly because of BREW...  things like a great session put on at Harvard Business School by Mike Roberts that had Staples' founder, Tom Stemberg sharing his war stories with a few hundred entrepreneurs.  

This year things have expanded.  The Commonwealth of Massachusetts is inviting entrepreneurs from overseas to see what we have to offer.... and what is the destination?.... BREW... a series of BREW events that will appeal to (and be an attraction for) entrepreneurs thinking of coming to the United States.  We have over a dozen successful entrepreneurs having 1-1 lunch meetings with aspiring entrepreneurs.  We have VC's holding a series of office hours during BREW..... Entrepreneurs competing for free office furniture, a year's free rent, and more ... (and, as the vegomatic sales guy says... MUCH, MUCH more...... ).

By the way... if you want to become part of BREW, then join the BREW LinkedIn Group, "friend" us on Facebook, come up with some creative ideas for an event between October 12 and October 28... or if you are already planning an event... especially those of you with established organizations... and help us show off what we have.

Thought for the day:  A culture gets what it celebrates. -- Josh Wolfe