CMU commencement speech focuses on importance of entrepreneurship

Yesterday, Carnegie Mellon President Cohon emphasized entrepreneurship and innovation across campus as being a key directive for the future of the university, America and the world. In his closing commencement speech for the graduating class of 2011, President Cohon discussed the recipe for entrepreneurship on campus. In addition to the Don Jones Center for Entrepreneurship out of Tepper School of Business, he mentioned the School of Computer Science’s Project Olympus, new courses in innovation in CMU’s engineering school (Carnegie Institute of Technology, or CIT, for which I teach entrepreneurship at both the graduate and undergraduate levels), and the university’s revised technology transfer policies, all of which make it easier for students and faculty to start new businesses.

While CMU has been doing and teaching entrepreneurship since the 1970s, it is only recently, as a result of these new initiatives, that entrepreneurship is taking hold and spreading across campus. Carnegie Mellon’s Vice President of Research calls these efforts our innovation ecosystem where entrepreneurship is more and more a shared ambition among faculty and students. And, while CMU ranks #2 nationally in startup efficiency (defined as the number of startups created per research dollar), we can still do more to encourage and promote successful entrepreneurship and innovations that can change the world.

Thus, we are about to add a new initiative to our innovation ecosystem in the form of a fund, called the Open Field Entrepreneur’s Fund (http://www.cmu.edu/news/archive/2011/May/may15_openfieldentrepreneurs.shtml). This fund is fueled by CMU grad, Jonathan Kaplan, founder of the Flip video camera. The funds will be used to invest in CMU spin out companies by faculty and students. This fund will help to expand and maybe even close the loop on our innovation ecosystem where we do a good job teaching entrepreneurship, where, thanks to Project Olympus and other pragmatic initiatives, we help students and faculty actually start and grow companies, and where now we will be able to fund these companies. This fund will enable CMU to do even better what we already do well!

Portugal travel log, Day 3 (final)

Today was the second day of presenting entrepreneurship and venture investing a l’Americaine to the attendees at the University Technology Entrepreneurial Network event hosted by the university at Aveiro, Portugal. The mandate in Portugal, given the dire economic circumstance, seems to be to emulate the Obama mandate to innovate our way out of this crisis. To do that, the Portuguese are trying to expand their vision beyond the small regional footprint that is Portugal to the larger markets of the rest of the world. This is the purpose of our all-day workshop – to instruct and inspire, to discuss and debate, to deliver suggestions as to how to connect the disparate dots into an entrepreneurial culture that drives innovation, change and economic growth.

Again, the three of us from Carnegie Mellon – Tara Branstad from our Center for Technology Transfer and Enterprise Creation who takes the university point of view, Raymond Vennare, CEO of Thermal Therapeutics, a medical device company just through the FDA and ramping up sales and marketing in the US and, in the near future with a CE Mark, Europe, who takes the entrepreneurial point of view, and me taking the investor perspective – triangulate the presentation Rashomon-like by offering three different views of each core topic.

The subject of today was venture investing and valuation. We start the session by showing a real pitch by an American entrepreneur. As investor, I present the Magic 10, the list of key things that I look for in a pitch. Raymond Vennare gives his Series A pitch (although in reality he is past this phase). As facilitator, I ask them to ask the hard questions, to think like an American investor.

From there we launch into the lexicon of entrepreneurship and venture investing, from which we conduct a mock term-sheet negotiation exercise, where certain groups are venture investors (who have to decide what type, what stage, what domain, etc.), and other groups represent early stage ventures.

We wind up the day with a discussion of the differences and similarities of policies, attitudes and activities around innovation and entrepreneurship in the US and Portugal. Certainly entrepreneurship is different in the US which has a strong history of entrepreneurship and venture capital. Portugal is in its infancy in terms of entrepreneurship and new venture financing. However, we see several trends in Portugal that are of note regarding entrepreneurship and startups. One is that many resources are being devoted to stimulating innovation and entrepreneurship in Portugal, particularly within the university and incubator communities. As a result, the country is teeming with entrepreneurial verve – we see many impressive innovations that have clear commercial potential on an international scale. But Portugal needs to recognize what they have and they need to tell the world. In general, we find that the entrepreneurs are thinking too small. It’s equivalent to a Pennsylvania-based entrepreneur planning to market his/her products and services only in PA!

But Portugal, which invented navigation and once ruled the seas, has put resources into education. The quality of the technologies that we see, the minds of the professors and students that we meet, the fact that they celebrate science and technology from grade school on up (we witnessed the end-of-the-academic-year celebration on a university campus of a middle and high school program that accelerates math and science education) is impressive. If the Portuguese can continue this trend, producing novel technologies and if they can foster the entrepreneurial spirit, knowledge and experience to bring these innovations to market, I believe that we will see much influence on both sides of the Atlantic from this small nation.

Portugal travel log, Day 2

Today I have many thoughts that are a continuation of the conversation at dinner last night, here in this university town of Aveiro, Portugal, where I am here with the Carnegie Mellon contingent to inform and instruct the Portuguese on the subject of “entrepreneurship, American style.” Since the government in Portugal is in crisis, we Americans wonder about the effect of the instability on the people. What I am exposed to here, however, belies that instability. The talk continues, the laughter continues, people still do their jobs and think about the present and the future in the same way. And I witness a vibrancy regarding entrepreneurship – in this tiny country, they are trying to make entrepreneurship happen.

We give a vibrant all-day workshop to about 21 attendees at the university regarding university valuation for licensing to existing companies and to startups. While it might sound dry, it was anything but, given the interactive exercises that Tara Branstad, CMU’s Associate Director of the Center for Technology Transfer and Enterprise Creation, has created. With Tara representing the university, Raymond Vennare, CEO of Thermal Therapeutic Systems, representing the entrepreneur, and me representing the venture investor – and the Portuguese as willing participants – the discussions were very lively!

But, I note that there are some key issues here in Portugal that make me question the entrepreneurial future. One is that the young entrepreneurs that I am meeting are not doing their homework on the market and the competition. I look at their opportunities and think that they have to be thinking of a larger context than Portugal. Europe perhaps? The US? But to do that, and to do that well, you have to really delve into the market and the competition. These young entrepreneurs, far east of Delaware, are not being mentored in how to do this analysis and why it is so critical.

The second thing that bespeaks much is exemplified in the current inability of a university in Portugal (a public institution) to raise money from a donor for naming rights. An example was CMU’s Gates Building, our awesome new home for the School of Computer Science. Mr Bill didn’t pay for all of the building, sure, but enough to get naming rights. That happens all the time in the US, right? In universities, stadiums, all kinds of places. But it doesn’t happen here in Portugal. At all. So the universities (the government?) hamstrings itself by not being able to raise funds from its alums, high net worth individuals (read entrepreneurs). Which leads to a lack of that give back mentality that we have in abundance in the US – we call it mentorship. From my perspective, Portugal is making it harder to create and build companies by not having embedded in its culture an entrepreneurial spirit that trumps bureaucracy!

Portugal travel log

Day 1: I am in this balmy and beautiful country for the second time this year, as a part of a Carnegie Mellon/Portugal partnership around the University Technology Enterprise Network (UTEN) program. The purpose of this trip is to give a series of seminars and workshops around early stage company valuation. Clearly the Portuguese believe that we know how to do this in the US and that they can learn from us – the American way of entrepreneurship. And like several European countries, perhaps all of them, they realize that entrepreneurship is a path out of their current economic mess

We think that there are no jobs in America. But there are really no jobs here in Portugal. The economy is in the tank; the government collapsed in March, the last time that I was here. Two days ago, the Wall Street Journal reported on a $78B European bailout of the country. The article also reported on how little would change as a result of the cash infusion – the workers still get paid for 14 months with 12 months work, etc. If entrepreneurship is ever to take hold in this country, that attitude will have to change. It can’t be about separation of work and home; they will have to fuse and meld, as we have done in the US,  where entrepreneurs are working and living all the time, no separation between the church and state in their world!

Leaving the striking Orient train station bound for Aveiro, a smaller town on the coast in the northern central part of Portugal, we have prepped our talks which will start tomorrow. There are three of us from Pittsburgh and our roles are clear. Tara Branstad, Associate Director of Carnegie Mellon’s Center for Technology Transfer and Enterprise Development, represents the university technology transfer perspective. Raymond Vennare, entrepreneur, whose current venture is Thermal Therapeutic Systems, a medical device startup which has recently received its 510K FDA approval for its novel product and is ramping up for sales and marketing, represents the entrepreneurial perspective. And I represent the investor point of view. Thus, we have triangulated our program to ensure the broadest perspective of multiple points of view about the particular topic of valuation.

Our goal on this trip is to impart valuation information, methodologies and our own experiences to the Portuguese attendees. In addition, we hope to leave them with recommendations of how to do this right, how to encourage entrepreneurship in this smaller European country and maybe not make some mistakes that we have made in the US.

Thoughts on CEOs (of really early stage companies)

There are two types of early-stage CEOs. I call them CEOa and CEOb.

1. CEOa is the domain expert with lots of experience in the industry in which the startup plays. CEOa may also have – is likely to have – a technical background relating to the domain: MS at the least, but maybe PhD and/or MD. While CEOa is technically proficient, he/she really knows (or learned through years of experience in industry) the business side of things. It’s possible that CEOa doesn’t have a spot-on technical background for the startup, but may have a more general technical background that is relevant, such as engineering, software development, etc.And what does CEOa do on a daily basis? He/she charts the path to product development through a deep understanding of customer needs. Leveraging his/her industry/domain expertise, CEOa travels constantly, interacting with customers and landing deals.CEOa will likely need a strong CFO, or second-in-command, who will help build the company and manage operations from the home-base. And while CEOa will be engaged in fundraising, as all CEOs are, the primary responsibility of such may be allocated to someone else.
2. CEOb is a broad-based business person who can’t write a line of code to save their lives. However, CEOb is not intimidated by whatever technology is at the foundation of the company’s core product line. Usually, this type of CEO is more effective if they have been a serial entrepreneur, having gained a significant amount of startup experience along the way. To CEOb, it doesn’t matter if the company is a medical device, a software system, or a soluble plastics firm. But, it is critical that CEOb believe in what the company does.What does CEOb do on a daily basis? He/she leads. He/she builds the team. He/she is excellent at raising funds, and leverages many fundraising contacts. CEOb must be an excellent and dynamic speaker and presenter.He/she may not actually do much specific for the company, but make sure that all the pieces are in place to build a great company. CEOb inspires and motivates others. And, CEOb keeps on doing those things over and over for as long as it takes.

   CEOb will need a strong technical, domain partner. Since he/she is not a techie, nor a domain expert, CEOb is highly dependent upon the partner to meet expectations and to deliver technology and product.  CEOb will need the technology partner with hi/her as they interact with customers.

Obviously, the above categories are not immutable. In my experience, I have seen folks that live in a shade of gray in between CEOa and CEOb. But fundamentally, a company needs to know its CEO and his/her strengths. The two types outlined above should provide some insight and guidance as to the ever-crucial fit between a CEO and a startup.

The 7 Deadly Sins a la entrepreneurism

According to Wikipedia, “the Seven Deadly Sins, also known as Capital Vices or Cardinal Sins, is a classification of the most objectionable vices that has been used since early Christian times to educate and instruct followers concerning (immoral) fallen humanity’s tendency to sin. The final version of the list consists of wrath, greed, sloth, pride, lust, envy, and gluttony.” Do these “sins” transpose to the world of entrepreneurship?

Wrath – We all get wrapped up in what we are doing and an entrepreneur is hyper-focused on their business. But product development, marketing, sales – the whole entrepreneurial endeavor – never goe according to plan, and entrepreneurs who don’t react professionally to the endless cycle of disappointments and defeats does not inspire his/her team to go the extra mile, to stick with it, to persevere in the face of constant rejection – which is what they need to do.

Greed – Entrepreneurs who focus too much on the end game suffer from missing the entrepreneurial point. Is the goal to change the world, to solve problems, or to get rich? Those who are focused too much on a successful financial exit can fail to build what creates value in the first place – a viable operating business. Of course, it’s usually not the entrepreneurs that are greedy; it is the VCs, who have been known to deserve the title vulture capitalists. VCs are almost completely focused on the exit to salve the LPs breathing down their necks, but the shorter term focus – three to five years – is often not long enough to start, build, and reap value.

Sloth – Entrepreneurs are rarely victims themselves of slothfulness. They are usually highly energetic, purposeful and decisive. But woe to the startup team which engages someone who does not share that core value of working hard. Because there is no way to shortcut the fact that hard work is always the basis of bringing an idea from concept to reality. Entrepreneurs recruiting team members should find ways of testing people as to their ability to work hard and long.

Pride – Entrepreneurs have to be proud of their vision, proud of their accomplishments, but some veer to the extreme into arrogance. And this turns everybody off. Since most successes stem from team effort not one person it is important for entrepreneurs to be team players and it’s unpleasant to be on  a team where one person is a jerk.

Lust – Entrepreneurs often fall in love with their solution without knowing if customers actually want or value that solution. Rarely do I see an entrepreneur that has done adequate homework on the MARKET opportunity. The lesson: do your market research, then do it again (because you can never do enough market research). Be customer driven, not product or technology driven.

Envy – Entrepreneurs vie for customers from someone – their competitors. Start ups compete for grants, contracts, investment – they look at the competition but they don’t always SEE the competition. Entrepreneurs in early stage companies have to be chauvinistic about developing competitive barriers and unfair advantages in their product and service offerings. They need to spend time reviewing and understanding the competition deeply so that they can differentiate themselves in the market. Of course, to do that, they have to UNDERSTAND the market!

Gluttony – The entrepreneurial culture can lead to over excesses including trying to do too much. Most successful businesses started off with a singular purpose and focus – one product that solved one problem. This can be labeled too nichey, but there is nothing like a good niche as a place to start. Expanding from a base of strength is always better than failing to get traction due to lack of focus.

Thoughts on When to Form the Company by Babs Carryer

First time entrepreneurs often ask me “when should I form the company?” What does form the company mean? Does it mean come up with the idea for the core product/service for the company? Does it mean making a decision with a co-founder(s) to do a start up and then brainstorming ideas? Does it mean actually pulling the trigger on the legal formation of a newco? The answer to the “when” question is that it depends on how you define “form.”

Forming the legal entity is probably the last thing that you will do assuming that you will do what is most important first. Here are a few guides to help you decide when and how to form a company.

1. Rather than think about a company, think about the problem that you are trying to solve: do you see a clear market need? If yes, can you provide/build a product or solution?
2. If yes to the above, can you build in competitive barriers, unfair advantages? You need to really ask yourself, “can this be the basis for a company or is it something that should be licensed to an existing company?”
3. If you believe that your innovation warrants a company, do you want to do this alone? Alternatively, you may have already answered this by using others to brainstorm about the marketplace problem and the solution.
4. If you have or want co-founders, how many, how do you find them, and how do you split the equity?
   1. A total of two to three co-founders is optimal. More gets complicated with defining roles and commitment.
   2. You have to recruit co-founders like you do investors. You have to tell a great story and convince people of your opportunity. This means that you don’t wait until you have the co-founders to research and identify the opportunity; you move forward and get better, more articulate, and more convincing as time moves on. Finding co-founders is best done via networking: tell everyone what you are doing and ask people for referrals. Given the six (or fewer) degrees of separation inherent in the entrepreneurial world, networking will help you will find others that are happy to adopt your vision.
   3. There are some great thoughts on how to split equity that are already out there. Noam Wasserman has some good thoughts in his “Founder Frustrations” blog (http://founderresearch.blogspot.com or on the Project Olympus Entrepreneurial Corner: http://www.olympus.cs.cmu.edu/entrepreneurial). Frank Demmler’s Founders’ Pie Calculator is also one of the better article (http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%20Calculator.htm or on the Project Olympus Entrepreneurial Corner: http://www.olympus.cs.cmu.edu/entrepreneurial). In his calculator, Frank (adjunct professor of entrepreneurship for Carnegie Mellon University and Director, Entrepreneurial Executive Teams for Innovation Works) provides a rationale for equity splits that are based on contribution. My advice? Decide and agree upon an equity split relatively early – before you go too much further and end up with a nasty breakup as a result of mismatched expectations!
   4. Put it in writing! Throw into the equity discussion ongoing roles and responsibilities and you have the beginnings of a shareholders’ agreement, which will document in writing what happens in the event of a divorce between the co-founders, or other situations that might occur in an uncertain future. You need a document that outlines what happens in this and other situations because you need to protect yourself and the company.
5. Conduct the market research by talking to potential customers to validate that your solution will be accepted in the marketplace. Stay customer focused! A business is only a business IF it has a product/service that customers will buy!
6. Build an initial business plan, not to prove that you know how to write an award-winning plan, but so that you have some thoughts and direction on paper that validate your assumptions.
7. Interview several start up lawyers based on referrals and pick one. Make sure that the lawyer is VERY experienced with start ups and their unique issues. Make sure that you are clear on billing and pricing. A good start up lawyer should attend your board meetings sans charge! Ask for estimates for particular tasks (entity formation/filing, stock option plan creation, CDA, consulting agreement, employment agreement). And do your homework on the various legal entities. Come with questions rather than a blank page about C corporations, Subchapter S corporations, Limited Liability Companies (LLC), etc.
8. Do the same (interview and pick one) for an accountant or accounting firm that is VERY familiar with start ups. Get an understanding up front of what will be required in addition to tax preparation (who is doing the day-to-day bookeeping, payroll, etc.).
9. Pull the trigger on the legal formation when something occurs which necessitates having a company:
   1. Landing a customer which means revenue or a contract.
   2. Hiring an employee or consultant (sometimes you can get by with the latter even before you form the entity).
   3. Raising financing.

   10. Along with incorporating, form your initial board of directors (see “Thoughts on boards,” the previous post in this blog).

Thoughts on Boards – directors and advisors, especially for early stage companies by Babs Carryer

• For an early stage company, a small Board of Directors (BoD) is better.
• An odd number is preferred (for obvious voting reasons); one is too small; so three is optimal.
• One insider from the founders, one industry expert and one who can add value through his/her experience with startups, or a particular domain expertise.
• BoDs for early stage companies need to be actively engaged. Hold monthly meetings; two-to three-hour duration with tightly defined agendas; task assignments and homework provided in-between. Monthlies can be via phone; quarterlies should be face-to-face.
• Annual term. Stand for reelection (or appointment by contract) each time. No staggered terms needed; those can mostly be reserved for very large boards in public companies.
• Given the primary responsibility/duty of a Board Director is as a fiduciary for the shareholders (and also of the creditors when the company is in the “zone of insolvency”), and a closely related second responsibility is to recruit/retain the CEO (and also to quickly recognize when a new CEO is needed to replace the current executive), it is critically important not to simply add directors who may possess great marketplace and business building skills and forget to determine their knowledge about governance. A company can overcome lack of board governance experience if it has a very strong and knowledgeable Chairperson who can ensure that the others directors act properly. The inexperienced board members are expected to quickly learn their duties and governance issues under the Chairperson’s guidance.
• Directors incur liability as fiduciaries for a company; thus they may require Directors and Officers Insurance (D&O). This is common and most insurance companies offer this type of policy ranging in annual premiums from $1750 to $4500, depending on what is needed.
• Obviously an early stage company may have difficulty attracting competent directors who can provide significant business opportunity and strategic skills, much less add the governance/CEO management piece. So if you need to augment the management team in areas of strategy, deep industry knowledge, or marketing/technology/partner expertise, then add those members to an Advisory Board. Further, there may be some candidates that are very good at the strategy piece, and/or be very useful filling gaps, but do not want the responsibility or potential risk of accepting a directorship. Again, a good Advisory Board fit.
• Whatever the mix of BoD and Advisory Board, the BoD cannot basically be ignorant of their duties or otherwise shareholders will not be well served.
• In addition to acting as a fiduciary for shareholders and recruiting and managing the CEO, directors for an early stage company should be involved in managing the affairs of the corporation. This does not mean that they run the company; rather their responsibilities might include: ensuring that the organization has an appropriate strategic planning process, reviewing outputs from the strategic planning process, understanding what is being developed and approving the strategic direction for the organization, learning the business and the industry well enough to have a well-formed perspective on the benefits and risks of the organization’s strategic direction, monitoring to ensure that strategies are being executed as planned and expected outputs are being achieved, and monitoring to ensure that the BoD is governing effectively.
• Directors are expected to work and provide significant value. Directors should be able to do whatever the company needs, from picking up the phone to make introductions, to facilitating strategic partnerships, fundraising, legal/accounting/banking relationships and the like.
• The corporation should adopt and enforce a “continual director improvement/replacement” policy or approach that says a director is elected/appointed for one year, but the director formally/absolutely agrees that, in the event a significantly better director is identified, the weaker director resigns their post to enable the better candidate the seat.
• Regarding director compensation, the company should expect to reserve approximately 20% of the option pool for directors. Therefore, in the case of a 20% company stock option pool, 4% is reserved for directors. Each director could be granted, for example, 1/2 of one percent of the fully-diluted shares in Non Qualified Stock Options (NQSOs) of the corporation to be vested over three to four years.
• Regarding expenses (a minor point but often over-looked), the company should reimburse each of the directors for all reasonable out-of-pocket expenses incurred while attending meetings of the BoD, meetings of committees of the BoD, and on company-approved business.
• Advisors should also be compensated but at an amount less than directors (since they take less risk and have no “formal” duties/responsibilities). For example, advisors could be compensated at half that of directors, or one quarter of one percent of the fully-diluted shares in NQSOs of the corporation, also vested over three to four years.

Early-stage Funding is Up – Babs Carryer

A couple of weeks ago, the Pittsburgh Business Times published an article, “Early-stage funding on the rise, according to new study,” http://pittsburgh.bizjournals.com/pittsburgh/stories/2010/05/17/story9.html. The article stemmed from a new study from the National Association of Seed and Venture Funds and Temple University’s Fox School of Business. One of the more interesting statistics for the year ending March 31, 2010 was that funds are favoring smaller size investments as investments over $1M dropped from 29.1%  from the previous year to 10.4%. That’s great news for all of us entrepreneurs who may be looking for seed financing.

The valley of death is sometimes what the gap between seed stage and early funding is sometimes called. Of course, there are many valleys of death for a start-up, sometimes multiple valleys occur on the same day! But filling the funding gap is critical to our ability to innovate and push humanity forward. So, TBEDs (Technology-Based Economic Development organizations), angels, early-stage VCs (and when I say early I mean earlier than that!), university initiatives, and incubators step in where others fear to tread.
But, is traditional financing the only way to go for entrepreneurs? What is out there that is new and innovative about how to get fledgling companies off the ground? Please comment!

Exits are looking up – Babs Carryer

On Wednesday, the Wall Street Journal reported VentureSource’s recent statistics in “Start-Ups Begin to Find  Buyers After Drought” . The stats are that recently 15 VC-backed companies merged or were acquired by larger companies, 14 venture-backed companies went public, and dozens more are in the IPO pipeline. The uptick in deal flow is making the venture capital community drool that good times are coming again.

The stats belie the entrepreneurial problems that still exist: the venture capital model has led to most VC firms investing in later stage companies; companies that are capable of acquiring start-ups (because they have the cash and other resources to bring new products to market) have lower risk tolerance; it is harder than ever to get a new company off the ground (obtain funding for product development); and exits have proved to be longer than the life of many VC firms.

Does this discourage new company formation? As with all challenges, entrepreneurs have risen to the occasion with new (or old) strategies for bootstrapping, self-funding, partnering, and general creative ways to start companies because not starting new ventures is NOT an option! No matter how difficult it is, entrepreneurs keep starting new ventures because they believe in changing the world for the better with new ways of doing things. The entrepreneurial spirit has been strengthened by the changes in the market that have forced new ways of starting and growing a business.

Now that exits are becoming more viable, and VC funding is on the rise, entrepreneurs need to realize that they are in the driver’s seat. What they have collectively learned during the downturn, that they can still start companies that can thrive in spite of the lack of VC funding,  in spite of companies that are willing to take risks, is important to move our economy forward. Because the entrepreneurial spirit just won’t die, no matter what! Outside funding is important, sometimes critical. Exits are great, particularly when they provide wealth and returns to shareholders. It’s just that this path is not the only way. When times are tough, entrepreneurs need to remember to never ever ever ever give up but to find new ways of doing start-up.