BUSINESS BLOGS
BUSINESS BLOGS
category: business
16 Mar 2008

Sequoia’s Mike Moritz looks for frugality in entrepreneurs before investing in their project.  His investment checklist includes:

- Clarity of purpose. Great companies can be summarized in a single sentence.
- Large markets. Buy where there’s a billion to be made. At least.
- Rich customers. You don’t need me to explain this, right?
- Focus. Simple products with obvious value are easy to sell.
- Pain killers. Great businesses solve a real problem facing consumers.
- Think differently. Inventive firms drive their competition nuts.
- Team DNA. Talent attracts talent, and talent usually produces excellent returns.
- Agility. Being first to new markets matters.
- Frugality. Great managers allocate capital only where they must.
- Inferno. Excellent businesses produce huge returns from even small doses of capital.

Moritz’s Sequoia did not invest in troubled company Jobster, but it did in Podshow, another company going through some rough spots.

From Paid Content:

Jobster, the much-hyped and heavily funded online-recruitment-meets-social-networking service, is out looking for more money, after burning through most of the $48 million it has raised since 2005. Founder and CEO Jason Goldberg left the company late last year, and has started a new social news site. Jobster, under new management, is now looking to raise more money, reports ERE.net. In a letter sent to investors, quoted in the story, the company lost about $11 million in 2007 and has less than $3 million left in the bank. Its burn rate about $1 million a month, an amount calculated from information contained in the shareholder letter, the story says.

Jobster has raised the previous funding from Ignition Partners, Mayfield, Reed Elsevier Ventures and Trinity Partners, and in 2006, after buying a few sites, laid off 60 employees, about 40 percent of its workforce. With the economy slowing down, recruitment startups may be heading into tougher times.

$1M / month? Really? That’s not a startup anymore, that’s a black hole.Of course, it’s fine for a company to spend $1M, but then they better have a lot to show for it.

Elsewhere, Valleywag reports that Podshow will be firing 20 of 60 employees. Sequoia has actually invested in Podshow (along with Kleiner Perkins). I am not sure if Moritz had misplaced his investment checklist but Podshow’s legacy doesn’t exactly conjure images of frugality:

PodShow, the San Francisco-based online-video network best known for launching the career of CNET’s Natali Del Conte, is laying off about 20 employees, or as much as 30 percent of its staff.

What on earth does a podcasting company need 60 employees for?

Madness I tell you, madness.  We could build an empire with $1M or 20 employees, let alone a monthly burn of $1M and 60 employees. In fact, we sort of have already with neither one nor the other.  Mind you, we don’t do podcasts… and by definition: the cost of podcasts should be low, no?

Taboos: Thinking about Revenues and Costs…

Speaking of Valleywag: writer Nicholas Carlson made fun of me for saying that the reason why these things happen is because VCs - who usually lack advertising and sales experience - start to build out companies with the expectation that their lofty revenue targets will materialize.

In fact, many entrepreneurs rarely have actual sales experience so they sign off on forecasts that are unrealistic. Some poor VP of Sales - eager to please the egopreneur - will “sort of agree” to the numbers until he or she realizes that they jumped the gun and their bullishness was misplaced.

I have been in many situations where I see a salesman agree to a figure because if he does not, the CEO or founder will find someone else who will. At my last gig, I fell backwards into the Sales VP role so I did not have much time to have that kind of friction with my President. I was also much more aggressive with sales and our VC was more of an angel so he was somewhat hands off. But ultimately, by year 5 of our courtship, as my CEO was looking to sell the company, he was asking for numbers that remained a bit lofty; but the fact was: the model was developed.

I doubt Jobster or Podshow even know what revenue streams they will really have, let alone what those actual figures will look like.

Of course, by the time everyone realizes this, it’s too late. This is what Fred Wilson accurately describes as the main reason why VC-backed ventures fail: you invest money chasing the wrong business plan. It’s like Mutt Lange used to tell Def Leppard guitarist Phil Collen: “just because you practice every day does not mean you are getting better, if your technique is wrong, you actually get worse”. I am paraphrasing, but you get the idea.

With startups: usually forecasts aren’t worth the paper they’re printed on… so the revenues sag but the expenses pile on, especially when VCs enter the landscape, thinking that the only remedy for defensibility is some money, money and more money.

This is what you are seeing with Jobster and Podshow (I presume). I don’t really wish either company any ill will and hope they can turn things around, but it’s crazy that Jobster has raised nearly $50M and investors are even considering putting in any more money. And then you wonder why the financial markets are tanking.

Misplaced Bets on Revenue?

I cannot really comment on Jobster, that’s not my market; but with Podshow (I don’t know them at all, but if it involves video content, then I know it like the back of my hand), I do not see why they piled on the expenses while online video advertising remained so embryonic.

Who knows, maybe they are raking in the revenues, but if they were, they would not be laying anyone off, right?

For purposes of illustration, imagine if their sales strategy for monetizing streams revolved around pre-roll advertising but then they subsequently find out that users shunned these and advertisers eventually adopted something else. That’s a tactical error… now project such mistakes or wrong bets across both strategic and tactical areas and you start to realize why some companies fail.

People Matters

I do not know Podshow founder Adam Curry, I am sure he is a nice, smart man.  Judging by his biography, he is no newbie to the Web. He did, after all, register MTV.com back in 1993 (I was 15 years old, for God’s sake!).  But he remains a TV guy trying to do online video and this creates some obstacles.  Why?  Let’s first examine the company’s funding:

According to Wikipedia, by the end of 2006, total VC investment in the company stood at $23M.  $23M?

A challenge some online video companies invariably face is that they set up really cost-heavy organizations because their founders hail from TV and basically bring their bag of expensive tricks to the Web.

I personally think it is easier for web entrepreneurs to do online video content (so long as they can tell stories) than it is for TV execs to move online.  Rarely do they understand the intricacies of online marketing and these variables (along with keeping costs down in early days) are more important than being a good story teller alone.

Then again, this is moot in some cases, because the most experienced TV executives can raise so much money that they never run out of capital… even if it means that they have to become fundinistas.

Had Jobster or Podshow not raised boatloads of cash, I am sure someone would come and buy them out, for one reason or another.  We do believe that 2008 is the year of micro deals… but when a company has raised so much money, it takes a very large checkbook to be able to please financial backers… meaning that sometimes, the only option is to scale back.