Yahoo has a pretty miserable track record when it comes to startup acquisitions, a roll-call of the doomed and soon-to-be forgotten that includes Flickr, Delicious, MyBlogLog and several others that may or may not be trapped in “sunset” mode. But it’s not just Yahoo, of course: Google has also made a series of startup acquisitions that went nowhere, including the purchase of Dodgeball — which languished until founder Dennis Crowley left to create Foursquare — and the acquisition of Blogger, which also withered on the vine for the most part after the company bought it. The reality is that most of these big startup acquisitions fail, and likely always will.

One of the standout talks at Start-up School came from Dalton Caldwell, the founder of defunct music startup imeem who is now running his second company, picplz. If you’ve ever considered launching a music startup yourself, or wondered why so many seem to falter, it’s really a must-watch. We’ve embedded a video of his full talk here, and he’s also given us the slides so you can take your time reading through some of the data points he lists off.

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Engineers aren’t perfect. Flaws in software and hardware design are only natural in the tech industry. But what is not commonplace is knowing how to effectively deal with the fallout when engineering flaws become known.

Apple’s “Antennagate” is the most recent high-profile product flaw at a tech company, and one that, so far, has left Apple (mostly) unscathed. Their example offers startups a prime example on how to adroitly handle a product-flaw crisis.

Eric Dezenhall, a highly regarded Washington, D.C.-based crisis management expert, begins his analyses by reviewing three questions the public asks when high-profile mistakes are made:

• Was the sin episodic or chronic?
• Has there been sufficient repentance?
• Do we like you?

The public will weigh the responses to the above questions and then render a judgment as to whether the mistake is forgivable. When it comes to Antennagate, it’s instructive to analyze how Apple was able to frame their response around these questions. The result offers three lessons for smaller tech startups that don’t have the resources Apple does to address a product flaw.

As Cohen noted, it's a result of seeing so many pitches that investors can offer insights into what works and what doesn't work in a pitch. Here are a few of the most common mistakes that Cohen along with other investors list:

1. The pitch lacks clarity

You should be able to give a clear description of what your company does - what needs it meets and how it does so. This should be short and succinct - think "elevator pitch."

2. You don't talk about your team

As Chris Dixon suggests, you want to pitch yourself not your ideas. In other words, it's important to be able to describe what it is about you and your team that gives you the skills to accomplish your business's goals. Highlight what you've done in your past in order to demonstrate your abilities.

My friend, Chris, sent me a link to Why Venture Capitalists Avoid Innovation: They Like Making Money, written by Andy Singleton.  It was interesting reading, but I don't agree with many of the conclusions. 

One of the author's complaints is that VCs "claim to be in the business of innovation, but they also talk constantly, often in the same paragraph, about how much they want to avoid innovation."  However, Singleton is confusing 'innovation' with 'risk.'  There are lots of types of risk with any new venture:  technology risk, team risk, market risk, competitive risk, development risk, sales and marketing execution risk, financing risk, etc.  A brief word on each:

• Technology risk -- The risk that some fundamental new innovation just won't work.  This tends to come up more often with 'hard' technologies like semiconductors, energy, drug development.  This is different from development risk.
• Team risk -- The risk that you either can't build a team with suitable skills or that the team you build won't work effectively together.
• Market risk -- The risk that the market for your product won't appear.  Perhaps you are counting on some market shift in the future.  If it happens, you'll be the big winner because you saw it first.  If it doesn't, you may be dead.
• Competitive risk -- The risk that existing competitors in your market can fill the need that you are trying to fill more quickly than you can.
• Development risk -- The risk that your development team will be ineffective and fail to build a product that works well and/or is done on schedule.
• Sales and Marketing Execution risk --A set of risks ranging from getting the product requirements correct so that engineering builds the right thing to the ability to generate sufficient awareness and demand for the product to the ability to actually get customers to part with their cash in exchange for the product.
• Financing risk -- The risk that you can convince investors, now and/or in the future, to invest in the company in light of all these risks.

There are probably other risks (add in the comments), but these are the main ones I think about.  One problem in Singleton's post is that he equates innovation to risk, and most likely technology risk.  I look at it differently.  I think that an investor looks at any early-stage company and weighs the risks versus the potential upside.  If they can mitigate the risks and the upside is big enough, they invest.  If the risks look too big and the upside doesn't justify them, they pass.

How would you mitigate some of these categories of risk?

• Technology risk -- Is there a proof of concept or prototype that demonstrates the technological achievement?  Has the team demonstrated the ability to project the technology advance in the past?  Is there independent diligence that validates the planned technological advance?
• Team risk -- Have you worked with the team before?  Have some of them worked together before?  Does that validated track record give you the confidence that they can execute the plan?
• Market risk -- Are there early market trends that will tell you if the market is shifting in the direction you are hoping for?  Is there a fallback or interim plan that will keep the company going if the market shift happens later than you predict?
• Competitive risk -- Can you gather some competitive intelligence that will give you a hint of what the competitors' plans are?
• Development risk -- Similar to team risk: Does the technical team have a validated track record of developing similar projects with high quality and on time?
• Sales and Marketing Execution risk -- Another team risk:  Does the Sales and Marketing team have a validated track record in specifying the product correctly, building awareness and demand, and closing profitable business?
• Financing risk -- Does the plan give the company sufficient cushion to ensure that they can get far enough to attract additional investment?  Will an objective new investor be attracted to this opportunity?  Is there room for a reasonable valuation step up in valuation while still leaving room for a new investor to make sufficient money?

From my experience, the most common reason why a venture-backed IT company fails isn't technology risk but sales and marketing execution risk.  Products are poorly specified, requirements aren't honed sufficently, products are positioned poorly and undifferentiated, sales teams are ineffective, etc.  It's hard getting all this right.  If you don't, even the best product won't sell.  In fact, great sales and marketing execution can make a success out of a mediocre product.

The second most common reason is market risk.  Oftentimes start-ups are projecting that a new market segment will open up that they can capture.  If it doesn't happen, or doesn't happen before the start-up runs out of money, you are in trouble.  Hopefully, there is some sort of fallback plan.  If not, you are probably dead in the water.

Most VCs take on some level of technology and development risk as history shows that many times these can be overcome.  In fact, the first thing I read after reading Singleton's post was about Bloom Energy.  If that's not VCs backing innovation, to the tune of $400M, I don't know what is.  Of course, I am sure that these VCs see gigantic potential upside and had plans on how to mitigate the risks before they invested.  And, there are many others in clean tech, drug discovery, etc.

Some of Singleton's comments on the state of the VC business are accurate, but don't impact the calculus around these risks.  Some firms are more risk averse, but they still evaluate deals along all these axes.  An innovator has creative ways to mitigate these risks.  That's the type of innovation that VCs are looking for.  There are very few deals with no risks and big upside.  Instead, most VCs are looking at how some or most of these risks can be overcome.  It may be a high bar and may not always sound reasonable.  Perhaps they are looking for business innovation rather than just technological innovation.

Before you present your company to an investor, make sure you have thought through all these risks and what you would do to mitigate them.

This week's op-ed piece (Microsoft's Creative Destruction) in the New York Times from Dick Brass, a former Microsoft VP, was a wake up call for the tech world. In a thoughtful but ultimately scathing piece, Brass describes how and why Microsoft gradually evolved from an innovative company with first-mover advantage to a technological also-ran scrambling behind just about everyone in bringing new products to market:

"As they marvel at Apple’s new iPad tablet computer, the technorati seem to be focusing on where this leaves Amazon’s popular e-book business. But the much more important question is why Microsoft, America’s most famous and prosperous technology company, no longer brings us the future, whether it’s tablet computers like the iPad, e-books like Amazon’s Kindle, smartphones like the BlackBerry and iPhone, search engines like Google, digital music systems like iPod and iTunes or popular Web services like Facebook and Twitter. [...]

Microsoft has become a clumsy, uncompetitive innovator. Its products are lampooned, often unfairly but sometimes with good reason. Its image has never recovered from the antitrust prosecution of the 1990s. Its marketing has been inept for years; remember the 2008 ad in which Bill Gates was somehow persuaded to literally wiggle his behind at the camera?

While Apple continues to gain market share in many products, Microsoft has lost share in Web browsers, high-end laptops and smartphones. Despite billions in investment, its Xbox line is still at best an equal contender in the game console business. It first ignored and then stumbled in personal music players until that business was locked up by Apple.

Microsoft’s huge profits — $6.7 billion for the past quarter — come almost entirely from Windows and Office programs first developed decades ago. Like G.M. with its trucks and S.U.V.’s, Microsoft can’t count on these venerable products to sustain it forever. Perhaps worst of all, Microsoft is no longer considered the cool or cutting-edge place to work. There has been a steady exit of its best and brightest."

Obviously, something happened to the culture of the company, changing the very direction of what it means to work at Microsoft. One way to conceptualize this is to think about the "impenetrable layer of suck" that tends to grow at just about every company -- especially those already bloated with layer upon layer of middle management. On her Strange Attractor blog, Suw Charman-Anderson has posted a fantastic graphic showing how this "impenetrable layer of suck" works. Creative ideas never quite make their way down through an organization. Note the squiggly red lines that are the "social media fissures" -- these are just about the only way that innovative ideas work can find their way down to the rank-and-file members of an organization.

You can read the New York Times op-ed piece as a bit of grumbling and mumbling from a disaffected former employee -- or as a warning shot fired across the bow to other tech companies like Yahoo, Google and Amazon -- all of which are no longer young, frisky, risk-seeking startups. Apple may no longer be a young start-up, either, but it has thus far avoided the "impenetrable layer of suck." Steve Jobs has almost single-handedly enabled innovative ideas to come to market through charisma and sheer force of will. Which explains to a large degree why Microsoft was never able to realize the full potential of the Tablet PC, while Apple was able to generate a market sensation around the iPad.

[image: The Impenetrable Layer of Suck via Strange Attractor]

Wired on Failing Early & Often

Wired Magazine's January issue is a survey of one of our favorite topics: failing early and often. Several of the stories highlight the value of a diverse team in creating breakthroughs (a.k.a. radical collaboration.)

In case you don’t have time to read the whole issue, here’s a highlight:

"The diverse lab, in contrast, mulled the problem at a group meeting. None of the scientists were protein experts, so they began a wide-ranging discussion of possible solutions... the intellectual mix generated a distinct type of interaction in which the scientists were forced to rely on metaphors and analogies to express themselves... These abstractions proved essential for problem-solving, as they encouraged the scientists to reconsider their assumptions. Having to explain the problem to someone else forced them to think, if only for a moment, like an intellectual on the margins, filled with self-skepticism."