TiE: How to build a successful Web company ?

Tonight I attended an event of the TiE Internet SIG, organized by Kaboodle's Manish Chandra: How to build a successful Web company ? Forrester's Charlene Li was moderating a panel mixing accomplished entrepreneurs and venture capitalists:

• James Currier was the founder of eMode in 1999, renamed Tickle and sold to Monster in 2004
• Tom Cole is a GP at Trinity Ventures focusing on Software and Services
• Gautam Godhwani started Atweb back in 1996, and sold it to AOL/Netscape in 1998. After a few years spent in the non profit world, he has founded SimplyHired
• Tod Francis has had a long career in CPG before joining Trinity as a GP. He then moved on to co-found Shasta Ventures, an early stage fund investing in consumer and software services.

Charlene's first question was about the “hits” - and their metrics - that panel members were involved in:

- Tickle initially raised $1.5M in Angel financing, and then $7.5M in a Series A (they were 3 days from missing payroll) from August's Capital Andrew Anker, and reached profitability with 3 months of running out of cash.
James Currier sold the company for $100M to Monster after 9 profitable quarters, returning 5X to his investors.
- Atweb was funded by Sequoia Capital in 1998 for $3M, and was sold a few months later for $100M - that value bubbling up to $700M in 1999 (providing Sequoia with the highest IRR they had achieved at the time).
- Tom and Tod mentioned a few of their winners: Speedera, Cygate, Blue Nile,...

Moving onto execution, and what it takes investors/entrepreneurs to succeed, or avoid failing:
- Tod focused his answer on the customer (the customer asset on the balance sheet, as he called it) as the fundamental success component of Internet businesses. The outsider may somehow perceive that it is easier to build a consumer business, and get a few dollars per month or per year from them, as opposed to selling enterprise systems. It is however very difficult to sell to large audiences of millions. Nailing the customer value, and what's make them tilt, is the key - and will differentiate a service that will get a few ten of thousand users and a MySpace.
- Tom mentions the nimbleness and agility required by Internet businesses, that need to be able react and change their product or model in a matter of a few weeks. New technology and development methodology allow for monthly or weekly pushes on new functionality, and makes that market very fluid - with new competitors appearing every few weeks in hot spaces. Gathering metrics, instrumenting, reviewing, and testing the adoption of new feaures is the way to zero in on the true value of a service.
- Per her blog post, Charlene met James upon his founding eMode and was not convinced by the suggested model. James agreed that they tried a number of different models, and products. He actually pointed to personalities and talent assets as the key differentiator in building a successful company.
- Gautam quoted Vinod Khosla: Vision, Team and Cashflow is what you have to focus on as a CEO.
- Cost efficiency is the major difference between the Web 2.0 context and the previous generation: customer acquisition, back-end, product development, bandwidth, etc. are all cheaper by a 10X factor.

We then moved to questions from the audience.

Q: Should you build a business by taking the time to get the model right, and then scale as fast as possible after raising expansion capital ? Or should you rush on a potential idea that sounds right in order to outpace competition ?
A: Gautam commented that it was about finding the right target first, and then “floor” the execution by raising a suitable investment.
A: James countered that feeling your way by putting something up and figuring out people's reaction was the way to go for eMode. As they tried many different products, they figured by accident that selling IQ tests would actually be the way to build a profitable business - moving away from advertising as the main revenue source to switch to subscriptions, and actually arbitraging between them advertising on AOL and MSN, and selling these tests.

Q: Viability of advertising as a revenue model.
A: Tough unless you have a very large network. James organizes advertising in 4 buckets:
- Search: tough to scale beyond the most profitable vertical/keywords/categories
- Branded advertising: requires a very large sales force to sell the “real estate” to advertisers/ad agencies
- Lead generation (for mortgages, education,...): currently the most productive programs, their margins will eventually be squeezed
- Remnant: companies with large traffic (billions of page views) have the worst CPM (a few cents) because of the sheer size of the inventory they need to sell

Q: When is the right time to deploy a business model ?
A: It is a very tough question, since focusing too early on the business model can get in the way of finding the right set of features, but it is also dangerous to just amass page views and then much later find out that these can't generate revenues at the right scale. Tod commented that he favored businesses that will offer products that consumers are ready to pay for.

Q: Skills required to build a business ?
A: It is about the management team, first and foremost, that communicates well, figures out the marketing, the customer value and the competition, and is able to work together to execute on the opportunity. James and Gautam mention a trend among Web 2.0 entrepreneurs to share their experience quite openly, and benefit from the wisdom of the “collective”. James added that it is about knowing what you don't know, and the passion you have for your product and your market.

Q: Charlene asked what the panel would have liked to change if they could go back in time:
- James: “No one wishes that he/she would have fired someone later than they did” - quite the contrary.
- Tom: we should pay more attention to personalities, raw skills and potential, as opposed to just considering the strength of the resume and  and the relevance of previous experiences.
- Gautam reminded us that the 10th person you hire in a company is 10% of the company - which means that every person you bring in at the beginning can be a life/death decision. And he would have spent more time hiring (at SimplyHired, Gautam's co-founder Anil is actually focusing on hiring). He also says that he would have dreamt bigger.
- Tod: “It is all about the team”. He made money on companies that had outstanding founding team, and lost on companies where the management had to be “retooled” and the VCs thought they could actually fix the team.
- Charlene adds that in some cases, key hires are not rewarded to the level of their potential positive impact.

Q: Tips and suggestions for raising capital in the current market
- My answer: raise the right amount of money from the right source (angels, small funds, large funds) at the right time to get the company to the next level - raise too little and you don't get a step up in valuation, and raise too much and you will spend too much and limit your exit options.
- Tom: Many companies are not meant to raise capital, and that's OK, especially in the current environment.
- Tod: Figure out what your business (feature vs. company), and capitalize it accordingly. Do not bring in a lot of capital that you are going to feel forced to deploy. And do spend time to figure out which VC firms and which partners you want to engage as opposed to sending business plans to all firms on Sand Hill Road. Speak with entrepreneurs in your space to understand who has had the relevant experience.
- James: bring in the right VC, with the right fit of personality and product feel, and prefer Partners with operational/leadership experience.

Q: What criteria/metrics are you using to assess an investment opportunity ?
- Tom: there is no one answer, since it depends on the maturity of the target market, the product, the ability of the team to execute,...
- James: you want to get the right person engaged in a VC firm who is going to be excited about an opportunity, and offer ways of reducing execution/adoption/technology risks
- Tod: bring together a great team and a compelling customer value proposition, and these will be the foundation of a company that can execute in the long run

Tags: TiE