Entrepreneurship

Five Things On Software IP

Yesterday, I had the pleasure of speaking to a Duke class on Intellectual Property and Innovation: Law, Policy & Entrepreneurship. Thanks Ed for including me!

In addition to sharing my story and hawking GrepBeat, I reviewed five things that mattered when thinking about Intellectual Property (IP) for software startups. But, let me save you $60k/year in Duke tuition and give you the gist of it here:

1. Terms of Service

In the early days of Bronto and its predecessor DatabaseApp, we included a terms of service (TOS) page on our websites and on our order forms. This is important! Not only does it build creditability with customers but, many moons later, when hopefully you raise capital or are acquired, you will go through an extensive due diligence process. This process is about minimizing risk for the investor / acquirer. Having a TOS early on shows that you have your ducks in row and lessens the chance of strange claims on your IP from early customers. Your lawyer can simply draft a TOS for you. Or, if you are particularly cheap and scrappy, you can just copy the TOS from one of your larger competitors and change a few words. That’s what we did.

2. Proprietary Inventions Agreement

Future acquirers and investors want to avoid claims on the IP (and thus their ownership) that crawl out of the woodwork once the big money is announced. Early employees, particularly engineers, are the most likely sources of these claims — someone who could say, “oh yes, that code is partially mine because I borrowed it from the outside.” Be on top of it from the get-go. Have all employees and contractors sign a an agreement BEFORE they start working with you.

3. Due Diligence

Investors and acquirers will complete due diligence on your startup prior to completing the deal. For acquisitions, it’s about risk mitigation. The process is extensive. You will have to produce every customer contract and employee agreement from the beginning of time. If you have been around a while like Bronto, this can be difficult. So, be good at record keeping! At Colopy Ventures, like all investors who don’t share your same last name, we require due diligence for our investments. The larger the deal, the more extensive the due diligence.

4. Escrow

Escrow, as it relates to acquisitions, means the acquirer withholds money from the acquisition for many months or years to settle any odd claims that might pop up. In Bronto’s case, this wasn’t trivial. Twenty-percent of the acquisition price was held for 18 months. Nothing did pop up (whew!) Every acquirer looks at escrows differently. Keep your ducks in a row early on so that you can negotiate escrow terms for as little and as short as possible.

5. Trolls

Even when you do everything right, large acquisitions still bring out the trolls. We stumbled upon this, too. At the time of acquisition, Sinclair Oil sent us a Cease and Desist letter around use of a Brontosaurus in our logo. They claimed our logo was too similar to theirs. Judge for yourself. Of course, this was ridiculous because there are only so many ways to draw a Brontosaurus and we are in completely different industries. But, anyone can send letter. In the end, their claim went no where. Oracle did hold back escrow of a couple hundred thousands dollars for three years after the acquisition … just in case. And for Sinclair, they lost a gas-pumping customer for whenever I am RVing out West. Ha! I’m sure that they are still kicking themselves on that one.

Results May Vary

These are five things to think about as a software entrepreneur. IP applies differently to other industries. Fortunately, IP tends to be less relevant and simpler in the software space. In the end, the success of a software startup is all about execution.

My words aren’t enough? Take a look at the slides and see the presentation in pictures:

Entrepreneurship

YAWA! Yet Another Web Application

YAWA! Yet Another Web Application. Software has clearly moved to the cloud and web applications are the way for software to be delivered. In the late 1990s, SalesForce.com and others were innovators in this new business model: software as a service. Times were good and Bronto jumped on it in the early 2000s.

Twenty years later, the business model is fairly well understood and the tools for crafting a web application are mature. It’s never easy to make a great application but it’s easier than before. Thanks Amazon Web Services, React, …

This raises the bar for the entrepreneur. It’s not enough to have a web application with a clear customer. You need to build a sales and marketing machine. And, in the earliest stages of the startup, this means founder hustle.

Hustle leads to traction and traction is the best indicator that you can scale sales and marketing later. Well-designed UIs make for nice products but a hustle-first entrepreneur makes for a real business.

* YAWA also means another things according to Urban Dictionary. Nothing too inappropriate.

Entrepreneurship

Seed Investment Calculator

There is math and then there is startup math. For many entrepreneurs this includes evaluating an angel or seed round investment that requires an option pool.

I created this handy Google Spreadsheet to help you do the math for this typical situation:

  • The startup is founder held before the round.
  • The round requires an option pool and the pool needs to be created before the investment happens. (i.e., in the pre-money.)

Let me know what you think. Always looking to improve it.

Portfolio

Welcome Seguno to CV

Welcome Seguno to Colopy Ventures. We’re excited to have you.

Seguno was founded last year by Chris Geiss and Marc Baumbach. Their focus is to bring commerce marketing automation to the Shopify platform in a new and refreshing way. Stay tuned!

Chris and Marc may be new to Colopy Ventures but they are not new to commerce marketing or anyone who has spent time with Bronto Software. They are veterans of commerce marketing and know the space as well as anyone. We’re excited to see what they come up with.

P.S. Chris and Marc are the two fellas in the middle of the picture, enjoying a Friday beer with Chris and Jeff of Pugbee

Bronto, Entrepreneurship

Missions, Strategies and Values … Oh My!

I played the scarecrow in my elementary school’s rendition of Wizard of Oz. One of the best parts was when my fellow sixth grade Tin Man, Dorothy and I cantered across the stage as we chanted “Lions, Tigers and Bears … oh my!” Tales of my performance still echo through the hallowed halls of Fairlawn Elementary School.

Why am I telling you this? The challenge of scaling a company to the next phase is scary. The first phase is about hustling your way to a real product, stable of customers and small team. But, you have to change your approach to continue growing. The business needs outstrip founder heroics. This is where setting and articulating a broader mission, values and strategy becomes critical — a la Missions, Strategies, and Values … Oh My!

At Bronto, we ran into this scaling problem when we were doing $3m in sales. Someone suggested we read Beyond Entrepreneurship by Jim Collins (he also wrote Good to Great and Built to Last). The book is targeted to leaders of successful small businesses who struggle to move past the initial successes. That’s where we were. The crux of the book is to add a vision framework in order to empower your team and scale beyond founder heroics. I was very skeptical of this mumbo jumbo corporate voodoo, at first — but, I am now a believer. It was one of the reasons we were able to grow from $3m to $50m, over the ensuing years.

“Repetitio mater studiorum est” is Latin for repetition is the mother of learning. This is true. At Bronto, I started every presentation with the same vision framework slide (the first one below.) Inevitably, the team would moan, like teenagers asked to clean their room for the third time. But, their boredom was great! Everyone deeply understood who we were and what we were trying to accomplish. This emboldened us under a common direction.

Our vision framework had four parts — mission, strategy, values and purpose.

  • Mission was the most referenced part. It succinctly spelled out our positioning, multi-year revenue target and time frame. Our most recent mission was to “be the leading marketing for platform for commerce with $50m in ACV by 2015.”
  • Values were best described as our corporate personality. We were “transparent, approachable and passionate.” We didn’t draft those words ourselves but rather heard them from our customers. They were genuine — not forced or fabricated.
  • Strategy wasn’t a simple statement, unlike the other parts. It was a catch all for explaining our differentiators, go to market plans, etc.
  • Purpose was the simplest but most fundamental of the four parts. Instead of saying we sell and service our product, we framed things around helping our customers drive more revenue. This re-enforced our customer orientation and was very effective.

Our vision framework worked for us. We evolved it around our needs and over time. And, we repeated it — over and over again. Repetition is the mother of learning. Eventually, we found our yellow brick road and our mission, strategies and values drew the map to get us there.

P.S., I wrote a similar post about strategy over seven years ago, when we were in the midst of Mission 2.

P.P.S., Yes — there is a photograph of me as a sixth grade scarecrow. And, no — you will never see it.

Entrepreneurship

Growth by a Thousand Paper Cuts

Entrepreneurs and investors are on a perpetual quest to have hockey stick growth for their startups. Hockey stick growth happens (hopefully!) after you get product-market fit and start ramping. If growth accelerates, the revenue curve maps to the curve of a hockey stick — smoothly up and to the right. But, in reality, startup growth is never smooth and fraught with bumps and cuts along the way that are often masked by the larger curve.

bronto rev growthBronto grew its revenue from zero to fifty million dollars, over fifteen years. See from the graph — the curve is up and to the right. It would seem like smooth sailing but, in reality, it was with continual stream of discouraging setbacks.

Think of these setbacks as paper cuts. And, think of the growth of a startup as growth by a thousand paper cuts. Constantly losing customers and employee, even if we were growing overall, was demoralizing. Two steps forward. One step back.

Here are some Bronto examples:

  • We always lost our largest customer. Inevitably, we stretched too far to acquire them and ultimately couldn’t deliver. Although not fun to lose them, this stretching prepared us to handle more customers like them in the future.
  • Every year, we lost 15% of our customers. Customers are hard fought with a lot of hustle. Even if our net revenue for the year exceed 100% (growing the revenue from a subset of the customers), it was still demoralizing to see the others go. Emotion and spirit isn’t mathematical.
  • We lost employees. At the time of acquisition, we had about 250 employees but we had hired 1234 over the years. That means, we had lost almost 1000 employees through the years — employees who we worked hard to hard to recruit and celebrated when they are started. We had a great culture but life changes on the personal and professional front take people different places.

Winston Churchill wrote “success consists of going from failure to failure without loss of enthusiasm.” That was the story Bronto. If you dig into any successful entrepreneurial story, you’ll see the same thing: a broad upward curve, strung together by many failures.

To quote a more famous thinker, Rocky Balboa said in Rocky 5 — “It ain’t about how hard you hit. It’s about how hard you can get hit and keep moving forward; how much you can take and keep moving forward. That’s how winning is done!”

Startups are hard, even when you are successful. Its growth by a thousand little paper cuts. But, the joy of the small successes along the way make it worth it, especially if you end up building something truly great.

Entrepreneurship

TO VC, OR ALT VC?

Modern day Shakespeare would be a startup entrepreneur asking the question: “TO VC, or ALT VC?” Raise venture capital or bootstrap? Bootstrapping is a hard but great alternative to raising venture capital (VC).

Unfortunately, the media rarely tells the story of the bootstrapping startup. The more commonly told story is of the glories of raising VC. Raising VC makes for a great story but the consequences of those choices, if not thought through, can have very not exciting and sometimes painful consequences for the entrepreneur a few years down the road.

Because of hype around funding, many entrepreneurs confuse the formula for startup success as one of raising capital versus one of getting customers and generating revenue. This is akin to highlighting that you are going to run a marathon versus actually running one. The emphasis is erroneously placed on the intent versus the result.

My last company, Bronto, was entirely bootstrapped — no venture capital, no angel investment, no private equity, no subsidizes from existing businesses, etc. But, despite that, Bronto required a huge investment — an investment in time and forgone salary. In the summer of 2000, I left my mid-level marketing position at Red Hat and the last paycheck that I would see for three years. It was a hard road to travel but I had several advantages that prepared me well for the journey:

  • Savings. Karalyn are I are savers. We geared up to live our life on one salary (hers!) for a long time. We kept our “burn rate” low and planned for the long game.
  • Habit. I used to be a Peace Corps Volunteer and made $6k/year (outside of housing.)  So, I was used to living with little.
  • Cheap. I can be scrappy. I taught myself web programming (LAMP = Linux Apache MySQL PHP/Perl) so I could be self sufficient and create my own product. I didn’t want to become a developer but had to learn these new skills in order to create the product and start the company. Hiring developers was an expensive option that I wasn’t able to afford.

On the flip side, I was fortunate because I didn’t have other challenges like heavy student debt (I paid it off beforehand), struggling or dependent family members (parents and siblings stable, no kids yet), and other things that would have made these choices very difficult. Also, many software companies are not capital intensive businesses to start. Biotech or manufacturing stories would be very different.

Bootstrapping is more common in tech than one might think. Here are a few examples:

  • SAS. Cary NC-based analytics company, generating over $3 billion in revenue per year. A forty-year overnight success story!
  • MailChimp. Atlanta-based email marketing powerhouse, doing over $400 million in revenue.
  • Zoho. India-based cloud business app provider, generating over $400 million in revenue.

We all started and grew in highly competitive spaces. We all thrived because we could exclusively focus on the customer with a long-term perspective.

Why don’t all startups bootstrap? Well, it’s hard. Money helps. And, often the entrepreneur’s life situation prevents them from doing so. Also, many believe that there is a race to market and the window will close. This can be true but I believe that is usually not the case if the entrepreneur aims to build along-term sustainable organization versus a short-term M&A transaction. Other times, the startup truly has a unique business model that needs to be funded differently. Great VC success stories are often like this — Red Hat, Google, … And, sometimes the models don’t always work, like Napster, but still made sense to be VC funded.

Some will say that “the VC model is broken.” This is partially because the model is applied to too many tech startups where the economics won’t work, especially for the entrepreneur. Most tech startups and their entrepreneurs would be better served by bootstrapping. Plus, it has many advantages, like:

  • Financial. Bigger piece of a small pie often makes more financial sense. And, sometimes those pies aren’t so small. Of VC-backed startups, founders collectively own 15% of the company at the time of IPO. That percentage is much higher for bootstrapped founders. Plus, there isn’t the same pressure to have an IPO for institutional investor liquidity and these founders avoid the hard reality of liquidation preferences when early lofty valuations don’t match acquisition prices. (More here! This could be an entirely different post.)
  • Focus. Investors can bring many benefits beyond money. But, they also require time and focus — at the expense of your customers and employees.
  • Direction. What do you want to do? Do you want to be high profile and grow faster or would you have more control to shape the destiny of your creation? Either way is fine. Just make the choice deliberately because your financing choice will dictate your path. And, if that direction is inconsistent with your vision, you will lose.

VC can make sense. But, it is not the only game in town. Its important to do what makes sense for your business and, most importantly, for you. Also, the required discipline around bootstrapping makes for great businesses. And,  great businesses attract incredible employees, customers and even investors. They all want the same thing.

In the end, VC or ALT VC depends on what you want to do. Both paths can lead to great businesses but can have very different outcomes for the entrepreneur.

To VC, or ALT VC? This is the question. Easy to ask. Hard to answer.

Bronto, Entrepreneurship

“Stories from the Bronto Journey” @ Harvard

Last week, I spoke to a Harvard class on “Stories from the Bronto Journey.” The class was offered as part of the Technology and Entrepreneurship Center at Harvard (TECH) and consisted mainly of undergraduates — almost 200 of them! Excited to see so much enthusiasm for technology and entrepreneurship.

Here are some takeaways from my talk:

  • Entrepreneurism is often less about the “what” and more about the “how”. Innovation is how you execute and approach the challenges.
  • My entrepreneurial journey was very long and with five stages — the before, the genesis, the grind, the graduation and the after. The grind is long, hard and usually uncelebrated — but it makes all the difference.
  • Graduations (or exits) can be bittersweet. Build your art and someone else will find it as attractive as you.

Watch on YouTube: (long @ ~31 minutes)

Or see the slides on Slideshare.

Enjoy!

Entrepreneurship, Raleigh-Durham, Technology

My Hustle into Red Hat

Here is a wildly embarrassing video about how I hustled my way into Red Hat. I recommend starting at the 3min 15seconds mark to watch the blooper reel. It has the best bits. Enjoy!


They say great entrepreneurs have grit and hustle. I’m not sure if I am a great entrepreneur but I have been known to have moments of hustle.

One such moment was in 1999. Back then, I was a second year MBA student at the University of North Carolina, focused on technology / marketing / entrepreneurship. I have always been entrepreneurially minded but I figured that I should go work for a software company for a little bit before starting out on my own.

It was frothy back in the Dot Com Boom days. There were lots of startups to go work for. But, I found few that were truly interesting and innovative. In my search, I stumbled upon a little company called Red Hat and was intrigued. It was based in Durham and still very small, less than a 100 people. More importantly, I found its open source model and community fascinating. I believed that it was truly going to change how software was developed and deployed. Back then, Red Hat was rough around the edges but I could see that there was a diamond in there. I had seen this diamond in the rough before so I knew what to look for.

I graduated from college in 1993. As a computer science major, I had been fairly tied into the pre-Web Internet and even ran a Bulletin Board System (BBS) as a kid. But, I took a detour after graduation and joined the Peace Corps. By the time the “World Wide Web” burst on the scene in late 1993 and 1994, I was living on a remote island with no connectivity. My days were filled with teaching and coconuts instead of coding and startups. (Which was awesome btw!) I missed the Web’s grand entrance but deeply understood what it looked like before becoming mainstream. I saw the same thing with Open Source in 1998 and 1999. Fortunately for me, I was near its epicenter and determined not to miss out on it again.

I wanted into Red Hat but I needed to get their attention. So, I recruited my business school friends to help me make a video, stating my case. I pressed the video onto a CD-ROM and FedEx-ed to the CEO. Easy to do now but no so easy in 1999.

It worked! (in addition to a few other tactics like organizing a school-wide presentation for the CEO and telephoning the head of marketing every week.) I joined as an intern and then converted to a full-time employee around graduation. Meanwhile, I let my more lucrative offers at places like Dell Computer expire. Red Hat IPO-ed on scant revenue later than summer and managed to survive the Dot Com Bust to become the $15 billion 10,000-employee gorilla that it is today.

Some of that $15 billion is likely because of the awesomeness of this video.