While this blog’s focus is on marketing and the media in the high tech investment arena, it is still worth taking a look at some principals of marketing that are generally universal in scope. In fact, good marketers have skills which are very transferable — from B2B to consumer to members to employees and across industries. Of course each of these universes has its own quirks, acronyms, and special needs. As long as a marketer knows marketing basics, industry-specific and audience-specific important details can be learned. And while there are lessons that cross divides, it is also worth noting that what works for one product in one situation can rarely be replicated. However, you can take away elements that have been useful, adjust them for your own technological product or service, and build them into your own, solid marketing plan and media plan.

So, here are some useful things to know:

• Creativity without persuasion is just fluff. The best ads are not necessarily the ones that everyone loves – many of these are memorable, but the product being advertised can get lost.

We can all remember wonderful ads, ones we love, but cannot remember what the product is that’s being advertised. Recently, I love the television ad about a couple about to say their vows. The fiancé starts discussing things in financial terms, and the best man ends up marrying the bride. It’s a funny ad (albeit a sexist ad), and I know it’s for some non-US bank, but that’s all I remember.

• Do not state claims for your product which are exaggerated or questionable; you may not be able to recover if you’ve lost credibility.

Read what the Federal Trade Commission has to say about this: http://www.ftc.gov/redflag.

• Persuasion without a decent product is hollow and short-lived.

Customers and clients may try it once, but unless they’re stuck with a major purchase, such as a business communications system, there will be no repeat business or positive referrals.

• If you put out ten messages and nine of them are true, the public will focus on the one that isn’t and rarely ever give you a chance to make good on it.

There’s an old expressive about one bad apple ruining the whole batch. Truth in advertising is imperative if you do not want your credibility questioned. And while your competitive may be stretching the truth and gaining market share, this will probably backfire in the long run. The same thing is true for earnings reports and other key indicators (think Enron).

• If one customer is unhappy, that customer will tell many more people (the number varies depending on who is being quoted) about this than the customer who is very happy.

No need to elaborate; this one everyone know!

• If you act wisely when you’ve got a problem and are forthright and quick to react, customers can be very forgiving. In fact, if you’ve made a large blunder and admitted it, you will usually be more admired in the long run than you would have if everything went right in the first place.

A case in point is the classic one about the package tampering and Tylenol scare back in the early 80’s when J&J recalled all of its products. This is called crisis management, but it’s also very wise marketing. See http://www.personal.psu.edu/users/w/x/wxk116/tylenol/crisis.html.

• The first to market often has only a 50-50 chance of staying ahead of the pack.

This statistic is not backed by fact; rather, it comes from my own experience observing the marketplace. While sometimes the early bird does have the edge, often it’s better to let the innovator take off from the gate first, tackle the early kinks and landmines, and then pave the way for close followers to perfect the offering and delivery of it to the customer or client. This means that even though you’re not first, if you are skillful in executing the business essentials, your prospects are often very good.

• What you learned in kindergarten…you’ve heard the rest of this before. There is still a lot of truth here. In the consumer market, if your 5-year old finds your product appealing, it’ll probably be a hit.

In any work week I will meet with a number of entrepreneurs who are looking for venture capital – that’s not surprising, since I manage a venture capital fund.  You’d think they would just want to spend time with me because I’m good company…. In any event, most of the meetings won’t after reflection result in further consideration.  At that point, as an investor you have a choice, you can either say something comforting or equivocal and plan to deliver the “bad news” later, or you can spend a bit of time discussing your reasons.  I tend to try when I have time to provide immediate feedback, but not everyone goes that route.

Generally (and I think that this is true for most of my VC brethren), when I meet with an entrepreneur I have a reason to think on first reflection that the entrepreneur may present an interesting opportunity.  But, that’s a very different thing from going into a meeting with all of my questions and concerns addressed.  That’s the point of the meeting, whether it’s the initial meeting or the last meeting before an investment is made.  The process of venture capital investment (unlike merely handing someone a check and hoping for the best), is probably best analogized to peeling an onion.  Of course, I have heard entrepreneurs compare the process less to food preparation and more to a visit to a doctor with rubber gloves and cold hands. But, the point is the same, getting a meeting and getting an investment are very different things.

So, understanding this, the conclusion is that most of the time when entrepreneurs meet with a VC the ultimate answer to the question of “give me money” is going to be “No.”  Faced with that, what should an entrepreneur do?

Some stress the requirement of a thick skin – all but the most fortunate entrepreneurs will have to endure many meetings and the accompanying disappointment.  And, without giving away a state secret, sometimes people (and yes, VCs are people too) are rude, distracted, or otherwise engaged elsewhere. 

Personally, I think the more valuable approach is to get as much information as you can from the “No.”  Merely stopping your discussion with the VC after you get a “No”, or even a “Maybe” might limit your further interaction and save your feelings, but you are losing the opportunity to get valuable information.  The secret is to try to drill down on the reasons for the “No” in a polite way and spend some follow up time in reevaluation.  Here are some standard examples of VC responses that can provide you with more information:

• “We don’t invest in deals in your sector”.  Did you look at the VC’s website for his investment targets (stage of investment, technology focus) before coming in?  If you think that your opportunity falls within the VCs investment focus, then perhaps you didn’t do a good job of describing your business opportunity.  Look at your presentation and compare it to the VCs investment requirements – did you meet each one and explain why you did? 
  
  
• “We would be interested if you find a lead investor.”  Inquire whether the VC otherwise leads investments (or do some research ahead of time to see if he does), and if he otherwise leads investments, then something else is behind this reason.  It could be that your investment requires more money than he can comfortably provide, or he is intrigued but doesn’t have sufficient expertise to evaluate your opportunity.  In either case, an interested VC would likely refer you to other investors with whom he has a trusted relationship.  In other words, if a VC has led other deals and tells you to go find a lead without offering interested help, then that VC is probably not that interested in your opportunity.
  
  
• “Come back when you have [some/more] revenue.”  While this has the appearance of being a useful guidepost, without further detailing it’s probably about as useful to you as a mere “No”.  Get some clarification – what type of revenue, and why does the investor want to see it?  There are many reasons why revenue could be important, including providing customer validation, demonstrating the removal of technology risk, showing the team can execute and providing cash flow to leverage the VC’s capital. 
  
  
• “Your deal is not a venture capital deal.”  This response, while on its face the most critical, actually can hold the most information.  Before going to see the VC have you properly evaluated what makes a deal attractive to a VC – does your opportunity really provide those attributes?  If you thought that it did, then you should try to figure out more specifically how your deal falls down against these criteria. 
  
  
• “I don’t like your business model – I would like something that was ____________ [insert model here].”  Entrepreneurs hearing this often fall into two camps: those that bristle and those that take notes assuming that they are getting well thought out business advice.  Two things to think about here. First and foremost – don’t confuse an off the cuff reaction with well thought out business advice.  But, second, and more importantly, try to determine how the revised business model differs from yours.  Is it different in a few ways, or every way?  What explains the differences?
  

The overriding advice here is that in my experience the most successful entrepreneurs are those that “fail upward.”  They take an adverse situation and use it as the launching pad for progress and advancement.  Obtaining venture capital is a difficult process – much of the focus on the lore of VC is how to get to “yes.”  Hopefully, now you will be more attuned to the converse.

In an earlier blog, I introduced the process of rapidly developing product in a Web 2.0 world. In this blog, I am going to begin a discussion on the process of commercializing Web 2.0 technologies. In future blogs I will discuss specific successful and failed examples and how they fit into this model.

In running, investing, and working with startups, I have observed a process of commercialization that has two broad dimensions:

• Phase of the product lifecycle: The phases of the lifecycle for product development include exploration, development, and production
• Business function: The three business functions that support the product development lifecycle include product development, marketing and sales, and business and infrastructure

In the following table, I illustrate these two dimensions and summarize some detail that takes place within these dimensions.

As an idea or product moves through the product lifecycle, the business’ functional support, including marketing and sales and business and infrastructure, needs to be at the commensurate level maturity. In large companies, an infrastructure is typically in place to support a new product as it moves through its lifecycle. But given the cultural limitations of large companies, the trick is often less of supporting the product and more of cultivating a culture to encourage innovation.

Startups are typically building their business support while at the same time moving product through its development lifecycle. In starting a small company, the trick is to balance the resources invested in product development versus marketing and sales versus business and infrastructure. As an entrepreneur, I consider the process of optimizing the balance between these three functions critical to the launch of a successful business. When investment in any one of these functions gets too far out ahead of the others, it is possible that scarce startup resources are not being used efficiently. One way to look at this balance is similar to the portfolio optimization process found in the world of finance, where the entrepreneur is finding the optimal balance between product development, marketing and sales, and business and infrastructure, in an attempt to maximize return and minimize risk.

Below, I provide a few observations on balancing the maturity of each of these business functions.

Product Development

As I discussed in my last blog, the advent of Web 2.0 technologies makes rapidly delivering product increasingly more easy and affordable. Web 2.0 enables entrepreneurs to create prototypes using open source tools to conduct concept analysis on product ideas with very little investment. This enables the optimal portfolio mix to weigh more heavily into marketing and sales than has been traditional with technology startups.

Furthermore, when combining open source platforms with off-shoring, startups can also move through the development phase much more rapidly. Many startups have begun moving much of their development resources overseas to countries such as the former SovietRepublics and India while keeping high-level engineering and developing technical specifications in-house. Moving development offshore tends to be very efficient allocation of resources. Some of the lessons-learned from offshoring include:

• Finding an off-shore development shop that is familiar with your company’s choice of platform and architecture 
• Keeping turnover low on your off-shore product team to keep development efficient
• Communicate with your offshore development team that you have a ready stream of projects for your offshore team so that there is incentive for efficiency

For startups, the production lifecycle is an ever-iterating process, as the product matures. But as the product goes to production, it is critical that the product’s support is delivered commensurate to marketing. 

Marketing and Sales

With the plummeting price of technology development, more resource can be spent on marketing and sales during the exploratory phase. This enables a more precise targeting of product development toward actual clients – before the completion of the first development iteration. Below, I provide a few highlights:

• Immediately productize the technology and position as providing real, tangible value to business or consumers
• Target your first product development iteration toward actual paying clients
• Get feedback by launching your technology online as a beta
• Take product feedback seriously during the marketing process – if people consistently don’t get it, maybe it’s your product and not the audience

To focus on one area in particular, it is my observation that entrepreneurs tend undersell their technology by not immediately productizing the technology and highlighting the tangible value it can provide their clients. For example, the technology behind blogs has been out since the beginning of the internet and is not particularly complicated. But it took productizing editable webpages as “web logs” that revolutionized everything from citizen news to family vacations. This was strictly a marketing, productizing exercise that had nothing to do with technological innovation.

Business and Infrastructure

Finally, in startups, the most neglected business function tends to be business and infrastructure. And depending on the startup’s exit strategy, this neglect may make perfect sense. There’s no use in investing in infrastructure when the business model relies on scalability that can only be accomplished via an acquisition.

As a quick overview of business issues where startups can’t afford to neglect include:

• Protection of intellectual property
• Developing and implementing a fair valuation formula
• Structuring the business’ legal organization to support potential exit strategies

To focus on one of the above areas, coming up with a fair valuation of the business is critical for entrepreneurs. As a part of this exercise, it is important to work with an experienced advisor in working through the issues involved with valuation. For example, if an entrepreneur is inviting friends and family to invest in their start-up and their initial valuation is too high on the seed round they could be putting their friends and family at a disadvantage when they are ready for the next found of funding.

The New Year is always a good opportunity to take a look back and forward, since it is a consistent measurement point, and at least in my case, thinking deeply is a better use of time than 18 hours of televised college football.  With that, I’ve been thinking some about the trends I see affecting the venture investment climate.  Here are some things that strike me as I think about 2007 and beyond.

Web 2.0

The Time Magazine cover story aside, there is a perception shared by many that “Web 2.0 is over.”  My view is that is far from the case – the underlying trends that caused the creation these new Internet businesses are now entrenched and further development is inevitable.  However, for those that equate Web 2.0 with explosive businesses sold for large amounts of cash, or Google’s sky rocketing public stock price, the YouTube acquisition may be the watershed.  What many Web 2.0 start ups are going to find is that there is not an exit for them – it won’t mean that they are not interesting businesses, or have not acquired customers.  And, without immediate exits, venture investors may look to other sectors and opportunities.

That’s the bad news, but the good news is that innovative software technologies cost less and less to create, so committed Internet entrepreneurs would be wise to approach their businesses as cash efficiently as possible, both to manage their capital requirements and also to ensure that if an exit comes it can occur at a price that satisfies the entrepreneur and the investor.  In other words, just as happened earlier in the decade, a fading of enthusiasm for financing Internet technologies will mask the larger trends – the Internet as a tool, and the things that it enables people to do, will continue to progress, and businesses that survive the times when investment is less in favor will be the winners when favor returns.  If you want an example of this, look at Google, which was largely financed and grown from 2001 through 2003, a time when consumer Internet was disfavored.

Bandwidth and Net Neutrality

Many of the most in favor investment sectors currently (mobile content, video, social networking and Software as a Service), have something in common – they assume that bandwidth will not be a problem.  In other words, if you think about the Internet as a rail road, there is an assumption that there will always be enough tracks to run fast trains all the time and every place.  That is a faulty assumption -- at some point available bandwidth will not be sufficient for demand. This will happen for one of two reasons: Internet demand will grow sufficiently to outstrip the amount of installed bandwidth or owners of the bandwidth will accelerate this trend by favoring certain utilization of their bandwidth to the detriment of other uses.  Rationing of bandwidth is a coming problem.

Basically, bandwidth is provided to consumers by private owners.  They build, maintain and sell the bandwidth.  To this point, the economic model has been to sell access to the bandwidth for a fixed price, and not to charge or otherwise pick favorites among the providers of the data transported by the bandwidth.  This model has been the underpinning of the so called “long tail” of the Internet – the small provider of customer shoes who can reach national customers through key word searches, or a blogger like Mike Arrington who reaches national prominence.  However, if these small guys had to pay for distributing their data, or if for some other reason bandwidth providers decided to favor other data producers, they would loose access to consumers.  You might have heard of the phrase “net neutrality” already, but if you haven’t, this is what it is about – will the owners of bandwidth be able to discriminate among the providers of data. 

Over the coming year Congress will likely address the issue of net neutrality, and how it determines to regulate (or not) the bandwidth providers will have a dramatic affect on the investment climate.  If as a software or media entrepreneur you are not familiar with this issue, you should make it your business to understand it and be ready to adapt.  And, if you have a new technology to provide bandwidth to consumers that leapfrogs the current owners, get ready for a large number of investors to come knocking at your door.

Energy and Economic Security

Although you would not be able to judge by the number of SUVs on the Beltway, this year the American consumer got a taste of the fragility of our current energy consumption patterns.  Whether you blamed foreign instability, the demand of developing countries such as China and India, or hedge fund traders, the price of oil was volatile and threatening.  There is a growing sense on both sides of the political spectrum that the US’s national security depends upon changes in our energy consumption patterns – this can occur either through conservation or innovation.

Certainly, if you look at investment patterns in Silicon Valley and the activities of some of the best respected players out there, a part of the VC industry already believes that energy innovation is going to be an area of rapid investment growth in the coming decade.  This is a trend that is going to take over a larger part of the investment climate, and become part of the national consciousness – when you see a cover story in Time Magazine, for example.  I expect that one or more of the Presidential candidates will make energy policy an important part of the campaign, and that Congress will at some point adopt further measures to promote investment in new energy technologies.

Public Offerings and Being a Public Company

The continued depressed level of IPO activity and the number of large companies “going private” to avoid being public companies, reveal a troubling trend.  The regulators clamped down in a big way after the debacles of Enron, MCI and others earlier in the decade.  And, some would say, in light of the current scandals surrounding backdated options pricing and skyrocketing CEO compensation, that they haven’t gone far enough.  But, there is a real question of at what cost have the regulators been successful.  The efficiency and availability of the US public markets has been a major driver of our economic development – quite simply the sale of interests in attractive investments is necessary for earlier investors to be rewarded.  Or, to put it more directly, a venture investor needs to be able to sell his investment to generate returns.

The current regulatory trend will have to correct itself.  This will likely occur in one of two ways: changes in regulation to make it easier to become or stay public or US companies will seek liquidity in international public markets.  My expectation is that you will see a larger number of technology start ups investigating listings in Europe, particularly London and Germany over the coming year.

What does this all mean to the entrepreneur?

• See past the initial hype and understand the larger trends. Build your business against the larger trends, and build it to last.
  
• Pay attention to Washington.  The government is going to be addressing issues that will dramatically affect the technology investment climate and however it acts it will create opportunities for innovation and venture investment.
  
• Understand the dynamics of exits – who’s buying companies and why.  How available is the public market to your company?
  
• Venture investment doesn’t happen in a vacuum.  You’ll note that I didn’t mention anything about the level of investment activity in 2006 being at a healthy level, or fundraising for larger funds continuing to be at historic highs. That’s because those trends, while illustrative of a healthy venture market, don’t predict future investment patterns.  Whether the trends I’ve identified above will be more predictive is a matter of time; let’s check in with each other next New Year and see how they went.