Archive | August, 2007

Why the VMWare IPO Doesn't Dispel the Possibility of Crisis, But May Signal a Shift

15 Aug

VMWareThe successful IPO yesterday of VMWare does little to concerns I have flagged in two of my recent posts about how the credit crisis and shifting economic conditions may be making the US a less attractive and successful center for entrepreneurship (“Buckle Up: Why Entrepreneurs Should Be Scared of the Shifting US Economy” and “Will a Debt Crunch Drive Smart Minds from VC, Entrepreneurship?”). The basic reason is that an IPO is an equity event, with investors buying up ownership of the firm, rather than a debt-leveraged buyout or credit-based investment that will be paid back.  It neither proves that talent is continuing to flow to the startup world, or that weak economic conditions are not affecting the chances of successfully launching a business.

I am writing today in response to a short message I received from Tony, a friend and reader of this blog, asking whether VMWare’s IPO changed my opinion about current conditions for entrepreneurship. VMWare’s first day of trading witnessed the stock spending most of its first day well above the opening price of $29 a share, closing in the mid $50s (See Alarm:Clock – “VMWare IPO Crushes It“).

While the VMWare IPO says little, if anything, about the credit crisis, it may indicate that the market for “exits” for entrepreneurs may be shifting back in the direction of equity markets. In recent years, private equity buyouts have become a credible exit option for startups, with large investment firms using significant debt leverage to purchase an entrepreneurial business. This is in addition to the more traditional exit for startups, through acquisition by another firm in its industry, which would typically involve a significant amount of debt to finance the purchase. If credit is tight, and the cost of borrowing remains too high, these options could well become more expensive, raising the bar that startups must meet before they have a chance to be acquired.

Therefore, an IPO may very well become the most attractive way for entrepreneurs to sell their businesses and “cash out” on their work.  It is not dependent on the credit market, and relies instead upon the perceived value of the company.

Declaring IPO as the clear path forward on the basis of a single exciting tech IPO would, of course, be premature. More evidence in the form of other successful IPOs, weaker acquisition and buyout numbers would help support the conclusion. In the meantime, however, it remains an interesting trend to be on the lookout for.

So what about the gloom and doom facing entrepreneurs that I described in my previous posts? It seems a successful IPO (of a company that was doing well and preparing for this event well before the credit crisis began last month) will do little to convince smart candidates that moving to an operational position in a startup is the right move to make in todays market. Nor does it mean that a weaker dollar and slowing US economy are any less of a threat to startups and their VC backers.

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Day One in Saudi Arabia

14 Aug

Al Faisaliah Tower, RiyadhMy first full day in Riyadh was quite an eye opener. Having arrived last night after dark, it was the first chance I had to see the city. Our office, located on an upper floor of the architecturally fascinating and beautiful Al-Faisaliah Tower, has a sweeping view over the city below, which reflects the bright sun from its white and tan color. The desert is just visible around the edge of the city.

After months of working with colleagues connected only via conference call, it is refreshing to have a team of coworkers here to call my team. Since we will live, work, eat, and travel together over the next three months, there will be plenty of opportunity for me to get tired of them, but right now, I couldn’t be happier with the guys who are here.

Ironically, the first time in my consulting career in which I have had to wear a suit to work every day is in a climate where it rarely drops below 105 degrees F during the day. Even tonight, while I sit and write this, it is nearly 95 degrees. Of course, life here exists in the form of short jaunt from one air conditioned building to another, so it almost doesn’t matter.

And heck, after three months enduring London’s wettest summer on record, seeing a forecast that looks like this simply makes you smile:

5 Day Forecast

Will Traffic Die, Once and For All?

14 Aug

Congestion ChargingThere are a number of reasons why I am extremely impressed by how well managed London is compared to most cities in the United States. One area, in particular, is in transportation. One of the most controversial of these, when first introduced, was the congestion charge. Drivers are charged £8 (approximately $16 USD) to enter downtown London in their personal cars. The effect is that driving to work becomes too expensive to do it every day, encouraging commuters to use public transportation. At the same time, with less traffic, buses move faster, taxis zip from place to place more efficiently, and the city becomes an entirely more pleasant place to be. In the words of economics, congestion charging corrects a market externality.

As the New York Times reports today (“U.S. Offers New York Million for Congestion Pricing“) there has been a major step forward in New York’s efforts to replicate this important piece of legislation. While the plan is somewhat different, I have the utmost hope that it succeeds, and further demonstrates that public transportation can be successful in places outside of Europe and Asia (in one or two US cities at least…).

The secretary of transportation announced this morning that the federal government will provide New York City with $354 million to implement congestion pricing, if the State Legislature acts by March 2008 to put in effect Mayor Michael R. Bloomberg’s proposal for charging traffic fees in Manhattan.

Mayor Bloomberg’s congestion pricing proposal has attracted the broad support of business, labor, environmental and transportation groups, but he has been less successful at swaying state and city lawmakers representing the boroughs outside of Manhattan…

Nonetheless, the substantial federal support for the project gives enormous leverage to the mayor as he continues to press for his proposal.

The mayor’s plan, unveiled in April, proposes to charge drivers $8 and trucks $21 a day to enter or leave Manhattan below 86th Street on weekdays during the workday. Those who drive only within the congestion zone would pay $4 a day for cars, $5.50 for trucks.

Well done, Mr. Bloomberg. Let’s hope that he succeeds. It would certainly make that eventual move to Manhattan seem all the more tantalizing.

Needed: Flight Search for the Middle East

13 Aug

Saudi Arabian AirlinesI have just arrived in Riyadh, Saudi Arabia for a three month consulting engagement working on issues of regional competitiveness. Realizing that my teammates are escaping to various corners of the region this coming weekend (aka Thur and Fri), I decided to try and find a cheap flight to Istanbul or Doha, where I have some friends. Trick is, my old standbys, Kayak.com and ITA Software, don’t have much coverage at all in the region.

Therefore, out of pure self interest and with little basis other than my own 5 minute web search, I declare the Middle East is in need of some innovation in the online web search arena.

With Dubai and other regional cities booming, this might not actually be a terribly bad idea…

Beyond the Launch: SeedHive and the Stages of Entrepreneurship

12 Aug

RapLeaf

Businesses face different challenges at different stages in their development. An individual entrepreneur, batting around a business idea, faces fundamentally different questions and challenges than one who already has a prototype, one who has raised angel funding, and one who is looking for an exit through IPO or acquisition. It’s a simple concept, but one which I had failed to consider in my initial thinking on SeedHive, a business concept for an entrepreneur’s social network.

This modest but important revelation is courtesy Manish Shah, the co-founder and CEO of RapLeaf, a business which helps you manage your reputation online. I contacted Manish in order to get his reaction to the SeedHive concept as someone who fits squarely into my target user profile: he’s young, smart, web connected, and running a small business. His thoughts were valuable, and gave me pause.

Staying relevant to entrepreneurs of all stages

Businesses face different obstacles as they mature. As Manish said in our conversation, “It’s not always ‘early days.'” An entrepreneur may start with question about the basics, like how to find a good business partner, or how to legally incorporate. With time, however, those questions will shift to things like “How do I hire people?” “How much should I pay them, and how (equity, cash, etc)?”

In order for SeedHive to succeed, it would need to be both helpful for the newbies, and for those with experience. In essence, its success would hinge on the site’s ability to follow their journey.

Manish predicted that entrepreneurs would likely use the site in bursts. They might be extremely active and engaged in the community for a week or two at a time, as they tackle a new challenge, but then will “put their heads down” and get to work. Only if the site had proven truly useful in that initial period would they return when the next obstacle presented itself.

How he got started

Manish became an entrepreneur straight out of university, networking his way into a partnership with an experienced entrepreneur. In many ways, his partner’s knowledge of entrepreneurship, experience, and networks, eliminated the need for Manish to seek help to the basic questions of how to start a business, thus reducing the likelihood that he would have sought out the forums of SeedHive for advice.

Given his own experience, Manish strongly advocated that someone seeking a route into the world of startups must start through networking. Since Silicon Valley operates very much through informal networks, the onus is upon the entrepreneur to get plugged in. In this regard, SeedHive might hold some promise, since it would allow entrepreneurs and VCs to find each other easily, and start relationships online which could be transferred into the real world.

Challenges for a business social network

“Social network fatigue” is an ailment affecting not only Manish but many of the friends whom I would classify as “early adopters.” While Facebook is a novelty to my friends here in London, social networks seem like yesterday’s news to those in the Bay Area. If that attitude is consistent with the venture capital audience (which it likely is) then SeedHive might struggle to raise funding.

Most importantly, however, if the very people I would hope to be reaching with SeedHive, young, “plugged in,” entrepreneurs, are tired of social networks, and less likely to join and give it a try, the site might never get off the ground.

For Your Reading List: Why Smart People Make Big Money Mistakes

12 Aug

Why Smart People Make Big Money MistakesI had a fabulous lunch today with my former coworker and friend, Andre Medeiros. Our conversation turned to investing and he recommended a book, Why Smart People Make Big Money Mistakes — And How to Correct Them by Gary Belsky and Thomas Gilarch. Both he and his wife Christine vouch for the book’s readability, so I think I might just pick up a copy next time I find myself in a bookstore.

Editorial Review from Amazon.com:

Why do so many otherwise rational individuals make irrational decisions when it comes to money? Financial journalist Gary Belsky and Cornell University psychology professor Thomas Gilovich contend the answers can be found–and the deficiencies remedied–with help from a relatively new science called behavioral economics. Still largely unknown outside academic circles, the field can be traced to research on the impact of rewards and punishments on human judgment and decision- making that first were undertaken at Jerusalem’s Hebrew University some 30 years ago. In Why Smart People Make Big Money Mistakes , Belsky and Gilovich update this pioneering work and show readers how to understand exactly why they invest, spend, and save as they do. More importantly, using examples that everyone can identify with and language that anyone can understand, the authors offer dozens of workable suggestions that can help readers manage their money better. “We believe that by identifying the psychological causes behind many types of financial decisions,” they write, “you can effectively change your behavior in ways that will ultimately put more money in your pocket and help you keep more of what you already have.”

Most Popular Halloween Costumer, 2007? Sub-prime Lender

10 Aug

Jordan White, a Georgetown buddy with unrealized genius, just wished me a safe time in the Middle East. “Have fun and stay safe. And for God’s sake stay away from sub-prime lenders :)”

Which made me think: can I dress up as a subprime lender for Halloween this year? What on earth would I wear?

And more importantly, do they celebrate Halloween in Saudi Arabia?

For other ridiculous finance related Halloween costumes, check this out.