by John Nesheim
343 pages; Year of Publication: 2000
Simon and Schuster, New York
Looking for a concise introduction and survival guide to the trials and triumphs of the high tech start up industry? Aspiring CEOs, CFOs and entrepreneurs need look no further than “High Tech Startup” by ace venture analyst John Nesheim.
14 chapters and three appendices cover a wide range of tips and case studies, with topics ranging from intellectual property right and business plan formulation to initial public offerings (IPOs) and MNC venture initiatives.
John Nesheim is CEO of consultancy firm Nesheim Group. He teaches entrepreneurship at Cornell University and other schools in Asia and Europe.
High growth ventures have emerged as economic power houses in the United States, generating thousands of jobs, diffusing technological knowledge, and creating a culture of innovation that has ripple effects throughout every type of business organisation, and indeed their impact has changed business around the world, according to Cornell University professor David BenDaniel.
Nesheim begins with an overview of the various historical phases of the entrepreneurial capital industry, such as its birth in the 1940s and 1950s, the launch of the term venture capital in the 1960s with companies like Digital Equipment Corporation, the shrinking of VC pools in the 1970s followed by a big boom in the PC era of the 1980s (with names like Microsoft finally becoming household words), and another boom in the recent Internet era.
However, warns Nesheim, there are some grim realities beneath this rosy picture: fewer than 20 per cent of funded start-ups in the U.S. have gone public, venture capitalists (VCs) continue to complain about the poor structuring and conceptualisation of many startup business plans, and CEOs often underestimate the high personal costs involved in this business.
Nesheim identifies 12 stages of the start-up process which can be clustered into three phases: formation (business plan, legal issues, management team), financing (venture capital, valuation, dilution), and the IPO (investment bankers, stock markets, and M&As).
Key dangers in the early phases are the leaking out of the founding ideas and technologies, and lack of commitment from key players. Pulling together the original team while still fully employed by another company also entails risks of confidentiality and counter-offers. Some of the most useful skills here are negotiation strategy, street-smart tactics, and alliancing.
Start-up CEOs need to ask themselves tough questions about financial expectations, personal commitment, value perceptions, media savviness, industry consortia standing, social support systems, peer pressure, failure risks, and personal health.
Legal issues that will soon crop up here include IPR, trademark registration, employee contracts, NDAs, and incorporation. “The Internet era opens up uncharted legal territory requiring wise legal advice,” cautions Nesheim. “We are convinced that the choice of a good law firm is one of your most important decisions,” he advises.
In approaching VCs, aspiring start-ups need to ensure that they focus on core competencies as well as sustainable competitive advantage. A good financial accounting consultant can also help chip in with financial projections and marketshare growth estimates.
“Write a super executive summary, because that is all most VCs take the time to read,” Nesheim warns. “Start-ups outside the U.S. found that signing up with companies like the Big Five accountancy consulting firms helped their later entry to the large markets in the United States and got their financial forecasts into a format that the venture capitalists were most familiar with,” observes Nesheim.
Today, VCs look first for large and expanding technology markets, core management teams, an “unfair” advantage in the market, and satisfactory evidence that the company can come up with not just one product but an evolving series of product ranges and associated services. A key question that arises here is: “Is this is a product or a business?”
And as the company grows, VCs also expect founders to be prepared to step aside in favour of more seasoned management – well evinced in the case of Yahoo.
The book also includes over 30 useful pages of venture tables listing ownership, multi-stage dilution, valuation and IPO snapshots of companies like Amazon, eBay, Doubleclick, Exodus, Juniper, MP3.com, Net2Phone, Netscape, RedHat, Redback, Yahoo, Apple, Cirrus Logic, Microsoft, MIPS, Oracle, SGI and Sun.
Founders need to come to agreement on how much share dilution and board membership concession they are willing to settle for, at various levels of funding.
Start-ups also need to put themselves into the VC’s shoes to better understand their logic, priorities, and strategic imperatives: VCs are primarily interested in increased RoI, they are influenced by an industry shaped by institutional funds as well as day traders, and they must factor in the costs of the potential losers in their portfolio – companies that will go bankrupt or do poorly.
“Wild Ones” like Apples, Compaq, Cisco and Yahoo are rare and seldom seen in VC portfolios; more common are “Winners” and “Solids,” with quite a few “Zombies” and “Bombs” thrown in.
In the U.S., landlords and equipment leasing agencies are also emerging as sources of venture capital and related services; commercial banks, angel investors, and Fortune 500 giants are playing an increasing role in this space as well.
“Corporate partners can greatly increase credibility,” Nesheim advises, as evinced by Inktomi’s early alliance with NTT – the first in a string of blue-chip links for the content caching and search services company.
The holy grail, of course, is the IPO. The investment banker’s fee is in the vicinity of 6 to 12 per cent of the total offering. “Choosing the best research analyst to write about the IPO company is very important,” Nesheim advises. “Veteran CEOs most often said their first and most important selection criterion was which investment banker had the best research analyst,” he says.
Key factors to weigh here include the size of the deal, degree of work for lawyers and auditors, and the amount of competition between investment bankers.
Then there is also the question of timing the IPO with often unpredictable market windows of opportunity. “Some famous misses include Internet pioneers Wired magazine and PointCast,” Nesheim explains.
“When a company goes public, the CEO is fully exposed and must live in the spotlight, explaining disappointments as well as achievements to a vast audience that tends to be highly critical of the company and its leadership,” Nesheim cautions.
Post-IPO activities include managing press/investor relations, dealing with new board members, and developing relations with the research analyst community. Further on down the road, assistance from merger and acquisition specialists may also be needed.
In the coming years, challenges will arise in ensuring thorough due diligence, attracting and retaining skilled managers for start-ups, and managing a wide range of investment philosophies (eg. “first mover” versus “best mover”). As for other parts of the world, venturing from Asia (e.g. Softbank) and Europe is in place, but is not yet a dominant force as in the U.S.
Though written in the pre-“Black Friday” days, the book’s value will continue to endure in these more-sober times of the post-dotcom economy.
The book provides a useful reading list as well (magazines such as Business2.0, Inc., Institutional Investor, Red Herring, Upside, and Forbes, and books like Innovation and Entrepreneurship by Peter Drucker, Marketing Warfare by Al Ries), and online resources (Advanced-HR.com, Garage.com, StartUpWeb.com).