• The investing environment / opportunities to sustain the growth and competitive advantage of the American economy
• The exit environment
• The capital raising environment for VCs
• The positive and negative impacts of rules and regulations on the venture community and its portfolio companies

I have my own agenda and it centers around the topic of liquidity. 

In my opinion, the root cause of all issues that are curently having the greatest negative impact on the venture business – and our collective ability to raise funds so we can invest in your companies - is tied to liquidity. Every regulation that gets in the way of supporting liquidity ultimately affects the economy, Limited Partners, portfolio companies,  and the venture community in general.  

In my mind, there are three things the SEC could do to make an immediate impact upon liquidity for small, private companies:

SarBox. According to my own experience and industry experts, companies can expect to pay at least $2M/year just to service SarBox expenses. Meeting SarBox requirements eats up a good portion of earnings and therefore makes it impractical to even consider an IPO unless you are a much bigger company. Proposal: Relax the reporting requirements for companies generating less than $250M annual revenue. The market will build in a discount to the stock price to account for the additional market risk. This risk can be socialized in the Prospectus.  

R&D Tax Credits. Proposal: Enable small companies to carry forward all R&D expenses generated as a private company as a future tax credit thereby enabling small companies that IPO to generate strong earnings as a nascent public company so that their balance sheets can successfully compete against the incumbents for investor support.

Employee Stock Options. In this unstable economy, small companies are finding it more difficult to attract employees from large relatively stable companies. And, with all the stock option scandals that surfaced earlier in the decade, it’s dampened the enthusiasm for companies to broadly disseminate stock options as a mechanism to entice employees to join/stay with a small company. Proposal: Allow all vested stock options to be treated as a capital gain, irrespective of the exercise/holding period.

Those are a few of my ideas. But, I am quite confident you will have even better ones. Why don’t you comment with your ideas and I will see if I can compile them into some sort of categorized/logical order and get them in front of the Commissioner.

Looking forward to hearing your suggestions.

While at the application level, it’s easy to view Salesforce.com as the star of that sector, it gets a little murky as you move to other functional areas of the front and back office as well as down the overall cloud ’stack’. As with most nascent markets,  the market is highly fragmented: CoLo/Managed Services (e.g. Rackspace, OpSource, many others),  Infrastructure/Platform (e.g. Amazon, Salesforce.com, VMWare, many others), Tools (e.g. Salesforce.com, Corent, Serena, SAP/Coghead, many others), and some a mixture of 2 or more areas (e.g. Salesforce.com).

To make some sense of the trends, I attended a presentation last year by Bill McNee who is an industry analyst with Saugatech. I thought he did a particularly good job breaking the market down into sectors, segments and strategies. Here were some of his observations and predictions he shared with respect to the growth of cloud computing and SaaS at that time:

1. Core systems of record (e.g. Finance, HR and BI/EPM) are growing rapidly – both SMB & Enterprise are adopting.
2. International is beginning to grow.
3. Standalone applications is Wave 1, International is Wave 2, Workflow/Collaboration is Wave 3 and Measured/Monitored/Managed business processes are Wave 4.
4. Platforms are beginning to proliferate.
5. M&A will accelerate.
6. Customer satisfaction is generally quite high with high annual renewal rates.

Bill went on to say that their data showed that 70% of the companies with >100 employees would deploy at least 1 SaaS-based application by 2012. And, he believed that one of the biggest market opportunities would be SaaS-based BI/CPM which in 2008 represented about 17.3% market share and would grow to 40.7% by the end of 2010.

He also predicted that SaaS-enablement would lead to cloud development — which indeed is occurring. Salesforce.com’s announcement of Force.com last year and its latest quarter’s growth from that business is proving this out. In addition,  with acquisitions by companies such as SAP with Coghead last year and VMWare with SpringSource this quarter, we are now beginning to gain a sense for how this may play out.

For traditional software companies in the fight for ‘cloud’ leadership, the overriding issue that remains is the hostile business model that SaaS/cloud computing presents. Wall Street measures these companies by in-quarter revenue growth and margins. Deferred revenue and in-quarter expense are antithetical to those models. With Salesforce.com, they have been successful in selling to the Line of Business and primarily SMB’s (that’s where 90%+ of their business still resides). Selling a Platform/Tools to IT and larger companies is a big departure from that success. However, they recently hired some big sales hitters from Siebel Systems to help address that issue.

Here is some other data Bill shared with us based upon their market research polls:

1. 40% of large enterprises will seriously consider SaaS-based ERP, HR, order management, and procurement solutions.
2. 30% will choose a new next gen SaaS solution provider
3. By 2012, only 20%-40% of software will be sold under traditional perpetual license model

In support of this data, I  think we are beginning to see SaaS break into the back office — initially in SMB — just as Salesforce.com did with its CRM applications. Companies such as Host Analytics, SmartTurn, and Adaptive Planning are beginning to make  progress in an area that has traditionally gone unserved by the large enterprise ERP suppliers such as SAP, Oracle and Manhattan Associates.

However, even though we are beginning to see where companies are picking their spots to compete in the cloud/SaaS space, identifying the future master brand(s) out of this fragmented market is challenging. I would say, though, that the comments I made in a blog I wrote early last year titled “Global Market Leadership” are still germane to becoming the next ‘master brand’.  It may be one of the existing competitors we know about today or, in fact, it may come from a new entrant we have not yet seen.

That’s what makes this market so exciting.

Investing in Enterprise SaaS

As a result, large software companies whose innovation/growth strategy has relied upon a steady stream of start-up company candidates to acquire may be faced with a shortage in the not-so-distant future. Consequently, companies that have traditionally relied upon their strategic software providers to deliver innovative new solutions to enable them to further optimize back office and front office operations will suffer. 

A Spin on the Spin In

Given the current issues associated with the traditional venture capital business model (e.g. lack of liquidity) and the fear to invest in enterprise software start ups, and the innovation/growth pressures that the large software brands are faced with I believe there is a unique opportunity for the venture community and the large software brands to come together.- using a modified version of the classic spin in.

For this discussion I am defining a spin in as a company formed with the explicit endorsement and investment – including personnel, cash and IP – by a large software company and venture investors. The express purpose of the spin in is to build strategic products and/or go after new markets with the ultimate objective that the large software company will acquire the spin in at some point in the future.

The concept is relatively straightforward and has been tried, tested and proven most successfully in high tech by Cisco but it has also been used by companies in other industries as well as the federal government. However, this approach has not typically been employed by software companies.

Why? Well, primarily because there hasn’t been any need. Large software companies have had the benefit for years of relying upon the venture community to finance a plethora of competitive software start-ups that identify new markets, create innovative technology, and secure customers.  Once some/most of the technical and business risk s are removed and the 2-3 leaders emerge, the large software companies have been able to approach these  ‘winners’ and acquire one of them either willingly or unwillingly. This process has been used successfully by many of the larger brands including, but not limited to: Computer Associates, IBM, McAfee, Microsoft, Oracle, SAP, and Symantec.

Another reason spin ins have not been utilized much by the software industry is due to the widespread ‘Not Invented Here’ (NIH) syndrome that most successful software companies express. The attitude is typically “we can do this better, faster, and cheaper ourselves.”

However, the facts tend to conflict with the attitude.  As companies grow, few really innovative products are started, completed, and successfully brought to market. Each year when the products organization and executive team sit down to consider all the proposed projects for the following year, there is a finite budget to distribute. A line is drawn and all the projects that fall below the line go unfunded. The projects that are usually funded are those that are the current mainstay of the company; the ones that are most likely to generate short-term product and maintenance revenue.

The dilemma is that those projects that fall below the funding line could very well be the innovation the company needs to thwart competition and secure and grow substantial future revenue streams. In addition, many of those proposed, unfunded projects may come from some of the most talented personnel in the company. When those projects don’t make the cut, the people associated with those projects can become extremely frustrated and threaten to, and often do, leave the company to ‘pursue other interests’. This can put a significant brain drain on the company.

The framework of the spin in structure I am proposing is different from the more traditional approach and it is my attempt to address the issues of each of the constituents involved: the large software company, the venture investor and the “spin in” management/employees. While there are some financial/structural problems associated with the spin in derivation I am proposing (there are no panaceas) I believe the benefits could far outweigh them.

Product Selection

The key to selecting a specific project/product as a candidate for a spin in is to ensure the product is strategic to the success of the large software company and that the market opportunity is large enough to support an independent entity.  A product idea that is just a feature of a larger product suite is not a suitable spin in candidate. Think of it this way, if it won’t pass a venture capital firm’s due diligence as a sizeable, standalone firm it isn’t a viable candidate as a spin in.   

Financial Structure

There are several important elements required to make a spin in a viable financial structure for the large software company, the investors, and the employees. Below is my proposed framework for such a structure.

Ownership

The first objective is to ensure the spin in’s financials are kept off the large software company’s books and preventing it from diluting the large software company’s earnings while the spin in grows to profitability. To achieve this, the large software company must pass an outside auditor’s scrutiny demonstrating it doesn’t possess a majority and/or controlling interest. Practically, this means the company must own less than 20% of the spin in and cannot have a formal seat on the Board of Directors.

This is why the large software company needs the venture community as a strategic partner. The large software company can own at most up to 20% so it cannot execute this on its own. The venture community is the ideal partner because it brings money and expertise in building start ups.  

For some large companies, the lack of majority control makes a spin in a non-starter because they don’t have formal control. However, ultimate control comes from the fact the spin in is going to be highly dependent upon working with the large company to gain access to its marketing and distribution channels.  Doing anything to jeopardize that is not in the financial interest of the spin in’s management team and venture investors.

To attract a world-class management team and employees, the spin in will need to allocate a minimum of 20%-25%.

Therefore, simple math suggests venture investors will own up to 60% of the spin in at its onset and may need to provide up to 100% of the forecasted cash requirements. The large software company can contribute any one or all of the following: IP, key employees, marketing programs, a ready-made distribution channel, and even cash to account for its percentage ownership position.

Collar

The primary difference between the spin in structure I am proposing and a traditional spin in is the use of a financial “collar”. It is this collar that can ensure the large software company, the venture investors and the management team are incented to make the spin in become a successful business.

The terms of the collar I am suggesting gives the large software company a call option. This option includes a “first right of refusal” to purchase the company at a pre-determined multiple of revenue for a pre-determined period of time, thereby protecting the large software company from having to compete to buy the spin in on the open market.  This is only fair since the spin in will require the large software company to provide a significant amount of marketing and distribution support.

To ensure the large software company remains interested in the success of the new entity over the long term, irrespective of potential market and regime changes, the venture investors hold a put option to sell the spin in back to the large software company at a certain point in time at a certain multiple of paid in capital.

The collar can be structured such that the management team and employees are incented to drive a range of increased valuation outcomes tied directly to revenue and expense objectives. For example, the call and put options can be set such that they don’t begin to run until year 5. This gives the management team the ability to drive the company’s revenues as high as they can to drive a higher multiple if the call option is executed. If the put option is executed, the management team and employees only receive 50% of their equity ownership which incents them to make the business as successful as they can. Both options can expire at the beginning of year 8 so that if the large software company or the venture investors don’t execute their option, the management team is free to operate thereafter.

Although it is beyond the scope of this article, I have put together a set of terms and models with a variety of outcomes that show how this modified spin in approach is financially attractive to the large software company, the venture investors and the management team.

Summary

Software innovation is still needed by the large software companies and enterprises. For all the reasons discussed, large software companies are not able to do much real innovation internally. For at least the past 5 years, the venture community with few exceptions hasn’t been willing to fund new start ups focused on traditional enterprise software. And, due to current macro-economic conditions, the venture community is struggling with its business model.  As a result, I believe the enterprise software innovation engine could slowly grind to a halt if the status quo remains. I believe there is a unique opportunity for both of these communities to partner using a modified spin in approach. While clearly requiring compromise by all parties involved the spin in could solve a number of key issues that could enable the enterprise software innovation cycle to thrive.

The potential benefits of a spin in approach for large software companies are:

• Strategic projects that might not be funded because they are below the line are able to get funded.
• The cost of development is carried off the parent company’s balance sheet until such point the product is in the market and generating revenue so it is potentially non-dilutive to corporate earnings.
• The parent company is able to effectively retain key personnel by enabling them to exercise their entrepreneurial spirit.
• The spin in retains some of the parent company ‘DNA’ so cultural issues that affect most acquisitions are minimized.
•  The products that are developed can be managed such that they are architecturally consistent with the parent company’s products so there is little overhead integrating the “spin in” products.

 The benefits to the venture investors are:

• They can be certain the technology and business being created are interesting to the large software company from the onset, so they can invest with some confidence that the start up will ultimately have value v the typical 9 out of 10 failure rate they normally experience.
• While the upside will be capped, it his highly likely there will be a reasonably positive return within 5-8 years and therefore the investment will be accretive to the fund’s multiple and IRR.

The benefits to the entrepreneurs are:

• You will be funded!
• Lack of sales and marketing, not technology, is what typically kills most enterprise software companies. With a strategic investor/partner that is motivated to give you access to its customer base with a relevant offering this issue is mitigated.

I have shared this modified spin in concept with some executives at a few large software companies and I think I’ve heard all the reasons why it won’t work. However, as a former senior executive of a large software company, I haven’t yet heard anything to date that, with some work and compromise, makes the concept a non-starter.

So, I’m putting out a challenge to all those large enterprise software company CEOs and senior executives. Find that innovative project you’ve wanted get to market but for some reason just can’t get off the ground. I will share with you the full overview of this modified spin in model and why I believe it will work.

Wachovia Securities issued a report in May 2008 on the state of the SaaS market. On page 25, it shows amount of capital paid in prior to an IPO for 18 out of the 28 public SaaS companies. Here is that list below:

Blackboard                     $100.7M
Concur Technologies     $  30.2M
Constant Contact           $  37.3M
DealerTrack                    $  48.0M
DemandTrack                 $  42.0M
HireRight                        $  29.2M
Kenexa                            $  54.5M
LivePerson                      $  41.6M
NetSuite                          $  84.9M
Omniture                        $  66.9M
RightNow Technologies  $  32.2M
Salary.com                      $    5.7M
Salesforce.com               $  64.5M
Solera                              $   5.7M
SuccessFactors               $  54.5M
Taleo                               $ 36.9M
Ultimate Software            $ 25.1M
Vocus                              $ 26.4M

Mean                               $43.5M
Median                            $39.5M

So, it doesn’t really take $100M but the data seems to suggest it is still an expensive proposition. Let’s call it $40M — this is still 2-3X the amount of capital required for a traditional model software company to reach profitability/IPO.

However, this is where the details matter. It turns out that these public SaaS companies, on average, raised about $25M at strong valuation mark ups and invested this amount primarily on sales and marketing in the year prior to going public. For example, Salesforce.com raised $47M in November 1999 at a 224% step up in valuation and IPO’d just five months later in March 2000.

This makes sense when the data shows that Wall Street gives much better valuations (multiples that are possibly 2x-3x greater) to those SaaS companies able to demonstrate strong revenue and subscriber growth rates.

Consequently, if you eliminated this average $25M investment from the paid in capital, SaaS companies don’t look that much different from traditional software companies in terms of total capital required to either reach a liquidation event (e.g. IPO) and/or profitability.

All that said, SaaS companies do need to aggressively monitor and manage their customer acquisition costs (CAC). If Annual Contract Value (ACV is the expected annual stream of cash flows expected from each subscriber) is relatively low against the cost to initially acquire the customer, then the SaaS company can quickly get into cash trouble.

This is why I like my portfolio companies to constantly monitor and manage their customer acquisition to ACV ratio. A good target ratio to strive for is 1 or less — far less being the goal. That is, when you divide the total customer acquistion costs by the first year ACV, the resultant should be a number equal or less than 1. Customer acquisition costs should include: all direct and indirect marketing costs, commissions, and T&E.

In order for the SaaS business model to work, it’s critical to keep sales and marketing costs as low as possible. This means highly leveraged marketing programs that make the product as “viral” as possible — enabling current customers to easily tell others about the success they are having. And, sales costs must be kept down by using the website to answer as many questions as practicable, using customer video testimonials, self-service demos and web conferencing instead of travel for sales meetings.

In fact, if you’re a SaaS CEO, for 2009 I suggest you consider compensating your sales and marketing executives based upon achieving a pre-determined CAC/ACV ratio. This will force your sales and marketing organizations to work far more closely together — what a concept.

Venture Capitalist Gives Entrepreneurs Advice

Top Ten Questions:
1. Tell us about your Venture Capital Company.
InterWest Partners was established in 1979 and is a leading diversified venture capital firm currently investing InterWest IX, a $600 million fund. With more than $2B in capital under management, we take a long-term, collaborative approach to venture funding, providing early-stage and ongoing capital, management development and access to a broad network of resources.

InterWest is the lead investor in more than 70% of the investments we make, reflecting our ability to marshal resources and organize financings on behalf of our portfolio companies. We maintain relationships with our portfolio companies for an average of 5 years and in some cases for 10 years or more. An InterWest general partner serves as a director for 85% of the companies in our portfolio, often continuing to serve even after the partnership’s investment in the company has been returned.

2. What is its focus?
Our partnership invests in Life Sciences and Information Technology companies. Within the Life Sciences market, we invest in pharmaceuticals, biotechnology and medical devices. Within the Information Technology market, we invest in multiple sectors such as: semiconductors, telecommunications, consumer and enterprise software, infrastructure and wireless/mobile.

3. What is your minimum and maximum investment?
We invest in companies at all stages depending upon the circumstances. Where we have a strong relationship with the management team and/or know the market very well, we have made early stage seed round investments of $500K or less. InterWest, though, typically expects to invest an average of about $7 – 15 million over the span of our involvement with each company in our portfolio. We invest in companies through the full range of venture investment stages, and investments may be staged over several rounds of financing. Although we generally begin our involvement in the early stages of a company’s development, we pursue attractive opportunities based on their individual merits rather than their investment stage.

4. What do you typically look for when assessing a Business Plan?
At the macro level, we look at the following key criteria.
• Total Addressable Market – is the market large and growing and if so, can it be reached in a capital-efficient way?
• Technology – does the company have unique and defensible intellectual property?
• Management Team – has the management team worked and won together previously?
• Distribution – does the company have a powerful and compelling strategy for rising above the competition to become the recognized global market leader?

5. What do you typically look for when assessing a team?
• Is each member of the management team an expert in their functional area?
• Is the CEO credible and in command of the facts of her/his business?
• Do you have a credible financial model that shows you’ve really thought about the revenues/expenses of the business beyond plug and crank formulas?

6. How long does it typically take to go through the investment assessment process?
If we are very knowledgeable about the market and have a prior relationship with the management team, the process can take as little as two weeks. If we need to do a deep dive on the technology, the market and the team, it can take up to 60 days. Many times, we may elect to pass on the current opportunity to invest but stay involved and help the team for a year or more while they make progress against their plans only to invest once some of the more critical milestones have been achieved

7. How does your VC firm support its portfolio companies and founders?
The answer to this question depends upon the specific partner in our firm and her/his particular investment strategy and/or background. Many of us are former CEOs and/or senior operating executives and therefore are available to help our portfolio companies identify and hire key executives, compose strategic product and marketing plans, attract key board members, structure future financing rounds, etc. In all cases, we work as a team across our entire portfolio and can solicit advice and advisors in areas outside any one of our individual core competencies.

8. What is the best way to get your attention and stand out from the crowd?
Deliver a presentation that answers the questions I proposed in Answer 4 above and a demo (if applicable) in less than 1 hour. Read Guy Kawasaki’s blog titled “10, 20, 30”. He does a masterful job telling you how to pitch a potential investor.

9. Any advice for entrepreneurs relating to getting VC funding and support?
What follows is a long answer, and may be repetitive to some, but I hope it provides you with better insight into what drives the venture community. As an operating executive for the previous 27 years, it wasn’t until I joined a venture firm and had the opportunity to learn the business model that I fully understood what motivates most venture firms and partners.

First, when you meet with a venture capital firm, you need to remember it is nothing more – or less – than a high level sales call. Only in this case, the product you are selling is yourselves. As a result, just as you would prepare for an important prospect visit, it is equally important for you to do research on the firm you are presenting to: each firm is different and you need to understand their history, track record, the partners in general and the specific partners you are meeting with so you can adjust your presentation accordingly.

Unlike one of your typical prospect sales calls, however, where there is always someone who is “the decision maker”, partnerships are different. With few, but notable exceptions, there is no one “in charge” or who is the decision maker. In almost all cases, all the partners are equal in status – although informally some partners are more equal than others due to the fact they have been around longer and may have a longer list of successful investments. As a result, while one of the partners may decide she wants to invest in your company, she must convince the rest of her partners to vote favorably before the investment can be made. To do that, she needs to do due diligence and in many firms involve one or more of her partners in the process so that they are sympathetic and supportive of the investment. Each partner has a financial interest in the overall profits of the fund – called “carry” – that motivates them to be interested in any and all investments each partner makes. Therefore, each partner evaluates every investment opportunity brought into the firm and must weigh that opportunity against others the firm might make before voting positively to make the investment. Again, there are exceptions to this structure but by and large this is how it works. You should attempt to discover the firm’s investment/decision making process in your first meeting or as early as possible.

The one thing that is universally true among virtually all venture firms is that that they must answer to their Limited Partners. Limited Partners provide venture firms with the capital to invest, pay management fees, and run the firm. Limited Partners include entities such as large pension funds, family trusts, banks and other financial institutions and wealthy individuals. Limited Partners consider venture capital one of many asset classes they can invest in and, unsurprisingly, are seeking only the firms with the best investment records; while venture firms seldom share information about their results beyond their Limited Partners, Limited Partners have no qualms about sharing the results of their venture firm fund investments and generally make these available to the financial community at large. A venture capital firm’s track record against other investment asset classes and against other venture capital firms will dictate whether or not it can raise its next fund and survive. Most Limited Partners seek to invest in venture capital firms that are in the upper quartile of returns against all other venture capital firms – as measured by multiples of capital invested and Internal Rate of Return (IRR). Generally, Limited Partners want to invest in venture capital firms that have a sustained and successful investment track record with partners who they have met and known for many years. Partner turnover is a negative. Partners without a long, successful investment record is another negative and works against the firm’s ability to raise its next fund.

Partners are measured by their peers inside the firm and by the fund’s Limited Partners for the quality of investments they’ve made. Unfortunately, it usually takes at least 5 years before a new partner’s deals will mature to a point where the firm will know whether or not those investments are successful. As a result of this and the fact that partner turnover is viewed negatively, firms are very conservative about who they hire, who they fire and when.

Against this backdrop and at the very macro level, here is what the partner who is sitting across the table from you is considering. First, she knows that for the majority of successful venture capitalists, 8 out 10 of their investments will fail – are you 1 of those 8? She also knows that 1 out of 10 will just return capital – is that your company? She also knows for her firm to successfully raise its next fund, the overall fund must return at least a 2-3X multiple ($500M fund must generate $1B-$1.5B) and at least a 15% IRR (this is a rate of interest over time so the faster you return capital, the better your IRR – great companies that take many years to liquidate [e.g. IPO or merger] may have a great multiple but compromise IRR).

If each company, over time, requires an average of $10M of invested capital and 8 of them fail and 1 just returns capital here is how the model breaks out: $80M in 8 companies that are complete losses = net loss of $80M, $10M invested and $10M returned from 1 company = $0, and $10M in the 1 remaining investment. To that, the fund must also cover her yearly management fee (e.g. salary), overhead and expenses. So, assuming $10M for the remaining investment, this one investment must return the $90M+ to cover all previous investments/expenses/management fees and then generate approximately another $90M+ just to produce her share of a fund that returns 2X capital. By the way, a 2x fund depending upon the year it was started may not be in the upper quartile. And, all of this has to happen within 7-10 years of the original investment to generate a good IRR.

So, if the 1 remaining investment you own is 20% of a company that IPO’s with a market cap of $1B within 5-7 years, you will generate an overall 2x multiple of your 10 company investment portfolio with a nice IRR. Although it’s finally getting better in 2007, the problem with the IT market for the past 6 years is that only a handful of companies met this criteria (e.g. Google, Salesforce.com, Riverbed, Skype and a few others). Most failed outright and those that managed to hang on had no IPO opportunity to liquidate and few M&A opportunities to capitalize upon. Ouch. With few exceptions, only those venture firms that were diversified outside IT have managed to do well with their 1999-2002 vintage year funds.

This is why most top tier venture capital firms won’t/can’t invest in just any company/idea – even if it’s a reasonably good one. Our business model compels us to invest only in those companies we truly believe can be large (e.g. at least a $500M market capitalization) and/or where we can have significant ownership. For example, a company that becomes $500M in value but where we only own 5% doesn’t really help the fund/firm. This is why many firms won’t invest if they can’t have at least 20% ownership or if the company can’t achieve at least $250M in market capitalization – even if it’s a great idea, in a great market, with a great management team.

And, sometimes, even if you’ve got a great idea, team, market, it may just not be an area that is interesting to the specific partner you’re presenting to. If they pass, ask for an honest answer as to why (if they just didn’t like you/team, you will seldom get an honest answer), and move on.

So, now that you have a better appreciation of the business model and characteristics of how partnerships work, take a long look at your presentation/business plan and see if you’re covering off the issues that the partner you’re meeting with is facing.

10. Any advice for entrepreneurs with their startups or early stage companies?
1. Focus on executing against one thing. Get the entire company behind that one thing.
2. If you are a technology company, spend a significant amount of time thinking about your marketing and distribution strategy – nearly all technology companies can build a product that works but most don’t have a clue how to create a marketing and distribution strategy that compels companies to buy from them – ask yourself, “how will we rise above the rest of the industry to become the acknowledged global market leader.” Clue: the answer isn’t Google adwords.
3. If you feel you need venture capital, only seek out firms and partners that align with your business/management philosophy. If you fail to attract any firms that meet your criteria to invest, re-read my Answers 4 and 9 above and modify your presentation and try again. Don’t just move down to a lower tier of firms – you may get the money but you will more than likely fail because you didn’t really get the formula right.