Thursday, December 11, 2008

VC Saga - Part 2

The other day, I wrote about the entrepreneur that had the funding pulled after final docs were done. The saga continues. She called the partner on the deal and requested legal expense reimbursement. The VC kept talking about "trust" and their long list of satisfied entrepreneurs. The least they could do is pay for legal expenses incurred for deal negotiation and IP diligence. Since every VC attorney needs to run up fees on a "standard" deal negotiating all kinds of "critical items," this entrepreneur had a $75k bill. She had to either had to pay, shut the company down/restart, or negotiate to have the next funder pay for it (ha-ha).

The VC responded with a whole bunch of excuses like this was against their "corporate" policy and that the next VC could move through the deal faster. However, this entrepreneur had been around the block a few times and called him out on it. Every VC's counsel has all sorts of issues in every supposedly standard document. And IP diligence is completely custom. People embarrassed themselves by quitting then coming back to their jobs because they were assured that diligence was completed and the wire was ready.

At this point the entrepreneur was waiting for a further discussion with the senior partner...

Till next time....

Here's some other related items I will blog about:

- My friend who just did an inside round that washed out founders and previous investors.
- My view on the big business vs entrepreneurial risk
- Why these Preferred terms need to be eliminated
- Some positive outcomes of this recession

Sunday, December 07, 2008

"Trust Me" said the VC

Someone very close to me was very excited to close funding of a new concept company. The technology her team was creating was going to revolutionize health care for a significant segment of the population and had many follow-on applications. She had a term sheet from top quality VC's. She had a high powered team with amazing researchers from all over the country. The market was a concern, but apparently these investors were well-financed. They repeated consistently that they had money in the bank for tranche 1, tranche 2 and wanted flexibility in the terms, because they felt more money was required in tranche 2. They had daily conversations with the CEO which were described as open, honest and helpful. Some issues did come up, but they always do. The VC asked if the CEO "trusted" them when typical founding team protections were requested. Their reputations were so solid, the VC said, that this was nothing to worry about. They only invest in 1 deal a year, so they back their teams to the hilt.

Everything was moving quickly, final papers were in the CEO's mailbox, the money was about to be wired, then Friday at 4 PM....

...the bottom fell out. Apparently "market conditions" was affecting the bigger brand name of the 2 venture firms. They were going to have a meeting on Monday, but they would not be going forward. It was nothing the team did, it was just "market conditions." This was not a term sheet falling apart in diligence. Everything form of diligence was done - management, technology, market, IP, and on and on. This was final paperwork. The deal was going to close on Friday, but the opposing counsel was not available for a couple of days, so Tuesday was the date. Well, at least the CEO thought it was.

Later we find out, the firm has been under incredible disarray for months. It's clear "the denominator effect" was impacting them. That, and the inability of limited partners to cycle funds through hedge funds. This was one of the most powerful and well known funds on Sand Hill Road. A friend of mine who runs a late stage fund told me, "Rajiv, don't believe anything a VC tells you today. When there's no money for the next couple of years, you'll see all kinds of strange behavior. It's going to be ugly."

Luckily, the CEO-to-be and her team are able to get their jobs back. Though they have to deal with the fact that everyone knew they were leaving, but they are needed.

So a fundamental innovation that would improve healthcare and reduce cost is delayed. The uncertain financial market has created even more victims.

Of course, what this VC has done is unforgivable. This will definitely be called out in the It's one thing to pull out during term sheet diligence, it's another to bail at the close. Frankly, there should be a financial penalties for bailing out. Trust goes both ways - the more protection you want, the more you should be willing to give. There's no free ride, my friends.

Note: I decided not to name names to prevent unintended consequences - at least for now.

Wednesday, December 03, 2008

UAW Pitches In

Yesterday I blogged about GM's marketing failure. Today was some great news in how UAW workers decided to help automakers overcome their cost disadvantage over Toyota, Honda and other US transplants. Nothing motivates folks like a crisis and the specter of complete industry disaster. If the Big Three went down, we would still buy cars from Toyota and others. The biggest problem would be that they employee nonunion labor. While these firms work with unions in Japan, the UAW has been recalcitrant in work rules, job classifications and benefit costs. When you fight against workers taking on multiple functions, defection and productivity enhancements, you run against the notion that everyone is a partner in the success of the firm.

It helped tremendously that executives cut inordinate bonuses, perks and reduced salaries. It was smart and gutsy for Wagoner and Mullaly to take $1 salaries from their previous millions. That made it easier to swallow getting rid of the senseless job bank, delaying paying into the health trust, and helping in the transition to lower cost workers. Unions should mean protection from potential labor abuse, but it should also mean being an active partner in the success of the firm. Automakers didn't help either - paying large bonuses and option grants while slashing the work force and producing poor vehicles. It was not hard to see why unions would take an antagonistic stance.

I still believe they should do a prepackaged bankruptcy with government financing, as it will allow automakers to truly cleanse their liabilities and start afresh. With the unions and management pitching in maybe this crisis can actually turn out positively.

Tuesday, December 02, 2008

The GM Mess - A Marketing Perspective

One of my favorite pastimes was to read about the automotive business. While other kids were playing videogames or watching TV, when I was young my favorite reading was about cars and business. Fortune articles were some of my favorites. Reading the latest GM article in Fortune, "Death of an American Dream," recounted the 20+ years of trials and tribulations ending with how it has fallen to less than 2% of Toyota's market value. As a marketing guy, one thing struck me the most in how far GM strayed from some of the basics of branding. Durant and subsequently Sloan make GM a great company because they personalized the car from Ford's Model T. They may have shared components and management techniques, but each vehicle brand had a unique design and feel with differential pricing and features to distinguish it from other companies. The company rose to have over 50% market share of the US market, becoming the envy of the world.

How did things go so wrong? The list is long but I will do my best to focus on marketing. In terms of product, GM started taking each model platform and basically changed the grill slightly and then priced based on the brand. The Chevy Cavalier was the same as the Cadillac Cimarron - and it showed - based on the economy J car platform. In fact, GM would advertise the development of its platforms - J, X, A - over its brands. You would think they would hide the underlying platform owner so a Cadillac or Buick owner didn't feel like they were being ripped off with an overpriced Chevy, but GM's market dominance made it arrogant. They had strange justifications like they were simply graduating buyers as they made money. Sometimes the cars were so good like the Corvette that it would succeed in spite of Chevy's family-oriented and economy-priced positioning. But the homogenization continued. I still remember going with my parents to shop for an Oldsmobile Cutlass Wagon. The salesperson offered us a whole list of engines sourced from different GM brands and plants.

Over time, model differentiation improved, but brand communication still fell under the GM umbrella. Note the latest green advertising for E85 compatibility where GM headlines the ad with all 8 subbrand logo fall below. Then there's the bunch of hybrids under different brands and the someday to be released Chevy Volt all advertised under the GM brand. It's unclear why a Saab owner would want to know why their cool Euro sporty car is made by the maker of Pontiac. Or knowing that your import equivalent Saturn is a made by the leading domestic player. One of the reasons I bought a BMW 328i was because even though the Audi A4 was cool, it shared components with its VW equivalent - just look under the hood. I've owned VW Rabbits. Solid cars, but its not a sports luxury car like an Audi.

With its capital and rich heritage combined with the creativity of top ad agencies, it's surprising that GM took this marketing approach. When someone is spending a significant percentage of their take home pay, they are going to do some research. In the Internet age, its easy. Undifferentiated product, false tiers, uniform messaging across disparate brands - a recipe for failure. Reading Taylor's GM article, it makes sense.

Monday, December 01, 2008

Oh, Now It's Officially a Recession

In one of the silliest headlines ever, news sites are reporting that the recession started in December 2007. Apparently, till now, it was unclear. Most news articles were saying up until now that we were probably in a recession, or that we will be in a recession soon and that it will last for a while. Of course, to a person who lost a job, it's been a depression for some time. Nevertheless, it takes us a whole year to officially decide. Then promptly on this news, the Dow drops 680 points. What? Didn't they know already? Weren't previous results and future expectations already priced into equities? So much for the stock market being a predictor of where things are going. If you go back to Dec 2007, the Dow was around 13,000 up a few percentage points from the year earlier. It actually reached 14,000 in October, about the time it should have been predicting this whole thing.

Many of us in business have felt it throughout the year even though the press kept discussing endlessly rising markets. Everything seemed fine from all that you read, except for concern about the housing market. People were concerned about rising fuel prices, but airplanes & hotels were full, people were buying more flat screens, and India & China were growing at unbelievable rates. Then things got ugly with banks failing, foreclosures, bailouts and state revenue deficits. Now, market volatility is at an all time high. Check out the VIX, it's double where it normally is. That means people don't really know what is occurring.

Every article about the economy is now negative. Any positive result is couched with concern, reduced expectations or sometimes disbelief. For example when HP announced positive results, it was almost as if the writer did not believe it because it did not fit into the narrative. There was a great Lexus ad recently in the back page of the Wall Street Journal where they crossed out every negative word in a faux front page leaving... well, very few words.

The whole thing smacks of revisionist history. Yeah, there were foreclosures and a credit crunch, but that was before recession. A long and deep recession was coming. Now, everything must be reassessed because those weren't actually good times. We weren't really making money, working at a decent job or having fun the other day. We were actually in a... er... recession.

Tomorrow, I'll write about what my company, Position2, is doing about the recession.