Benjamin Kuo’s Blog

Jerry Greenfield — co-founder (and the “Jerry”) of Ben and Jerry’s Ice Cream, was the lunch keynote at the Los Angeles Venture Association’s annual Investment Capital Conference Wednesday. He spoke about the whole story behind how Ben and Jerry’s started, gave out lots (lots!) of free ice cream, and also talked about social responsibility and business. In telling the story’s of Ben and Jerry’s, Jerry spoke about how both Ben and Jerry knew nothing about ice cream or about business–not a great way to get a loan from the bank to start their business–and how, despite that, they opened up the first Ben and Jerry’s in Vermont and grew to become one of the most celebrated names in ice cream. (Photo to right: Jerry Greenfield on Wednesday at LAVA’s Investment Capital Conference).

Interestingly enough, I find in my wanderings around the technology industry here there’s a huge gap between the typical, first-time (and even second-time) entrepreneurs, and the folks who finance, service, and otherwise enable startup ventures. Even those agencies and nonprofits whose only purpose in life is to enable entrepreneurs to get to the next step find it extremely hard to reach out to entrepreneurs–who, typically, don’t know a lot of people and circulate in different networks than a venture capitalist might, for example.

I have frequently run across entrepreneurs who tell me they don’t know any venture capitalists or how to find them; on the other hand, I will be at a local business event and capital providers will talk about how they’re trying to figure out where the engineers hang out. There’s a gap between the many groups of folks who might find it useful to know one another, but who just don’t hang out with the same crowd.

It’s not all that surprising. Having been on one side of the gap when I was an engineer, often the typical entrepreneur is someone who has a lot of technical ability or a great idea — but really only knows the technical folks they work with. You know other engineers, the folks who sit on either side of your cubicle, and if you’re particularly outgoing you might know some other folks in the industry–but about the last place you’d be is networking and hob nobbing with capital providers at conferences. In fact, the technical folks are often fairly introverted (A large number of the CTOs and vice presidents of engineering I know are) — making it all that harder to connect the dots.

So what to do? There’s lots of potential success stories in folks who — like Jerry Greenfield describes, know nothing about their version of making ice cream or business.  In some part, I think fairly democratic events — like Andrew Warner’s efforts at organizing Lunch 2.0 efforts here in Los Angeles — help to mix up the crowd. The Lunch 2.0 crowd tends to attract a lot more of the “rank and file” folks who wouldn’t normally be out evenings networking with folks, plus the location at major companies is a huge incentive for otherwise sheltered employees to mix with the high tech community at large. Also, I think the efforts of technical organizations to bring some of that knowledge to engineers and others is very useful. There’s also an enormous effort by local nonprofits — CONNECT, OCTANe, Entretech, the Los Angeles Business Technology Center, and the Tritech SBDC are among some of the many organizations here — to try to impart some of those knowledge and connections to entrepreneurs.

The latest report from the NVCA has ranked the Los Angeles area as among the top areas for 10 year growth in venture investments, citing the change from 1997 to 2007 in terms of companies and dollars invested in the area. That growth–which only includes Los Angeles, and does not include Orange County or San Diego–is just a small part of the upsurge in startup activity in Southern California that I’ve personally observed over the last 10 years (socalTECH — in its hand-copied email form — started in 1998).

Interestingly, what appears to have happened — or is happening — here, is that we are going beyond what I think of as simple “critical mass” of self-sustaining startup activity and funding. Critical mass — which we’ve had for some number of years — is having enough entrepreneurs, anchor high tech companies, universities, capital, and service providers to create a healthy environment for startups. That can be achieved anywhere you have a set of anchor industries and companies — typically, larger and well established companies which attract and spin off engineering, marketing, and executive talent — and enough interested capital providers and the like to create new companies now and then. The key here is that most of the activity is generated by people in the community, moving from existing companies in the area. I’d argue this has been achieved in many “high tech” centers nationally.

However, going beyond that “critical mass” is what is only known as the “Silicon Valley” magic. That is, you are not just creating a few related new companies, spawing out new firms related to your existing industries; you’re now at the point where people relocate and seek your region out to start new companies. This is where people — with no family ties or company ties to your area — seek to relocate and start up their company where you are because it’s the “place to be.”

In technology, in the past this has always been Silicon Valley — which is packed with engineers and MBAs and others who have picked themselves up and moved to Silicon Valley, just to be “there.” Los Angeles — or more specifically, Hollywood — has always been “the place” for entertainment.  It’s the same with New York — think Madison Avenue, or Wall Street, or Broadway. Or, if you’re in Private Equity, Greenwich, Connecticut.

In the last six months or so, I’ve run increasingly into entrepeneurs who have specifically moved into the Los Angeles area to start up their companies. Often, it’s because of the convergence of technology, the Internet, and entertainment; in some cases, it’s the strong consumer orientation and online strength here. I’ve even heard of people who have relocated here because they want to be close partners with MySpace, and several because of the game studio presence here. It “feels” — very unscientifically — like we’re going beyond critical mass and becoming a destination where entrepreneurs go to fund and grow their companies.

We’ve just posted two new contributed articles to our startup section, the part of our site where we are taking articles from folks in the community on advice and information for entrepreneurs. The first is a list of five things an early stage company can do to ensure success, from Tech Coast Angel Ken Deemer. And, attorney Scott Edward Walker gives some tips on selling a business. We’re always open to good, balanced, and non-promotional material which might be helpful to entrepreneurs, so contact me if you’ve got something to share.

Tony Perkins (who founded Red Herring Magazine and now heads AlwaysOn) gave a great keynote at the Technology Council’s annual Technology Awards in Los Angeles last night, talking about how he got the idea for his first magazine (Upside) — from the late William F. Buckley, in the back of a limousine, while working for Silicon Valley Bank — as well as about six trends he saw happening in the world today in the technology area. Among the trends, Perkins showed a well-received video of 12-year olds talking about what is important to them in the world, and ranking the Internet, cell phones, iPod, and other technology in their world; he also talked about how instant messaging and cell phones are more important than email to the “under 25″ generation. (Interestingly enough, I heard the same exact trend cited by Marc Zionts in an interview we ran yesterday on Ortiva Wireless.) Perkins also talked about the effect technology is having on the entertainment industry, and also showed an HD clip of “Lost” using broadband streaming technology from Move Networks. (Unrelated to this blog, but by coincidence Techrockies, our site covering the Rocky Mountain technology industry, ran an interview with John Edwards, CEO of Move Networks last week.)

Photos from the event:

Below: Venture capitalist David Cremin (of Draper Fisher Jurvetson) with Tony Perkins before the event.

Below: Alex Quilici of YouMail and Luis Villalobos, founder of the Tech Coast Angels.

Make It Work’s “Guitar Hero” setup in the reception area.

Three things, as a startup, you really need to own. Forget all the talk you hear about “virtual companies” and how you can “outsource everything,” if you don’t have these, no one will take you seriously. I thought these would be self-evident, but I’ve run into a few companies recently who lacked one (or all) of the following:

1. Domain name. This seems pretty obvious, but I’ve run into several entrepreneurs lately who told me they were going to raise capital and go acquire some popular generic domain name. Folks, a single domain name does not make a business; and no one is going to fund buying your “ultimate” domain name. Really–did Amazon.com before Jeff Bezos have anything to do with selling books? Conversely, having a generic domain name does not guarantee that what business you put there will be worth millions–it’s what you do with that domain, not the domain name.

2. Engineering talent. If you are a high tech startup, where technology/software/hardware/etc. is your competitive advantage, you have to own your architecture, engineeering, or software talent. If you don’t, your competition will out-develop you, your development will taken ten times as long, and will cost several times what having the right, in-house engineering team can. Sure, you can outsource some development, infrastructure, and other elements of the business–but if there isn’t someone in-house who owns, architects, and understands your technology, I wonder how “high tech” your company can be?

3. Source code. I thought this one was also a no-brainer, but I recently found a company which was in quite a bit of trouble because they did not own the source code to their fully outsourced software. Either through fault of hiring the wrong contractors, a bad contract, or bad faith from their outsourcer, they did not have actual source code for their web site and the software behind it. If you don’t own source code to your own software and web site, you don’t have a company.

I was recently having coffee with a friend of mine who has been making the rounds of local venture capitalists, and he told me “It’s amazing how much more traction we’ve been getting since we started showing a demo of our product.” This entrepreneur–who has a great pedigree and lots of prior success–was surprised that, even with people he’d worked with before–the demo made a gigantic difference in the interest level and calls he had returned.

I’ve heard the same thing from many, many other entrepreneurs, who are surprised at the effect that a simple demo of their product has on their talks with investors, potential employees, and others.

What most entrepreneurs do not realize, is that there is a huge line between talking about a company, talking about a potential product, and showing a PowerPoint, and a “real” company. Most investors — whether angel, venture capital, etc. — see thousands and thousands of great “virtual” products and companies. Those companies are all on PowerPoint — what one investor told me he called “dream” companies. They’re someone’s dream, but no more.

However, when you show an investor a demo — even a simple prototype — suddenly, you’ve jumped a significant gap (from thousands of PowerPoints, to just dozens of companies who are showing products). What they don’t realize is they’ve proven a number of other things to the investor at the same time as showing their product.

1. You’ve proven you can move beyond the concept phase to implementation, ie, you’re not just an “idea person”
2. You’ve shown you are someone who is likely to execute — an important trait in companies and entrepreneurs.
3. You’ve demonstrated your team is technically capable of the tasks you are proposing.
4. You’ve shown you’re willing to spend your own dollars/time/effort to move your company forward, without waiting for funding–a sign of your commitment to the idea/company/product.

It can’t be underestimated.

Atticus Wagner at the Tech Coast Angels let me know last week that the Tech Coast Angels is now taking applications for their Fast Pitch event coming up in January. For entrepreneurs who aren’t familiar with what a “fast pitch” is, it is a very short, 60 second “elevator pitch” on your company. The idea behind the competition is to pit a number of entrepreneurs — all looking for funding — in a competition to see who can best convince an investor to make an investment in their company. It’s very informative, entertaining, and actually a useful skill to have. Last January, the winner of the Fast Pitch was Leads360. Frank Peters (podcaster and president of the Tech Coast Angels) has an archive of that winning pitch posted on his podcast page; Leads360 eventually raised $3.25M in a venture round from Rustic Canyon Partners.

There’s been an interesting trend over the last year or two in Southern California, which is the emergence of a new class of companies focused on helping companies bridge the angel investment to venture capital gap. The gap — the sometimes difficulty hurdle of going from informal seed stage investors to the professionally  managed venture world — is a particularly acute issue for some of the angel backed firms here looking to gain additional capital. The issue? Although these firms are often able to gain some basic seed capital from small angels, the companies are often not in the shape where a venture firm is willing to chance it on them. They might not have a management team in place, they may be tackling a profitable–but smaller–market, or they might just need to get their company or product a bit farther than individuals angels can fund them.

Into that gap has stepped at least three (if not more) companies I am aware of — all here in Southern California — including Momentum Ventures, Groundwork Equity, and Venture Farm. All three are run by very operationally-focused folks, and all provide some combination of equity and operational experience to their companies. Venture Farm just announced an investment in XSCapacity -  Momentum has made investments in Thermark, Sendio, and other firms, holding exec positions at all of their investments. Groundwork recently put some dollars into Interneer, also coupled with some exec placements.

It will be interesting to see how the model plays out, but so far, the firms seem to be putting their money where their mouth is, and staking equity — not fees — on the success of their companies.

Marc Averitt has a good post on “finders” — folks who help companies find capital — and how useful they are (or aren’t) in the venture capital area. Well worth a read. The majority of VCs I talk to will not fund deals from finders; and, most of the well regarded investment bankers will not engage early stage venture deals to help them find investment, because they understand that the VCs do not like funding deals with third party finders.

We’ve recently posted an article on some good advice for entrepreneurs just starting out on their ventures, from Scott Edward Walker. The article, Tips On Starting A Venture, talks about incorporation, stock and vesting, and other tips which new entrepreneurs ought to be thinking about. By the way, if anyone is interested in contributing their knowledge to the pool of articles in our Startup Section, please let me know. The section is open to anyone with something relevant and useful to provide to entrepreneurs and others in the technology community here, and we post the articles as a service, for free, as long as they are useful to people. Some prior articles:

• Basic Information About Trademarks (from Steven Sereboff, Mark Goldstein, and Michael Harris)
• A Look at Business, Strategic Marketing, and Information Technology Plans (David Gadish)
• Thinking Like An Investor (Matt Ridenour)
• A Practical Guide to Venture Capital (Bowne)
• and lots more…

We’re hoping this will be a useful reference, particularly to entrepreneurs.