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Something Ventured:
Aug 20th


Insight For BC Technology Entrepreneurs

By Brent Holliday

What A Concept!

"You bring meaning to my life,
You're my inspiration. "
- Chicago, You're The Inspiration

I've got an idea. And I think it's a good one. It could be a HUGE success. I'll tell you all about it… next column. Really, I will. This time around, I'd like to explore how you take an idea and make it a commercial success. Some of the following might be quite obvious to you, but it is incredible how many people forget the details and charge ahead without carefully evaluating their concept through a simple iterative process.

Everyone has a big idea in his or her lifetime. It was Ted Turner who said, "Thank God I've had a dozen!"

When will you know if your big idea is ready to fly? What characteristics of the idea do you need to evaluate? What are the go/no go decision points for mortgaging the house, quitting your job and going for it? For the sake of my argument, I am going to limit the idea commercialization to those things that you can build a new company around. To be sure, there are great ideas that can simply be licensed to bigger players (creating a fat royalty stream for you), or big ideas that you have in the context of your present company that will help make your career and help the company enormously. There are risks inherent to each of those strategies, but the riskiest by far is dropping everything and chasing that one big idea.

One other thing before I get going. There are idea people and there are entrepreneurs. The two need not be the same person. Idea people are extremely creative and think outside the box. Entrepreneurs should have those qualities, but there are great entrepreneurs that never have an original idea in their lifetimes. They are people that know how to execute a plan and are motivators of others, whom I would qualify as the opportunists. Sometimes, opportunists hook up with idea people when they smell a commercial success and a company is born.

From Idea To Sales:

Here is the highly iterative flowchart from idea to commercialization:

Idea - inspiration, cognitive association, read about it somewhere else

{Mull it over in your own mind and decide whether to put in some investigative effort}

if positive, then

Insight - gained only through knowledge and experience, someone else's insight is useful

{Research the market and the potential customers and bounce it off people, then decide if it is an opportunity worth pursuing}

if worth the time, then

Opportunity - more and more insight through research leads to go/no go on idea

{Can you sell the idea to someone else? Do they want to join your quest?}

if you have a team, then

Plan - develop the business model, find the people, get the money to seize the opportunity

then

Millions of dollars, a wing of the university named after you and a beach house in the Caymans.

Piece of cake.

Ideas are born as inspiration and immediately refined with insight. Inspiration happens at any time as the neurons in your brain make an association and you get the Eureka sensation. However, if you lack insight into a certain industry or product/service area, you will likely come up with a dumb idea. For example, I lack any insight whatsoever in the field of camping gear products. I thought that sewing an air mattress into the base of a tent would be a great idea, born of the inspiration of carting around two separate devices for camping. Perhaps it is too costly to do, or perhaps it is prone to breaking easily, or perhaps I am just a consumer sample of one and what I want isn't necessarily what the majority wants. Without the insight, I lack the ability to refine my idea. The lack of an available product in the market since I had the idea years ago tells me that it was, in fact, a dumb idea.

The very first person that you have to convince that your idea is a winner is, well, you. You have to keep turning the idea over in your head to see if it holds water. It helps to write things down and attack your idea with the four fundamental questions:

What is your product or service? - Seems simple, but try and explain it in under 10 seconds to a six year old.

Who would buy/use it? - Again, seems easy, but try and describe these customers in detail. In some cases, it isn't a consumer, but a business. Who in the business makes the decision?

Why would they buy/use it (value proposition)? - The toughest question. The answer is you don't know until you try to sell it. A plausible reason needs to be backed up by clearly identified assumptions.

How would you make money (profit) from this idea? - Oh, that. You mean I have to make money? Back of the envelope economics can determine what your business model might look like. It might also show that you can't make a buck.

These are the initial self-assessment questions to pose. If you can't answer them, you had better do some good old-fashioned work. Once inspired with an idea, or the beginnings of one, you can do research and talk to people that can help you find answers. A couple of points to make here: 1) don't rely on easily accessible data and 2) don't be afraid to ask, just be smart.

On the first point, you cannot accurately predict the success of your idea based on what the Forrester Group predicts for a market segment. I'm sorry, but I have read too many business plans that point to an analyst's report somewhere that says that the market for this is red hot. Yes, it helps validate an idea. However, what separates the real insight from those that can read is when a few living, breathing experts (that actually spend their days working in the particular product/service area) have been grilled and are available for consultation or employment if your idea gets going. In other words, get out there and ask! Bounce the idea off as many people as you can. Which leads me to point two: forget the paranoid idea-stealing crap. Screw the NDAs. While I will admit that there are unscrupulous people who will steal ideas, the risk of that actually happening is largely mitigated by the pace at which we are moving in the technology world and your need to know what is really happening in the industry.

Just to continue the idea-stealing sidebar, because it is important: If your idea is an incremental improvement (a better mouse trap), then chances are you aren't the only one that has thought about it and the time you waste getting people to sign NDA's is time you have lost to potential competition. My guess is that ninety-five percent of ideas fit in this category. If you have a ground-breaking, sea change type of idea, then you need to be careful who you talk to and how much you say. You can still gain great insight from people in an industry without telling them everything. But you have to give these experts something that they can chew on, in order to get valuable insight.

So how does someone without a track record get to talk to industry experts? Try calling them directly and start off the conversation with, "I have been told repeatedly that you are the expert in your field and I was wondering if you could shed some inspirational light on my dark, ignorant world." That usually works. Everyone likes to be stroked once in a while. Another tip, go to trade shows. They are incredible sources of information and insight. For instance, try tackling the keynote speaker to get a 5 minute brain dump.

Once you have battered and refined your idea against the four fundamental questions, the insight gained should leave you at a crossroads. Is it still an exciting idea? Have you received positive feedback? Did you, in fact, listen to the negative feedback, or have you selectively not heard it? For more cold water, try answering the following four questions which will determine if what you have is an opportunity and what kind of opportunity it is: (oh, by the way, try writing down the answers to all of the questions in a coherent manner. Nothing like trying to communicate an idea in words to help you realize what you do and do not know.)

What is the realistic market size of those who would buy/use it? Is it growing fast? - For me, a growth rate of less than 30% a year is not an opportunity worth looking at. But you can make a buck in a slower growing market if it is huge and you pick the right niche. How big is that niche?

What is the market like for your product/service today? Is it changing? - The dynamics of the market might make it easy or difficult to enter. If you need to build a $1 B plant to get started, then you can forget it.

How do you get the product/service to your customer? - Which partners are critical to your success? Great products or services fall down without distribution.

What is the long-term sustainability of your idea? - How can it outcompete others? How can it survive in certain scenarios (i.e. Microsoft comes to town…)

Once you have started entertaining these questions, you are beginning to form a plan. In order to address some of the issues, you need to formulate a strategy. At this point, you should bring in others. Let me emphasize this next point in capitals: THE ULTIMATE BAROMETER OF YOUR IDEA'S VALIDITY IS IF YOU CAN SELL IT TO OTHERS AND THEY BUY IN. Get it? Repeat it. As soon as someone else wants to join you, your idea has moved to an opportunity. The extent to which you can be successful is measured by how well you have done your homework to this point and how smart is the person you just convinced. "Hi Mr. VC, I'm (your name here) and this is my VP, Elmer Fudd. We have an incredible opportunity for you to look at." Probably not going to go anywhere with that. Always try to convince people smarter than you. Then hire them.

OK, let's review. You were showering one morning and suddenly the light shone brightly somewhere in your grey matter. An idea. You thought about all the way to work. You turned it over and over. Tried to think of all the angles. Over the next few days, you started to look at the industry and the market in some detail. Finally, you approached someone you trusted and floated a trial balloon. Lucky for you, it didn't pop. They liked it. Now, freshly energized and smelling an opportunity, you rolled up your sleeves and went to work. You wrote down the idea and started to answer the eight questions on paper. Then you pitched some experts in the industry. One of them really liked it. They asked if you were going to pursue it. They asked if they could join. In three short weeks, you had the beginnings of a plan. Then you told your old boss to get stuffed. That's it, you were now over the cliff and falling. Fast.

Don't worry if you try this at home and your first few ideas end up on the trash heap. Keep trying. The reason the Silicon Valley works is that people aren't afraid to bounce ideas and then act on positive responses. In Canada, far too many people worry that their idea is probably dumb and don't bother asking. The inferiority complex strikes again. At the risk of sounding like a shoe company, "Just do it."

Next time, I will take an idea that I have chewed on and floated to a couple of experts. If I convince many of you, then maybe it's an opportunity. Yes, the tables will turn. Now you get to poke holes in the VC's story. Sharpen the knives and stay tuned.



Random Thoughts

- Echarge is a local company that had an impressive announcement two days ago that went largely un-noticed by the local press. In fact, they have been largely un-noticed by the financing community too. Here's an analysis by Whit Andrews of Internet World magazine:

ECharge, which has hawked its innovative payments system with limited success for more than a year, has signed up massive Microsoft as a customer. The company's approach allows users to add payments for goods and services to their phone bills, providing a simple method to add micropayments to a site's capabilities. But despite partnerships with software makers such as Intershop, Mercantec, and Inex, few merchants were taking up the opportunity. The Microsoft partnership, combined with a deal with gaming site Gamestorm, is likely to bring eCharge legitimacy with other merchants and services. Microsoft is expected to allow subscribers to MSN to pay through the phone company. Now all we have to find out is if consumers think it's a good idea.

- Pivotal (PVTL: NASDAQ) is up. Way up. Some drunk day trader actually bought a few shares at 19 ½ today, while everyone else was trading at 16. A 33% gain in 2 days ain't bad. I had to mention it here because I have taken some heat for what I said last column. Good luck and Godspeed, Norm.

- Some of you may have seen the National Post's shiny new business magazine. The really bored reader might have noticed a rather negative sounding quote from one, aspiring young venture capitalist and columnist, buried in a very short story on a new high tech park in Vancouver. Holy Field of Dreams! What a corny quote! "If you build it, they won't come." Well, I said it. What I was referring to was that they apparently are building the shiny new facility on the Finning lands by Great Northern Way under the impression that some US companies will locate there. Vancouver companies will certainly look at it, you know, right on the SkyTrain and everything. But, by building a high tech structure and hanging out a shingle for US companies to drop in ain't gonna work. I also said that adequate facilities are certainly important for the tech scene in Vancouver, but it's buried way down on the wish list.

You may also have noticed a long article on Canadian VCs being inadeqaute in comparison to US VCs. I think I have a really good answer to this malaise. I'd love to tell you about it. Not now. Soon.




Response From Last Week's Column:

Brent,

Your article on the HotHaus acquisition was very perceptive. The market dynamics and motivation for the purchase of HotHaus by Broadcom hit the bull's eye. Broadcom is the leader in broadband data access to the home with its cable, xDSL and networking systems on silicon solutions. After Internet access and with the $100B investment by AT&T telephone service is a primary service on these unified networks.

I agree with you that arguably, the biggest long term winner for this deal is British Columbia.

- WOF, the largest shareholder in HotHaus has 32,000 shareholders each of which gets a 50% lift in their RRSP savings.

- This is a Silicon Valley story with the start-up attributes, the strategic customers and the valuations and hopefully will be a magnet for technology entrepreneurs.

- Not only does it provide a financial infusion to the shareholders, it has generated excellent press and international exposure for BC, at a time when the economy is in a down cycle.

- Your comments about the BC and the economics of doing high tech in Canada were also noticed by Broadcom, as such Vancouver will become our Internet (IP) Telephony centre of excellence.

- The quality of our engineers, the loyalty our staff and the personal sacrifices that were made to get HotHaus to its current position were also notices by the VP of Bus Dev at Broadcom. They refer to HotHaus as a little Broadcom.

On a lighter side, your estimates of my winfall are high and the estimates of our employees is quite low. Every single full-time employee in HotHaus had shares and the early employees all took lower salaries and received options on shares. Additionally these employees were allowed to exercises their options (with escrow provisions) so that they could benefit from the small business capital gains exemption, a tax credit they are very, very deserving of, given their personal sacrifices.

Personally, I think HotHaus is a great story and reflects a lot of hard work by the employees, the contributions from WOF and Texas Instruments, Morgan Sturdy and Dees Communications, Science Council of BC, BC ASI and last but not least our customers. While the financial upside is interesting and entertaining, the longer term message is the entrepreneurial aspects, the focus and commitment of all people dedicated to the plan.

I think your story captures the positives and focuses on the newsworthy results of HotHaus. Well done.

Cheers

Ross

- I had the chance to talk to Ross at length on a flight just after he sent this response to my column of a month ago. Among other things, we discovered a common home town (London, Ontario). I know you have asked yourself a million times, "What would I do if I won the lottery?" Well, Ross has brushed it aside and is getting on with the job that he sees is still not done with HotHaus and Broadcom. It was almost as if nothing had happened. Oh yeah, in case you were wondering, we were in economy.


What Do You Think? Talk Back To Brent Holliday



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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