Number 1: Be a college dropout, wear black, and then you can raise money!
As a NY Times interestingly pointed out, Elizabeth Homes/Theranos had all the requisite background to raise $742 million dollars for her phlebotomy startup – dropped out after her first year from a well-known university, Stanford; wears black in the style of the late Steve Jobs; and eats weird food. http://www.nytimes.com/2015/10/17/business/theranos-a-blood-test-start-up-faces-fda-scrutiny.html?_r=0. http://www.nytimes.com/2015/10/30/business/the-narrative-frays-for-theranos-and-elizabeth-holmes.html. http://www.nytimes.com/2015/10/28/business/dealbook/theranos-under-fire.html.
I myself find this popular Silicon Valley profile perplexing considering that the so-called managing directors of the regional VCs all attended major business schools should know better: how someone dresses or specific academic backgrounds should not qualify someone to run a $800 million company. Common sense should say that.
I can understand that certain skill sets do not require graduate degrees such as mathematical. In fact, virtually all major discoveries in math and physics were developed when the authors or inventors were under the age of 30. Programming falls into that category since that skill set is essentially applied math.
Not in the case of healthcare. I recently attended a medical conference in regenerative medicine where each company boasted teams with Chief Science Officers and Chief Medical Officers with various graduate degrees. Theranos was in the same industry and lacked such officers. http://www.wsj.com/articles/theranos-has-struggled-with-blood-tests-1444881901. Of course, that shortfall can explain its failure to deliver its products. http://www.nytimes.com/2015/10/22/technology/theranos-elizabeth-holmes.html.
In my Wall Street meetings, one gets a sense that these NYC investment bankers – smart money — have had the experience in identifying a weakness in a company. They bring to the first meeting, experts, graduates from top 10 colleges and universities, for the following: equities, fixed instruments, subject matter, valuations, due diligence, and international. For example, one investment banker told me that to attract investors to raise $1 billion, the CEO must be someone with the experience of running a $1 billion company in the same field. Not so true in Silicon Valley. All you need to do to raise $800 million is to drop out of a top tiered school, dress in black, extol the revolutionary approach, and then eat weird food.
Number 2: Attend Stanford or Berkeley, then you can raise money!
Where one attends school in Silicon Valley – specifically, Stanford or Berkeley, favors your NorCal financing success. http://www.forbes.com/sites/liyanchen/2015/07/29/americas-most-entrepreneurial-research-universities-2015/. I have not been surprised by the startup funding from these two universities and they are ranked in the top 3. For the various expositions by startups in Silicon Valley on how it wants to revolutionize the world, I am amused on how provincial Silicon Valley thinks about everything else. I just think that these VCs have limited knowledge of what is out there in academic institutions. A few days ago, I met a local journalist, a known author writing about the fertile, creative market of Silicon Valley, who “attended Oxford.” He also claims to write for Forbes magazine. And then he asks where I attended college, and I replied, Williams. He obviously never heard of the college since he thought the college was located in Connecticut! A simple Google search for the college would reveal that Forbes Magazine ranked in 2015 Williams as the number 1 nationwide, one notch above Stanford, #2. So the so-called Silicon Valley academic myopia is limited to NorCal academic institutions.
Further I have observed that Stanford and Berkeley guys have easier access to capital – even though the quality or caliber of the business has not been vetted. One halitosis/alcohol breadth Silicon Valley company with a questionable product has been able to raise over $10 million, and the founder, of course, attended Stanford Business, with no obvious healthcare experience, just IT. Meanwhile product sales have been deplorable – and maybe because the technology doesn’t work. Sounds familiar? Yet it has the labels – new and revolutionary! And still raises money.
On the VC side, I see the same theme where few colleges dominate. Even attending a few months has significance. I also noticed a woman with her website bio indicating a Stanford degree. In reality, she attended a small local school, Menlo, and took a year’s writing course at Stanford. Now she is a managing director at a VC firm screening technology companies! Maybe all one needs to put on a Stanford label is to attend one semester class.
Now the big question should be if such degrees do help in managing a startup. I met a couple of founders of a Unicorn startup, (who, coincidentally, attended both Stanford and Berkeley), now with enough funding to hire over 600 engineers worldwide — engineers like themselves. Normally, there is nothing wrong about expanding internationally — if done right. In looking at the potential international hires, I noted that they were about to employ 2 engineers for Hungary. That stood out in my mind and I questioned the profitability of such venture. Hungary has a small population, numbering about 10 million, and Budapest, its capital and largest city, 1.7 million inhabitants. So I wondered whether one needed “feet on the ground” for that market.
For a previous employer, I decided to bring each department to screen every international expansion or major capital expenditure. Rather than stomping the fire afterwards, I needed to preempt any issues beforehand. I would hold an inter-departmental meeting to include marketing, engineering, legal, financial – to determine the profitability of that venture. Placing feet on the ground places the holding company at financial risk. One has to execute a cost/benefit analysis before making such decisions. In India, a company that places an engineer or other employee for over 180 days, exposes that company to Indian corporate tax – with substantial penalties. In Switzerland, to interconnect or provide telecom services within the country, one has to create a corporate subsidiary. That might mean hiring someone local, contract with local accounting/law firms, evaluate the additional tax exposures, etc. In other words, there are other incremental and fixed costs beyond the labor being dedicated there, which can make that Hungarian project unprofitable.
Breaking down individually each project’s P&L makes sense. Google, under the direction of the CFO, has applied a similar approach by breaking down each venture. I expect the worst, unprofitable Alphabet projects to be shut down in a year. And I foresee the same for the Unicorn described earlier.
Number 3: Be under the age of 35 and you can raise money!
For a supposed liberal environment, Silicon Valley practices ageism with a vengeance. http://anewdomain.net/2014/12/11/dont-hire-anyone-30-ageism-silicon-valley/. Regardless of the technology’s validity, a company founded by someone over 35 has a rat’s ass chance of raising money from the Silicon Valley. It makes more sense to raise money anywhere else but Silicon Valley. One article quoted an older entrepreneur with a strong track record failing to raise local funding. Yet, someone half his age with little or no experience can easily grab that capital. Result? the company folded with the young founder. The younger entrepreneur had no healthcare experience, could not comply with the FDA regulations, did not understand marketing. Of course, older workers cost more. And maybe that is the underlying truth behind many startups in Silicon Valley – how to pay little cash up front, search ways to fail to comply with expensive regulations with the “revolutionary” label, and, in reality, use these common tactics to increase gross margins and inflate the valuations. The truth behind these mantras is money – not improving society. http://www.forbes.com/sites/stevenkotler/2015/02/14/is-silicon-valley-ageist-or-just-smart/. And again, this shows the selfish mindset in Silicon Valley – profitability is clothed with the idea that younger works are more effective. But this approach is pennies wise, pounds foolish. An experienced executive would not be making the business mistakes that inexperienced younger ones would. For example, Uber will be hit with so many lawsuits that substantial capital will be reallocated to pay for lawyers and lobbyists. Simply because the company had no international corporate experience, something gained by years of management experience.
Let’s take an example with Uber – for example, I create a cab app business in France. Then this foreign presence kicks in many compliance issues—tax, registrations, labor, etc. It is not a simple task of placing a local app and receiving the commission of 20% for every dollar being billed. It might require, and very likely so, creating local entities, hiring local lawyers, accountants, and lobbyists. And those foreign lawyers will bring other lawyers and consultants. Then the international corporate management becomes daunting. The fact that you can write a few lines of computer code does not mean you have the innate experience of running an international conglomerate. Then the costs sky rocket even with a simple revenue app.
At a major conference, I chatted with a managing director of a Silicon Valley VC firm, who related to me that Uber recently raised $1 billion, more than enough to cover worldwide compliance expenses. I countered, not enough — Citibank spent over $2.4 billion last year for legal compliance. I guess Uber will have to raise more to pay bills.
Number 4: Get patents and you can raise money!
This year, I interviewed 2 CEO-scientists with an obsession for patents. One held over 50 patents. The other held over 17 patents. Both believe that with their patents, their business models will generate untold riches. The former made his initial wealth out of fewer than 3 patents. Now he is stuck with 47 costing just filing fees. Somehow or another he cannot generate not even 2 cents of revenues from his other patents.
One thing I have observed over the years: a) patents might not generate revenues (stated in an earlier blog) and b) an approved patent does not mean that the product works (e.g. Theranos). I believe that this strange prejudice stems from the attorneys and investors. Attorneys believe that a patent represents financial value, even though they are not qualified to make that determination. They do earn thousands of dollars in fees. Investors, as part of this delusion, see this filing as a barrier to entry. But I can hire patent lawyers to write a patent to skirt around a granted one. And a granted patent can face competition from similar patents easily. I even pointed out that to a holder of a CO2 sensor patent holder that the USPTO also has granted over 199 CO2 filings. Hence, nothing is unique by holding a patent for a specific product; hence, the barrier to entry argument is specious. I myself don’t see patents to a grant of exclusivity since the early days of Xerox. Today, with thousands of patents being filed by thousands of lawyers, what matters now is the first to market and the corralling of substantial market share.
Yet the VC firms invest on management teams with alphabet soup credentials at the end of names and titles – as if these credentials are synonymous with marketing and management expertise. In the 50 patent holder mentioned earlier, he lists his management team, including a Ph.D. holder to do the marketing for a BtoC product. Marketing requires social skills, not scientific. I am willing to make a Las Vegas odd bet that this startup company looking for $10 million will never reach any sales milestones in the first 2 years, if at all.
One VC firm replied to my funding inquiry stating that they have lost money in each medical device company. Rather, these VCs should re-evaluate their due diligence behind their investment failures: to invest in companies based on their business strategies, not upon the management’s credentials. Now they pass on all further medical device deals categorically and invests in companies such as Uber as a sure thing. That explains why so many investors flock to companies such as Uber.
Number 5: Do some wild and exciting outdoor sports from road biking or climbing Mount Everest to raise funding!
During my tenure, I have been asked to hike a local mountain in Fremont, California, and then deliver a pitch. (Actually, the sponsor never appeared at 7am!) Also, another invitation to ride a bike all around the Bay Area to demonstrate my energy and endurance for a distance amounting to 70 miles. Other startup CEOs I see windsurfing, or mountain biking extensively while reporting that activity on Facebook. I guess that an unusual outdoor activity means that you are both intelligent and creative.
Having worked in NYC for a major law firm, I had no time for any outdoor activity except short term jogging. My law classmates and I were lucky to have a single day off during the calendar year – least of all go hiking for days, climb mountains. We were overworked. I do know of a young attorney who, once made partner at a Wall Street firm, decided to jog in Washington Square and died in his thirties. Since he had no identification, he was placed in the John Doe morgue and only his secretary claimed the body. Apparently his friends and colleagues thought he was simply working hard as usual. The fact that he did not participate in sports is no indication of that man’s capability.
What is so strange from Silicon Valley discriminatory behavior is that it claims to the hotbed of innovations in the planet. We don’t see the many failures based on these prejudices. Given that VCs lose their paid-in investments about 80%-90% of the businesses they invest in, it is fairly obvious that this system has considerable flaws. I guess that is why so many gravitate to fewer deals like Uber and AirBnB. One article noted that Google survived since the investors brought in a seasoned executive to handle the young founders, and, now, a seasoned CFO from NYC.
I believe that the funding parties for unicorns will be shutting down soon. The bad investment choices will surface soon. So the bubble will be bursting at the seams. I prefer short selling the unicorn stocks – if they succeed to IPO — within a year. In an earlier blog, I described that Jim Clark’s healthcare venture to be an utter failure, although he earned millions of dollars. I see more flash in the pans coming in the near horizon. And the parties suffering from these failures will be the institutional investors – the retirement funds, endowments. Regardless, everyone else gains from this game: the unicorns get their liquidity, lawyers are paid their billable hours, VCs earn their fees. And the consumers/retirees will be shortchanged in their retirement funds and never see their “revolutionary” products on a product shelf.