Build With a Buyer in Mind

One of the reasons that so many companies are formed in Silicon Valley is that they are all groomed from Day One for sale to another Silicon Valley company. Proximity makes it just that much easier for a company to be sold, which makes it that much easier for the company to raise capital. When a company has a huge-market capitalization, it can use that stock or cash to go on an acquiring binge.  For many years, we started companies with a specific buyer in mind, such as Microsoft, Oracle, or Cisco. More recently, Google, Groupon, and AOL have been active acquirers. The movie companies are also in the wings as they decide to get into or out of the game business. It is a good strategy to watch the IPO market this year and ask yourself what newly-public companies would like to buy. Groom your start-up from to be a fit into their portfolio. Then move fast and get something going quickly before they have spent their money or find out that some of the things they bought are crap. Your sale will make your shareholders rich and you get to work with these companies for a couple of years as part of the deal. After that, you can buy your boat (or perhaps an island) and live happily ever after. 

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Things Are Looking Up

It is a great time to be starting your company. The early stages of any company do not really depend on the economy.  In fact, there are many things that are better for a start-up in a sluggish economy such as this one. Vendors grant more credit, landlords give better deals, and all the services like legal and accounting will often grant deals or work for equity. While banks have been difficult for the last few years, they will need to start making loans to make money.  There is a huge amount of liquidity in the cash market such that banks will have to start making loans to businesses not just in real estate. At the very least very attractive leasing for equipment is now a reality.

The most important driver of growth in the New Year will be the latest tax bill. Among other elements, there was an extension of the provision that qualifying investments in start-ups and small business is capital gains-free for its life.  This means that an investment in a start-up just made a lot more sense for a high net worth investor. Thus, I predict that angel investors will become very active throughout 2011.   The states with similar programs will also help.

THE EFFECTS OF THESE PROGRAMS WILL BE HUGE!

There are many signs that the economy is improving and unemployment will start to fall. It is difficult to keep the economy down when interest rates are effectively zero or slightly negative.  

Except for California, New York, and a few other states financially collapsing (think Greece), 2011 will be a great year of growth. Many very cool companies will be founded. Many more will thrive.  Make one of them your own. 

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The Value of Mentors

It is lonely at the top. Anyone that starts a business feels like a bit of an imposter. There are so many things to do and problems unique to the top position that the CEO has never solved before.  It is easy to think that because no business like yours has ever been done before that your problems are unique.  They are not.  Most of the things that early entrepreneurs do have been done by every startup and there are many that have gone through it many times.

That's where mentoring comes into play. I have had the good fortune to have a whole cadre of very smart business people that were willing to help me.  To succeed, you too must find good mentors. While my list of mentors could fill a book, I though I would mention four to give them the credit they richly deserve for their help with me in the formative stages. 

Bob Freed was my boss at Lagoon, an amusement park just north of Salt Lake City. I was a game manager ther during summers while pursuing an engineering degree at the University of Utah.  He was a no-nonsense guy that gave me a great deal of latitude within the company, and allowed me to experiment with both the midway games and employee-incentive programs.  What he made me adhere to was a sense of keeping the numbers within certain tolerable ranges. I knew that as long as my division made more money than before I was on safe ground. He ran a meritocracy; if you got better people, and produced better results, he would leave you alone. I have always tried to instill that same philosophy at my companies.

Next, I'd like to talk about Robert Noyce. He was a great guy and one of the founders of Intel. He was very free with his time and taught by telling stories. He gave me a lot of confidence because he would always have a story about how Intel had survived some difficulty when it was at a similar stage as Atari was at the time. For example, I remember one story he told me about a time when he shut down Intel's watch division.  (Yes, Intel was once in the watch business.) He said the lesson was that "when the other guy's business looks too easy, it means you don't know enough about it." While I thought he was a business God, Noyce also showed me how it was also possible to be a genuine person that makes mistakes and moves past them. 

Jerry Sanders was the founder of AMD and provided chips for Atari. We were a good customer, but we were also always late on our payments because we were always outgrowing our capital base. When I would come to Jerry with my tale of woe about why my payments were late, he would listen and make a judgement about how far he would trust me. He would give me ideas about how we could improve our cash flow and ideas about creating a more efficient way of doing business. Over the years, his counsel saved my company millions of dollars and I will never forget a particularly bleak patch in Atari's finances when we almost went out of business, he saved us by granting us an additional credit line that helped save the company. It is good to have friends in high places. 

Last but not least let me tell you about Don Valentine. Don was our lead investor when we finally were able to raise some venture capital. Don was the definition of hard love. He was the most difficult board member that I ever had and I learned the most from him. It actually became a game. At every board meeting I would make a presentation and he would ask a question that I could not answer but one that the minute I heard it I knew I should have known it. I would dive into the numbers before each board meeting making sure he could not catch me again. He always would.

What this process did was make me be a much better CEO and gave me a clearer picture of what was and was not important. Wisdom comes in many packages. Many young businesses do not have or have seldom board meetings. This is a huge mistake. If anything a young company needs more board meetings with smart and experienced board members. (If your board members are neither smart or experienced, change them.) Finding an engaged mentor who will keep you on your toes is an important growth step. 

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Go Shopping for a State

There is an old saying:  "If they are passing the hors d'oeuvres, you should take one." Right now, many states are passing out more than small nibbles. Despite the difficult economy, many states are creating attractive tax and hiring incentives for small businesses to start projects locally. These incentives taken as a whole can greatly reduce your cost of doing business and I suggest that they not be ignored.  Big companies regularly get incentives to locate a plant or a division in a particular state, and often city and county governments chip in, too. There are few malls, for example, that do not have some of their debt issued by cities in the form of tax free industrial revenue bonds.  

The thing that is somewhat new is the size and scope of the new incentives, and many are targeted to entrepreneurs in businesses ranging from video gaming to retail. Tax relief and local business boosterism  can also be used by a smart entrepreneur to approach civic-minded angel investors. If an angel is going to invest in a business, why shouldn't it be one that will take root in their local economy and help it thrive? The investment can be made with a strong sense of civic pride. (For you, a local angel can be a huge asset if they are able to share knowledge about attorneys and accountants and other services and connections.)  

In the early days of Atari, we located a factory for building coin-operated game machines in Ireland using very attractive incentives from the Irish Development Authority.  It was a great factory and we employed several hundred high- and medium-skilled workers for more than 30 years.  It was clearly a win-win both for us and for the local economy. The payroll taxes paid by our workers over the years were many multiples of the tax breaks we received. (The government provided us a building, a five-year tax holiday, and a few thousand dollars per employee for training). We would never have located in a tiny town in Ireland without the incentives.   

Today, Georgia, Michigan, North Carolina, and many other states have wonderful programs depending on your business. Look at their universities as well because they can be very helpful with hiring local talent.  

It is amazing to me that some high-tax, high-regulation states such as California and New York are trying to push business and entrepreneurs out of their states, while there are so many pro-business friendly states are going to great lengths to make business formation easier, cheaper, and more competitive in this global economy.  

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Google's Car Will Change the World

Last week the world shifted. Most people didn't feel it, and many people that saw the shift didn't view it as monumental but I did. The shifting was caused by Google's self-driving car.  While self-driving cars have been the grist of science fiction for years and many car companies have had test-track systems that required extensive road sensoring, the Google car was mostly a software triumph with modest special hardware. The costs are in line for deployment. The period of time it will take to bring the innovation from the experimental phase to deployment should be less than 5 years.  

The reason that the innovation represents a technological earthquake is that it will fundamentally change transportation—and society along with it. It will disrupt many very large industries and create massive political and cultural debate.  

The car will make driving much safer. The cost of insurance will drop to a fraction for autodrive cars. The cost of taking a cab will plummet. Downtown parking will become cheaper, fuel costs will drop, and highway congestion will be a memory. Cars will take on a drawing room feel instead of everyone facing rigidly forward.  Commuting time will morph into work time (boosting productivity) or fun time (improving our quality of life.)  

Google's self-driving cars will test governments as they juggle the lobbying forces of the constituencies that will be displaced with the efficiency that the technology brings. The governments that resist change will be dooming their citizens to a Third- or Second World existence, while those that embrace change will enjoy economic advancement. The retraining of drivers for other jobs will be monumental. The Teamsters Union will fight this with their dying breaths. 

A auto-drive car can be networked so that cars drive bumper to bumper. This drops fuel consumption since only the lead car needs to overcome the wind friction. The capacity of our highway system will jump in capacity by a factor of 20. Cars will be able to park blocks or miles away from congested areas while their passengers shop online for the cheapest parking locations. Your car will be a cell call away, and you will be able to text it for a pick-up. Kids will be able to go to school without mommy or daddy taxiing them. Cities without mass transportation can simply put extra cars on the road to pick up those without cars for point-to-point transportation. Long-haul trucks will pilot their cargos efficiently and cheaply. Local deliveries will be made in the same way. Perhaps there will be a kind of IP network of containers that can be routed like packets, but in the physical world.

The next few years will be very interesting as the winners and losers jockey for position in this new and efficient system. Bars will flourish as drunk driving becomes a thing of the past. The thousands of highway fatalities will finally cease. I can hardly wait.  

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The Product Nobody Wanted

Innovation tends to create sales and distribution problems. New products often cannot find retailers or they violate accepted distribution cycles.  I experienced this problem at Atari, when I started our consumer division.  We had come up with a way to put Pong onto a single chip, which allowed us to release a version for home computers. All our friends wanted one. We got the prototype working, built a model, and took it to the Toy Fair in New York in the winter of 1975.  We felt that the price was perfect, yet at the Toy Fair we sold zero. Turns out, Toy retailers were uncomfortable with electronics and thought that the game was more like a consumer appliance. 

So then we tried going after TV retailers. But many of them had previously been burned by disappointing sales and high returns of a game system from Magnavox called Odyssey.

My innovative sales manager, not to be daunted, called Sears. He started with a buyer from the TV department and ended with a buyer in the sporting-goods department  The buyer was excited and said he would fly out the next day.

He showed up we gave him a demo and sat down in the conference room to cut a deal. Suddenly, we were in the sporting-goods business. Creating a new retail category is one of the most difficult aspects of bringing an innovation to market. Of course, once you solve a distribution problem, you suddenly have a meaningful competitive advantage.

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How to Encourage Spinoffs

As a serial entrepreneur, you are always ready to create a spinoff, approve a new line of business, or simply let employees experiment. There is a right way and a wrong way to do this. Whenever one of my businesses embarked on a new project—one that was not part of its main business—we would set it off in its own small building.  It could be across the street or down the block, just so long as it was not under the same roof.  It is also necessary to give the project manager a separate checking account filled with just enough money to get the job done.  No need to set up a separate payroll, but to give the team wide latitude when it comes to covering the incidentals. 

That separateness fosters some of the idea of a start-up among the team members.

And you very much want that. Start-ups can move quickly because their founders can make decisions without all the wasted time that goes with more structured management systems or decision trees or "efficient" purchasing programs.

Being separate also allows a team to focus on invention without all the day to day hassles of producing and servicing the current products.  If you are interested in spinoffs, make sure you let teams operate autonomously. Give them some money and, above all, some space.

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Getting Perspective

A recent news item on Inc.com asked the question, "Are your employees afraid to take a vacation?"

You should pose that same question to yourself. It is easy to work all the time because the tasks of an entrepreneur seems to never be finished. But not taking a vacation is a huge mistake.

Tasks are the noise in the system of innovation, and they almost always try to muffle what is more important, which is to take the right strategic actions you need to build your business. Getting away from the office allows you to reconstitute a view of the company without all the daily noise created by tasks, people, and customers.

Of course, it isn't easy to get away. In the early days of Atari, I could not imagine taking a week off and being out of touch. I am sure that the first three years could have been much easier if I had just taken time to view the big picture without all the distractions.

Today, it is even harder to get that distance because of e-mail and cell phones. Can you really get perspective on your business when your BlackBerry hums constantly and pulls you back into the minutia?

Still, you must build the discipline to do it. There will be a payoff, I promise. I remember distinctly a September afternoon in a Paris café when one of the big ideas of my life was born.

The vacation was nice also.

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