Category Archives: Investing

Why Consumer 3D Printing Companies Should Think Twice About Fundraising

16 October 2013

2 Comments

As I’ve spoken to many in the Consumer 3D Printing industry, I’ve heard an increasing amount of talk about raising money from professional investors. While an angel round could bring stability and some financial certainty, raising institutional money is very big risk in such an early market. Venture Capital can bring validation, a comfortable bank account and open a few doors thanks to partner networks, but at this point, I believe the risks far outweigh the gains for Consumer 3D Printing. Here’s why:

Why consumer 3D Printing companies should not raise Venture Capital now

1) We haven’t crossed the chasm yet.

If we had crossed the chasm, people wouldn’t still be asking why you would ever want a 3D Printer. Zeepro would have already well exceeded their Kickstarter funding given how nice looking and feature-rich their printer is (instead, they have sold 300 printers and barely exceeded their funding goal). We would also have a robust set of applications to leverage 3D printers, which excluding design tools (the 3D Printing era’s BASIC imho), is fledgling or non-existent today.

Spreadsheets and word processing programs were largely responsible for early majority users buying computers in the early 1980s. Specifically, VisiCalc has been credited with catapulting sales of the Apple II when it came out in 1979 (2 years after the first edition of the computer). Of course, those programs weren’t even possible until early computers advanced their hardware in key areas like memory, hard drive space, and displays as well as overall product reliability.

Today, we have many hardware improvements still needed for 3D printers to enable new use cases. Breakthroughs in multi-extrusion, print speed, materials and huge improvements to the kluge software experience are all needed to create a “Whole Product” as described in the classic, Crossing the Chasm. Until then, sales will continue to be measured in the hundreds or thousands, which does not align with the mass market growth investors crave.

2) Fundraising is an accelerant for your business.

If you raise venture funding, you may be able to relax a bit from the stress of bootstrapping (i.e.- making payroll), but it comes at a high cost. Venture Capitalists invest with the expectation of the funds being spent aggressively and creating significant growth. If you haven’t had explosive growth, the next set of dollars will be even more expensive, if they’ll fund you at all.

Once you hire people ahead of revenue, it’s hard to stop and even more painful to do layoffs. But don’t take my word for it. Ben Horowitz put it best last week:

“We should first decide how much we like laying people off, because if we love it then lets stay cash flow negative, because when we don’t generate cash, the capital markets decide when we have to lay people off. In fact, we will have to listen very carefully to investors on everything because as soon as they stop liking us, we will start dying. I don’t know about you, but I do not want to live my life that way. I do not want to have to tell all of our employees that we will do what we think is right until investors tell us we have to do otherwise. I want to control my destiny.”

If you absolutely need to raise money, sticking to Angel investment is the only way to go; prudent angels will understand the need for financial stability without aggressively outspending your revenue. You could sell them on plans to turtle up and survive the chasm crossing while placing a few intelligent bets.

Larger investors will neither understand this strategy nor support it as they have funds to return over a time frame that may be shorter than the path to massive growth for your business. You should expect a volatile, painful 2 to 3 year chasm crossing period before we really hit the early majority years. If you raise capital during this time, you will require multiple, highly-dilutive rounds of capital before you can really return value as investors usually expect a round of funding to last just 12-18 months when deployed properly.

3) VCs don’t just talk to you because they want to give you money.

So you’re getting repeat meetings with a VC. They seem friendly and interested in the data you’re sharing and the plans for your business. While it’s true it could be that they’re serious about investing, it’s also quite common for meetings to be free research for them on up and coming industries (Note: I’ve specifically heard from some 3D printing companies they “wasted a lot of time” doing this). Walking in their shoes, a few pitches from different 3D Printing companies would give a great view of the market to gauge when they may be ready to invest years down the road.  

Of course, most VCs are also great at the “soft no”; they’re happy to continue to have you or one of your cofounders make more pitches and exchange more information without actually committing to funding or outright saying no to you. And as a worst case scenario, they can use your information to fund a competitor or steal your idea. I’m not advocating for you to completely ignore VCs, but choose wisely who you invest time in speaking with. Ask yourself if you could better spend that time growing your business.

4) The early PC industry succeeded without it.

In the early days of the PC industry, Venture Capital was just emerging and largely was not involved in funding companies. Microsoft only raised $1 Million in its history and at a time when it really did not need it. While Apple did raise money, the majority of the funds came in the 1980s, long after the market was established and Apple was selling millions of computers. The rapid growth of the market as it hit the mainstream allowed profits to easily fund additional growth and made many founders and their employees very rich thanks to their non-diluted stock options.

Early markets require new marketing channels and use cases. By Clayton Christensen’s definition in the Innovator’s Dilemma, truly disruptive innovations have to find their own way beyond what the existing industry does with a technology.  As PCs were before, consumer 3D Printers are just that kind of disruption, which means there is going to be a lot of experimentation and exploring to find the best opportunities and develop new ones. There are very few venture investors that have the patience and interest in letting companies do this kind of exploring, since their capital and experience is better leveraged for scaling.

5) Your best investors are your customers.

No one said it would be easy. To really meet where the market is going (because honestly, we don’t know), finding the first few people who will pay for something you’re doing is huge. They’ll help you build the product others will need, find others like them and keep your business afloat financially in the meantime. There’s a reason these businesses started in garages, motel rooms in Albuquerque, and the like; they couldn’t afford anything else.

To survive the chasm means finding a beachhead and expanding. The focus and controlled desperation of bootstrapping can be a powerful tool to develop such a market. If you’re sitting comfortably with venture capital, the hunger to find this will be less and you may even find yourself building a bunch of features that no real customer wants until it’s too late.

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We’re in an exciting, but challenging time in the 3D Printing industry. There are many more players currently than there will be winners, which is the tragic, harsh truth of entrepreneurship. Raising money may seem like the obvious way to get a leg up, but it could also be a major waste of time or drive you and your business right off a cliff.

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Why Netflix should buy AMC

12 September 2013

11 Comments

Earlier today AMC announced they have secured the prequel to Breaking Bad, a show based on the popular supporting character, Lawyer Saul Goodman. What was particularly fascinating was that an article I read reported that Netflix bid for the show. This got me thinking…

Netflix should buy AMC. Here’s why:

1) AMC has more top content than any other network.

While its an unscientific poll, I have found it hard to find anyone I know that watches television who doesn’t love at least one of their hits: Breaking Bad, Walking Dead, and Mad Men. Their passion is to the degree they rave about it and tell anyone who doesn’t watch that they must. There is no other basic cable network that produces shows with such rabid followings (unless you count juggernaut ESPN’s sports programming).

What’s more is that Netflix knows this. They’re known as a heavily analytical company as they used it to create their hit show, House of Cards, and now they gave Breaking Bad a ratings boost that saw their premiere of Season 5 Part 2 double their previous ratings high. Given Breaking Bad is a continuous story, there is no other explanation than the Netflix binging helped widely expand their audience.

2) Netflix is at war with Amazon.

There is no doubt this is a 3 horse race for streaming supremacy between HBO, Netflix and Amazon. HBO owns its own content so the play here is directed squarely at Amazon. With such an acquisition, suddenly, to see those shows your friends have been raving about, you would have no choice but to join Netflix’s over 37 million subscribers. Amazon wants to be the first place you check for shows just like so many other goods. Losing out on multiple popular series would be a blow to that mindshare goal.

With Netflix’s subscription and retention strategy this is equally huge. There are 35 episodes of Walking Dead already aired with 9 coming this fall, 62 Breaking Bad episodes by the series finale in a few weeks, and 78 Mad Men episodes with a final season looming. A subscriber committed to watching even one of those shows through is likely to stay a subscriber for a few months to finish any of those series.

3) AMC needs Netflix.

As a passionate fan of Breaking Bad from the first season, I followed it closely between subsequent seasons. The ratings were tough but Bryan Cranston’s multiple Best Actor awards made it very hard to give up on it and the fan base grew as there were more and more shocking episodes. AMC often had tough negotiations, but they kept renewing.

However, things really got tough with the final season. AMC only had the budget for 12 episodes, but Vince Gilligan wanted 16 to end the show the way he had planned it. There were rumors of him even thinking about soliciting other networks. AMC worked it out but you also notice there was a huge 6 month break between the first 8 and second 8 episodes, thus spreading out the costs significantly.

It seems these conflicts weren’t the first time the network had to squeeze budgets on a hit show as there’s been rumored conflict for both Mad Men and Walking Dead. There has also been their feud with Dish network which caused an estimated $31 million in lost revenue, which is a big deal when your net income over that time was only $15 million on $367 million in revenue.  Getting a stable budget from Netflix would cushion them like never before. 

4) Netflix needs more content and AMC knows how to make it.

Netflix knows the value of letting artists follow their vision, as they spent over $100 million on their first show, House of Cards. Their model ditches the pilot and wait and see approach of television to instead trust artists to tell a full story in a complete season from the start. When this works it will be widely praised, but a series of misses would get costly fast.

AMC has shown they can make hit after hit. That is the kind of talent that Netflix needs to continue to grow their content arm. The AMC team that has discovered multiple unexpected projects could help see the story behind the analytics Netflix is so known for. Would their analytics predict these as hits:

  • A 60s and 70s era period piece about alcoholics and philanderers at an ad agency.
  • A graphic novel about zombies (ok maybe, that one they could see)
  • A cancer-ridden high school chemistry teacher turns into Scarface. (no way)

Taking the eye for talent at AMC and augmenting it with the analytics of Netflix could create a content powerhouse.

5) Netflix is already invested in AMC.

Underlying all of this is the bulk payments Netflix has to make to AMC to stream their content. They’ve been working together for years already and the relationship has proven positive for both as the halo effect of Netflix binging brings new viewers to AMC. As the network continues to grow its catalogue of hits I envision those checks getting bigger and bigger. Like any good partner to acquisition move, I suspect this could be the catalyst for such acquisition discussions to begin. Of course, the ratings boom Netflix is helping them with is driving up their price to cable companies, so the longer Netflix waits the more expensive it will get.

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I don’t believe nor have a heard that any such deal is imminent or in talks. However, I do believe it makes a lot of sense especially as people cut the cord with their cable providers and a great network like AMC considers its role in such a post cable world. It would be an expensive move given AMC’s revenues, but they’ve already been willing to spend over $100 million on one season’s worth of a single show. AMC presents a one of a kind opportunity that fits Netflix’s expanding vision.

UPDATE:

Per some really insightful comments on Hacker News and some of the comments below, it appears I misjudged what AMC owns and not. What I would change this article to say then is why Netflix and AMC are going to become stronger and stronger partners going forward. There’s no reason to buy AMC, but they are proving very helpful to one another and potentially better served as two independent businesses with unique interests. I expect many more deals between the two companies.

3 Books Every Investor Should Read

8 September 2013

4 Comments

As an entrepreneur, when I consider the ideal investor I would like to have, it’s a lot more than someone with money. I want them to have characteristics like:

  1. Able to make smart bets: Investments are largely made when it’s too early to tell with certainty who or what will win in a market. 
  2. Add value and insights: This is more than replaying personal war stories and biasing from your own experiences.
  3. Asking good questions: Someone who pushes founders to take a step back and recognize the things that matter often comes more from asking questions than providing answers.

Being great at those three things is no small task. Fortunately, there’s been some great books written that can supplement the knowledge and know-how of even the most veteran entrepreneur or get a new investor off on the right foot. These are books I’ve read and re-read because they’ve providing so much value to me and I believe can specifically help investors as well.

The Innovators Dilemma by Clayton Christensen

Disruption is a brutally abused word in tech these days. Clayton Christensen brings it back to reality and explains how it really works in this classic written in the 90s (and has arguably gotten better with age).

As an investor this is critical so you can call BS on an entrepreneur that claims they’re disruptive, but really are hopeless. This book will help you understand not only how to recognize disruptive technology in its earliest days, but what it means to get in the market, grab a position and successfully grow and take down the incumbents. Benjamin Tseng, a Bay Area VC, has a great post also discussing the value of this book for investors here.

Investor Scenario: A founder claims they have a disruptive innovation and are telling you about their immediate mass market plans, The research in Christensen’s book will help you guide them a better approach or to pass on the deal.

The Master Switch by Tim Wu

Over the past 100 years, communication platforms have dramatically changed and evolved. During this time, we’ve seen the emergence of the telephone, radio, television, email, the internet and more. Without fail, every time one of these new mediums emerged, they fought an uphill battle to eventually win the market.

This book goes perfectly hand in hand with Innovator’s Dilemma by walking you through how many technologies were slowly commercialized and changed the world. By the time you get to the end the patterns will be impossible to miss and priceless to match against what you see in new markets emerging (some of which you hopefully can invest and place strong bets on).

Investor Scenario: A founder has a transformative technology. Knowing the patterns of past innovative companies, you can help them anticipate resistance they may face both in the market and legally.

Tribal Leadership by Logan, King & Fischer-Wright

A book on culture to go hand in hand with two on innovation cycles? Absolutely. While there are other books out there I’ve rated higher on culture, none are more powerful for an investor.

You only get a limited amount of time with a founder and their team, so knowing how to quickly tell the difference between a strong team culture and one struggling is huge. What makes Tribal Leadership special is how it helps identify the key words that you can listen for to tip off how a company is really doing. 

Armed with this information, you can help a founder get back on track if some of the team has issues.  It can also help you decide if you should pass on an investment that looked good otherwise; a motivated, excited team will be significantly more productive, work longer hours and help recruit the best talent. You need those for the characteristics for a company to hit deadlines and win the market.

Investor Scenario: You visit one of your investment’s offices. If you overhear employees talking about their excitement for the mission, they’re operating at a high level. If instead they’re complaining about how much their work or a project sucks, you may want to ask the founder some questions.

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Unfortunately, many business books are a complete waste of time. Luckily, gems like the 3 books above exist and help tremendously to educate us, change our perspectives and diversify our knowledge on important subjects. I’d love to hear any great book recommendations in the comments for investors or entrepreneurs.