A lot is being said and has been written about how strategies and market mechanics determine the success or failure of ventures and large companies. But any entrepreneur will confirm that it usually is execution which decides the fate of the company, especially in venture companies. Thus, leadership capabilities may be the most important skill set of venture management.

Leadership, management, and the principles which guide how employees are motivated and directed in their tasks are usually treated either as a self help topic in management books or as the HR side of company organization.

It might be time to focus on leadership and HR capabilities in the strategic dimension they have for the company. This means to recognize that the best company strategy can be killed by the wrong leadership methods. Good leadership is not only an important requirement for management. It is the necessary condition for company success!

In the region of North Germany where part of my family comes from we say that a fish always stinks from the head, which in my opinion puts in a nutshell the essence of leadership. If your venture team is not motivated or doesn’t excel, start at the head.

Ted Levitt once said that

organizations exist to enable ordinary people to achieve extraordinary things,

which I believe is only a way to say that things happen only if people do them. The success of a company is only achieved if the employees and the managers of that company willingly take the necessary actions to enable that success.

That is certainly first and foremost a question of deciding which of the actions that are available in a given situation is chosen, but it is equally importantly a question of ensuring that every employee executes that strategy in the way that best ensures success, including feedback and adaptation of the strategy when problems arise.

Achieving this, however, is a question of leadership.

Since all dictatorships eventually fail, leadership cannot be reduced to the ability to bark orders. All great historic figures acclaimed for their leadership, from Julius Cesar to Napoleon, from Spartacus to Martin Luther King, are all admired for their ability to inspire, to motivate, and to convey a sense of purpose to a large number of people, i.e. to the organization that they led.

Inspiration however, is nothing without credibility. Credibility, in turn, is only achieved through authenticity. Authenticity is only achieved through honesty. Applied to the world of the 21^st century and the context of leadership in business organizations, this means that a truly successful leader needs to combine the ability to inspire others with a set of skills and principles that are tenets of credibility as a leader:

1. An inspiring sense of purpose.

2. A clear set of unflinching values. Shifty leaders command no respect.

3. Honesty at all costs.

4. The ability to communicate necessities and convey a sense of urgency to a team.

5. The ability to define the organization as a community serving a common goal.

6. The ability to honestly admit own mistakes and address the weaknesses of the organization.

7. Relentless commitment to the company goal, including the necessary ability to “punish underperformance”, without humiliating anyone in the organization.

8. The ability to lead by example, including in personal matters such as health or respect for others.

9. The discipline to pursue a strategy and tactics that belong to that strategy and to adapt these whenever necessary, not only “acting from the gut”.

10. The intelligence to always overestimate competition and underestimate your own position.

Most of these traits require a certain level of self-assurance, respect for others, and clear view of your own shortcomings that is incompatible with most managerial egos. But while there are enough cases of at least temporarily successful egomaniacs, in the long run only those entrepreneurs intelligent enough to value, respect, and reward their performing team members, and self-critical enough to recognize their own mistakes become truly great.

Share on Facebook

This weekend a friend of mine called me up, as he was completing – as a leading seed investor – the first round (series A) of a company that I have a minority stake in. He told me that the round being negotiated was just short of Signing, as all main deal elements had been agreed with the investor (a large and well-known VC Fund), but there was one last point of contention left, and – big surprise! – that was Reps and Warranties.

That made me think once again about the peculiar habit of venture capitalists to turn Reps and Warranties almost as much a difficult topic as in M&A. If you think about the term “Venture Capital”, the whole concept is that you venture into something and there is no precisely NO guarantee of success.

Of course it makes full sense to commit founders to proper representation of the state the company is in and to also make them liable for the so-called Title Guarantees, in effect making sure that the shares being transferred to the investor are free of third party rights, are indeed constituted legally and are not subject to any limitations. However, I do not understand why these Reps and Warranties so often go to the core of the risks of the business model, thereby in effect giving the venture capital investment more the character of debt financing, disguised in the Reps and Warranties clause.

Why do I say this?

Because if a founder signs up for – say – a 3 Mil. Euro investment and the company fails due to an event that is at the core of the typical risk of the business model, this may create a warranty case that in the worst of all contract agreements may include full damage to be paid by the founder. This then means that the investor may get up to the total sum of that investment in damages from the founder because of an event that constituted the essence of the typical venture risk.

So put very bluntly, by enforcing Reps & Warranties covering business risks, the investor covered his venture risk by making the founder liable for failure of exactly that risk.

We all know that founders who may be otherwise admirable do not like to focus on legal details and may have bad luck in a choice of their attorneys.

That can be a deadly mistake.

When founders find themselves in such a contract situation, it is not just a reflection of poor negotiation skills on the side of the founders, who – one might argue a bit unfairly – therefore would not deserve anything better.

Such contract clauses are also always a case of misguided priorities on the side of the investor.

While as an investor I have full sympathy for contractual rules that prevent an irresponsible founder from walking away, as in the old adage “with my time and your money to waste, we have nothing to lose”.

However, it is equally unfair to put the investor of a venture in a position where his investment becomes more a case of debt with higher returns and higher default risk than of real venture investment. Moreover, discussions and probable litigation about business risk damage retribution by the founder can divert vital energy from surviving the damaging event, since both the founder and the investor will bes spending considerable time hedging their risks or enforcing their rights. THat can ultimately be much more damaging than the damaging event itself.

Here is my advice to founders in any negotiation about Reps and Warranties:

1) Before negotiation of deal terms, identify the natural risk of your business model

2) Prepare to describe and argue to the investor what the typical risk of the venture is and make it clear from the outset that that risk cannot will not be carried by the founder(s).

3) Make the investor acknowledge these risks early in the process of negotiating the terms

4) At term sheet level make sure that the basic principles guiding an equal distribution of reps and warranties rights between founder and investor include the following

a. Liability of founders is limited to willful behavior and gross negligence

b. There must be a cap of a certain percentage of the investment, in my opinion not more than 50% of the investment sum.

c. For all cases of non-willfull behavior the warranty term should be at most 12 months

d. Each founder is only liable for the fraction of the cap that corresponds to his fraction of shares in the entire company, so a co-founder who has 20 % of shares in a company shall only be liable up to 20% of the cap.

e. All shareholder managers with shares smaller than 7% should be exempt from any liability unless there is a specific reason for that.

f. Damages should be paid only to the extent that the Founder / Manager liable had best knowledge of the Warranty issue.

g. Retribution of damage should be limited to the damage that is incurred directly by the damaging event, confirmed by court ruling and could be reasonably expected. There should be no damage retribution for a loss of valuation of the company, which should be explicitly excluded. Valuation loss is usually covered by downround protection clauses.

h. Retribution of damage should be limited to such damages as cannot be corrected or “repaired”.

i. No damage retribution should be given for damages that are incurred due to lack of cooperation on side of the investor. This could include anything ranging from late payment of investment funds, lack of cooperation in litigation cases, failure of the board members dispatched by the investor to agree in litigating to avoid the damage, and so forth.

k. The most important advice that can be given to any founder signing Reps and Warranties is to put a large amount of energy into the due diligence and disclosure process and the documentation of that due diligence and disclosure process. THis is where attention to detail is a very necessary evil. The contract must include a clause that no events or fact about the company that were or could reasonable have been expected to be known to the investor at the time of the investment can lead to a claim of the investor against the founder. Thus claims are excluded if the the facts that led to the damage were known to the investor.

l. Negotiate all these points, then focus on disclosing well all risks that are part of the business model or lie within the company.

Often investors will present the founders with tough Reps and Warranties basically to incentivize them to puta significant amount of energy in thinking through the risks of the company and the development stage the company is at.

However, founders should rate their investors on the basis on their willingness to accept clauses that correspond with or at least resemble what I advise.

Good Luck!

Share on Facebook

In a recent discussion I had at a meeting of which I am a non-executive member, the eternal discussion of

whether priority should be given to monetization or to reach and internationalization

was brought up. The debate centered around the question of whether or not the exit perspectives of the venture (of which I am also a shareholder) would increase or decrease, depending on whether the business model was first proven, at the detriment of international reach, or whether monetization should be allowed to lag because entry into several international markets at once would be a priority.

To me, this debate simply has the wrong starting point. While it is true that exit markets, such as the stock market or the M&A market, are – just like any other market – subject to buyer preference analysis, and while there is some credit to the claim that understanding the decision making “fashions” of typical M&A acquirers does help you in setting the price of your venture at exit,

timing towards such an exit market is more of a gamble than a company strategy.

In my experience, having now gone through two boom and one bust phases, the best strategy for a company to pursue is to

create a viable business model that creates value for customers that customers are prepared to pay for.

This may not always be the “sexiest” portrayal a startup can give itself (as opposed to: we are the next Facebook), but to paraphrase the old saying about design following function or form following function-

PR and the Elevator Pitch should follow the strategy and not the other way around.

This is why I literally get angry at classic venture capital thinking that sees company strategy solely in the dimension of “How will this fit my exit market? How can I sell this story to an acquirer?”. I would always strongly advise any founder

to have a clear and separate vision of their business model that cannot be influenced or swayed, save by the customer

and to work relentlessly on proving and creating that.

Incidentally, succesful American start-ups have often proven that this is the best strategy since they have always focused on gaining size and growth in their home markets before over-focussing on internationalization. In general, this has given them the size and clout necessary to, if need be, acquire whoever it was in a landscape within a specific market. It is true, that this does not always work and that some local markets have been lost even for giants such as Yahoo! and E-bay because they haven’t gone local on time, but conversely there is no known example of a company that went for reach without a viable business model and survived.

Eventually, you do have to pay the bills.

So if you do have to reach several international markets at once (because you are in a European market with too small a home market or because your board is adamant or because you have that peculiar megalomania that most entrepreneurs – including me – indulge in, I would advise the following order or priorities in formulating your company strategy:

1) Define your Business Model

2) Prove it by acquiring your reference customer base

3) Identify the growth factors in your business model with respect to paying customers

4) Identify the multipliers or incumbents in other international markets

5) Internationalize on a sales / business model driven basis by acquiring reference paying customers in those markets

The perceptions of your target exit markets can change faster than you can change the positioning of your company.

But a functioning business model and a continuous revenue stream are two realities that a) always let your survive independently of your VC backing and b) always find an acquirer.

Where there is a business model, there always eventually is an exit market.

Share on Facebook

After having gone underground with a series of negotiations, I’m back withe the facts and some insights:

- Sevenload (http://www.sevenload.com) got a Financing from Burda Digital Ventures, the venture subsidiary of Burda group, a leading German Media Group

- Oneview (http://www.oneview.com) got a financing from a leading Media group as well, but that is still somewhat in stealth mode.

This introduces an exciting new phase in both ventures. Sevenload has reached new highs in usage. While competitors benefit from integration in TV channels, tend to trick somewhat on their figures, and basically are positioned as “videos generate traffic, traffic generates advertising impressions, ad impressions generate revenue”, sevenload is going for the Long Tail of content, creating a series of specialised audiences and trying to create advertising value there.

We have negotiated for months on the financing deal with a series of Venture Capitalists and strategic investors. We opted for Burda because it gave us a combination of media competence on their part and independence to pursue our own entrepreneurial course.

We closed the deal more than three weeks ago but wanted to gain some time before communicating it. We had carefully crafted a press release – only to discover that an early talk and its misinterpretation has led, a day before the release, to the faulty and undesired headline that we had been acquired. While this certainly serves the purpose of strengthening the positioning of Burda as a digital innovation leader, it is important for us to stress that we remain entirely independent and this is a pure venture financing. Lesson learned: remain on top of any and all first contacts to the press and lock in the main media with exclusives.

The other surprise was that the news generated so much response. The video market remains a very hot spot.

Share on Facebook