Engineering Entrepreneurship

Ron Lasser, Ph.D. EN 0062 Class #10 11-7-06

Quote of the Day † “Pioneers are the ones with the arrows in their back” – J. D. Marriott

A Preliminary †

Lynn Reedy eBay As senior vice president of product, development, and architecture at eBay, Lynn Reedy oversees the entire product development process. Her more than 700-person organization is responsible for all of the initiatives that pertain to the company's work in software development, product specification, user interface design, usability testing, and release management. Lynn joined eBay in 1999 as vice president of product development. That year, she and her team developed the processes and architecture that increased eBay's output fourfold. Prior to joining eBay, Lynn was senior vice president and chief information officer of Miller Freeman, Inc., a leading media company and the largest trade show producer in the world. At Miller Freeman, she implemented strategic business systems and developed the company's Internet strategy for more than 200 Web sites. Previously, Lynn spent nine years at Amdahl Corporation and seven years at Accenture (then Andersen Consulting) in a variety of management roles. Lynn has a Bachelor of Science in mathematics and computer science from the University of Illinois and a Master of Business Administration from Santa Clara University.

Two Perspectives †

Guy Kawasaki - Managing Director and Chairman [email protected] Guy Kawasaki is a founder and Managing Director of Garage Technology Ventures. Prior to this position, he was an Apple Fellow at Apple Computer, Inc. and sits on the board of BitPass Inc. A noted speaker and the founder of various personal computer companies, Guy was one of the individuals responsible for the success of the Macintosh computer. He is also the author of eight books including The Art of the Start, Rules for Revolutionaries, How to Drive Your Competition Crazy, Selling the Dream, and The Macintosh Way. Guy holds a B.A. from Stanford University and a M.B.A. from UCLA, as well as an honorary doctorate from Babson College.

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Heidi Roizen – Managing Director , Mobius Venture Capital http://www.roizen.com/ Heidi Roizen is an accomplished executive with over twenty years of senior management experience in the technology industry. She has achieved success as an entrepreneur, a corporate executive, and most recently as a corporate director and venture capitalist. She has held positions of leadership within a number of industry organizations, and is a recognized and popular spokesperson for the technology industry. Today, Roizen is a Managing Director of Mobius Venture Capital, a technology venture fund with over $2 billion under management. Roizen serves on the Boards of Directors of Reactrix, Perpetual Entertainment, Ecast, LoyaltyLab, Mondo Media, and AuctionDrop. She also serves on the Board of Directors of the National Venture Capital Association, where she is a member of the Executive Committee. Roizen is also involved in various educational, political and nonprofit organizations and initiatives.

Yahoo! 1995 † This is a case about decision making † It applies to all stages in the development of a new venture and an established company † It is about having the passion † It is about authority, responsibility, and accountability † It is about getting the money!

Let’s Review the Yahoo! Story… † Started with a problem: personal list of favorite web sites grew large and unwieldy † Develop a way to “bookmark” web sites † Dave and Jeff had a great sense of what people wanted † Offered it to other web surfers † Value to the customer: people all over the World emailed them saying they appreciated the “bookmark” service † Key component of value proposition: organizing the information for intuitive searches

The Story Continues… † Project was a labor of love † Born out of founder desire to catalog their own web exploration † Extended to help the people who surf to be able to navigate the vast quantity of information on the World Wide Web † Attracted attention of others in the emerging web search/service industry † Provided a solution in an intuitive manner

The Story Continues… † The pressure was on them to make a critical decision: „ Accept $1M of venture capital funding from Michael Moritz and Sequoia Capital in exchange for 25% share in Yahoo! „ Sell Yahoo! to Netscape „ Look for a better offer „ Partner with AOL „ Combine with Architext (soon to be Excite) and lose primary control as a condition for support from venture capital firm Kleiner Perkins Caufield and Byers † 24-hour ultimatum to decide how to proceed

What Can We Learn from Yahoo! 1995 † Evaluate the mix of circumstances that ultimately determine success or failure † Appreciate the tension entrepreneurs face when looking to outside sources of funding † Note the tension between the need for money and the desire to remain in control and the reality that all resources come with strings attached

Opportunity versus Good Idea † Produces significant value for the customer † Dave and Jerry realized from personal experience that there was pain when surfing the World Wide Web † Yahoo! was the remedy for this pain † Unlike its competitors: „ Solved main problem: to find what is relevant to them in a black box of vast and growing quantities of information „ Make it enjoyable and intuitive to use: “useful information easy to find for individuals” † The vision of Yahoo! goes beyond a simple web directory… and into a new understanding as to how users experience the wed

Business Model and Strategy † See accessible use of the Internet † Make it free to all users † Jerry and Dave dismissed Moritz’s subscription based model † Hoped to exploit Yahoo!’s popularity: the number of eyeballs staring at the web pages all day

„ Jerry and Dave believed they could attract a large number of advertisers to make their web portal extremely lucrative „ Internet advertising was not a concept when Jerry and Dave created their vision

Opportunity

Risks and Rewards † Opportunity „ Who is the new venture’s customers? „ How does the customer make decisions about using and purchasing the service? „ How compelling is it? „ How is it priced? „ How much does it cost to acquire a customer, then support, and retain them?

Riske and Reward † Context

„ Customer adoption rates „ Technology support „ Moritz states firmly to Jerry and Dave: the worst decision that they can make is not to act † Note: being a first mover is not necessarily an advantage…fast followers (established companies with deep pockets) can overtake young companies „ How does the entrepreneur anticipate the future? † Understanding the contextual forces ahead of the curve to reduce risk and increase the chances of success

Risk and Reward † People „ Think systematically about the founding team „ Knowledge of market, vision, complementary personalities † Moritz versus Jerry and Dave

„ Top priority: build a strong management team with appropriate business support and market experience

How to Assess a Market Opportunity—Before the Market Opportunity Exists

How to Pick Your Sources of Funding

How to Pick a Source of Funding Sequoia Capital Financing † Pros: Get the money now Industry contacts Media experience Legitimacy from backing of a firsttier firm „ “Smart money” „ „ „ „

† Cons: „ Give up a big percentage of the company „ No guaranteed pay out

How to Pick a Source of Funding Sell Yahoo! to Netscape † Pros: „ Similar culture „ Immediate pay out for Jerry and Dave „ Strong market presence to push the company forward „ If they don’t Netscape will crush them

† Cons: „ Loss of the vision „ Possible loss of fun of running the company „ Less long-term potential „ Loss of control

How to Pick a Source of Funding Look for Better Financing Offer † Pros: „ Could get a higher evaluation „ Perhaps there is another VC that would be a better fit „ Could retain higher ownership stake

† Cons: „ This could be the only offer they get „ Any delay could hurt their first mover advantage

How to Pick a Source of Funding Accept Corporate Sponsorship † Pros: „ High initial pay out „ Excellent probability of success

† Cons: „ Loss of the dream and vision „ Tainting Yahoo!’s image „ Smaller long-term potential „ Contrasting cultures

How to Pick a Source of Funding Combining with Architext Option † Pros: „ Backing from KPCB „ Benefit from combination of businesses „ Similar cultures

† Cons: „ Loss of control over the venture „ Loss of vision for Yahoo!

How to know the difference between ownership and control

The Critical Point † Question: What is the difference between an idea and an opportunity † Answer: an idea you think is good; an opportunity is idea is known to be good by a customer because they see value in it!

So What about Jeff’s and Dave’s Decision † What would you do?

Conventional Wisdom † Summary of issue: Yahoo! has reached limits of two-person venture † Problem: „ Option 1: Sequoia – money and good support to build management team „ Option 2: Corporate – provides funds to sustain operations, but lack of control „ Option 3: Merge with Netscape – good money, but not separate entity „ Option 4: Find another deal – loss of time for execution to build relationship

Conventional Wisdom † Critical value/priorities: „ Retain ownership – it is a labor of love „ Growth – Internet expanding in 1995 form $20 M in 1995 to estimated $2B in 2000

† Key constraints „ Timing – competitors forming to build web navigation aids „ Low barriers to entry „ Money – large funds needed to be raised

Conventional Wisdom † Decision „ Jerry and Dave not accept Sequioa’s offer because of the risks in the industry, the indefensibility of their market share, lack of patents, low barrier to entry, and added value of a merger with Netscape „ Netscape has strong technical management team, experience and expertise in fledgling Internet industry, similar culture to Yahoo!

† Go with Netscape was the recommendation of the experts!

What did Jerry and Dave do? † They went with Sequoia Capital Funding

Homework †

What makes Yahoo! a true opportunity, not just a good idea? „ „

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Created significant value for the customer The founders realized that the pain they experienced in attempting to navigate the Web was the same pain experienced by millions of other Web users

How will Yahoo! make money? What is the business strategy? „ „

Free access to all users Number of eyes staring at pages -> advertising † † †

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Balance needs of advertisers with needs to search Internet advertising was a novelty at this time Projections on advertising revenue: $20M in 1995 -> $20B by 2000

Identify the major risks in each of these categories: technology, market, team, and financial. Rank order them. „ „ „ „

Market: business model Team: getting the right people, skills Technology: many competitors Financial: Loss of control

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See earlier slides

What are the advantages and disadvantages of each of the funding options they could pursue?