Here You Come Again, With A Pitch Book Looking Better Than It Has A Right To…

Another day, another pitch.  What are your red flags to pitch out the pitch book?   Old technology?   Unlikely team?  Funky numbers?  Five Google pages of competition?  What about that promising little company we all have seen x times and to the nth degree:  the one with encouraging numbers and a niche–and no IP?   My favorite.  The pitch always waffles on IP.   A little arm waving in the direction of a patent, a nod to copyright, and the founders will refer breathlessly to trade secrets.  Right.  Look around for an expired patent, direct competitors first to market, off the shelf equipment, and outsourced development.  Unless the company has paid attention and put effort into tying up the IP in a neat package, pass, move on.

Most inventive software developers want to patent their work, whether it is worth patenting or not. They do not want the exposure of copyright registration. Where the company whispers “trade secrets”, I have found on further questioning that the company has borrowed freely and widely or is knowingly re-purposing someone else’s work—or has hired others to do the work without proper agreements in place and there is a dispute as to who owns the code. Examine who owns the code by agreement, whether the company has infringing code or open source code embedded in its products, and, indeed whether the developer has “freedom to operate”, that is, does not infringe someone else’s patent. Question carefully whether the developer has any IP to protect.

Start strategically with the outside developers, as the analysis is cheaper. Who owns the code? What agreements does your software company have in place with its outside developers? This is not a question of NDA’s alone. Often such a company actually knows or suspects that it does not have the proper agreements in place and tries to avoid the real or potential ownership dispute by ignoring it, neither filing a patent application nor registering the copyright, (the less preferred route among software developers).

Use code sniffing to determine whether the software infringes someone else’s patents or copyright. A major problem is that programmers freely participate in open source and other communities on their own time. They go home at night, log in, and chat, seeking solutions to coding problems at work. They exchange code, co-author code solutions, and otherwise identify code that they then take back to work and embed in their employer’s software. The flow goes in the other direction as well. They share out their own code, their employer’s code.

Most expensive but essential is the Freedom to Operate opinion. Use a patent lawyer with extensive software experience who will do a thorough patent search, order any implicated patent, complete with wrapper, and thoroughly examine whether your company’s products infringe one or more of such patents.

Protection of trade secrets is extremely difficult, particularly in the case of software. Code, data, information flow freely. Open collaboration corrupts the process too easily. People move around, company to company, place to place, with thumb drives, personal email accounts, and BYOD. Secrecy is very difficult to maintain when products flow well beyond what Homeland Security advisers call “guns, gates, and guards.”

Copyright 2014  S. Caroline Schroder.  All Rights Reserved.

Acquisition Begins At Home: Know Before You ‘Buy’

Bored with chasing “organic growth”?  Ready for some acquisition action?  

Stop right there.

What have they been telling you?  Have they told you that most acquisitions fail?  Trust this, really, they do.

Why? Ultimately it’s a failure in knowledge:  not knowing what the acquired company really is, not knowing what the consequences really will be, but, ultimately, not knowing what you yourself, the acquirer, is, from assets, to people, to operations.

Don’t be blinded by appetite: do due diligence and assume you know nothing when sitting down to figure out what is actually going on before starting in on valuation numbers….

How to plan a good acquisition?

Know what you need.
What problems, goals, or simply operating challenges could an acquisition solve?

Know what you can accept.
What geographies, agreements, debt, costs, and personalities could you accept?  Use your imagination.  What’s the range of acquisition realities that you and your advisers have seen or fretted elsewhere?  Go on to imagine

Know yourself.
Know where an acquisition could fit even before you go out into the marketplace. Know how your own company works, and where it doesn’t, before going out looking for action. Know your problems as well as your advantages and hopes.

Don’t get hung up on whether you are  “seeing negatives” by examining reality.

Moreover, don’t excuse yourself from these steps if someone around you intones the old bromide, “Have to take risks to make money”.  Yeah, that’s a good way to lose it too, and slide down the slippery slope like so many others.

© 2013. S Caroline Schroder. All Rights Reserved.

Dotcom.Bust.2.0: Is London’s Tech Boom Due For Bust?

From tulips to dotcoms: Booms implode. We should have learned by now that when people predict growth forever and believe the boom is really real, the danger of the crash is highest. The perennial problem, since Isaac Newton lost his fortune in the South Sea bubble, has been how to spot the danger of the bust from inside the boom. Perhaps worse, as we have seen repeatedly in much more recent history, has been the ‘dodgy’ flows of funds as healthy growth becomes a speculative boom, and there is a fundamental chaos in accountability and oversight. That there will be business model fraud, from distortion of the services and goods actually on order to infringing uses of other entities’ secure intellectual property and trade secrets, has become a given. This is not healthy growth; this does harm to valid startups; the investment fallout hits not just wealth and institutions but family, friends, pension savers, and municipal and local charities. There is certain to be not just straight out fraud but crime, from ventures’ misuse of investors’ moneys to use of the boom environment as cover for money laundering, particularly as funds detached from clear beneficial ownership flow in from offshore, and back. Growth is good; booms are inevitable as are their correlated busts; but when government puts its finger on the scales to fuel a boom, it fuels the fire with self-interest; watch out below. Nothing lasts forever, but regrowth from cinders is always slow.

Red flags:
1. TGTBT – Booms are always too good to be true. It has long been a given that when ventures, returns, business models, angels, venture capitalists, and other denizens of the boom ecosystem are TGTBT watch for the catch and look for the trap or the back door that will let you out of the deal. Nonetheless, as boom is about to go bust, even the steadiest become swallowed by self-delusion. “For man is a giddy thing,” as was Shakespeare’s conclusion.
2. Engineer shortage – We always hear this in a modern boom, whether oil, dotcom, renewables, or here. For months there has been a widely reported dearth of engineering skills and engineers, such claimed dearth extending even to Cambridge and the Imperial College; educate more engineers in the future, it is asked. The time factors are what? Why would so much money continue to flow in where there is such a gap? Why would ventures continue to form and perform?
3. ‘Rosy’ revenues – Ah yes, until the bloom is off the rose. The wonder of it all, we see in every boom, is the remarkable robustness of the earnings, out-blooming comparable markets, paralleling other times. Watch your wallet when the proportion of companies with positive and growing revenue numbers is unusually high and even higher when one considers the engineer gap.
4. Declared success as opposed to proof – Beware when the pundits begin counting heads. Declaring success is not the same as meeting the demands of success. Raw numbers as in the number of startups housed or funded or even revenue positive prove nothing without proven technology that is new, useful, functional, and making real markets.
5. History – Booms rush in where angels, venturers, and speculators already tread. We have already seen several time in the last decade how tech, financial, and real estate booms walk, or maybe stalk, in parallel. London’s real property market has been powered by speculators, now heavily from overseas, mixing with the moneys flowing in to power ventures, exits, and startup “lifestyle” choices, but leaving all the valuations vulnerable to losses when things turn down overseas. London as a money center has grown its own reputation for loose oversight of numbers and skewing of values, and a certain blindness to mismarked, counterfeit, and dark market goods getting cleaned up with transfers through shell companies, transshipment, and other means. The problem has become global. It is highly doubtful that the local tech boom would not be ensnared in this as elsewhere.
6. The X-market – The British government has called for far reaching efforts to overcome an exploding problem with pornography, child pornography, including live-streaming pornography. The past several years have seen police seizure of tens of millions of children’s images in England and Wales; British and Spanish authorities cooperated in the arrest of some 50 people wanted for made-to-order videos of child rape and abuse, from infants to tweens, moneys deposited in a British bank and moved to Belarus. Days ago, Marques was nabbed in Ireland on a U.S. arrest warrant connecting him with graphic images of small children being raped and otherwise tortured. He has been widely reported responsible for the largest proportion of child pornography, globally. UK women have been assailed for standing up against the Facebook images and groups endorsing criminal violence against women. In the past days, Tweets have threatened individual women and their daughters with rape and death , from a Member of Parliament and a journalist to the woman who simply campaigned to place Jane Austen on British currency. For years, Silicon Valley and other tech venture hubs have been known pornography profiteers. In the UK, as in the US and across the world, the usual suspects, lawyers and other activists defend child and adult pornography as “free speech” although the child pornography, endorsement of violence, and adult pornography are variously crime, incitement to crime, and images of a dark ecosystem that victimizes children and adults with violence, addiction, and degradation. This dark side of tech is a big business, globally. Given the rosy revenues and the tempo of the tech boom despite the engineer shortage, one might well question what else is running on the ventures’ servers.

© 2013. Sulgrave Strategies LLC. All rights reserved.

Innovation, Thought Through, Works: The Telework Example

Telework is a perfect example of how innovation works if thought through-and the costs if not. Contrast the commitment to telework at the USPTO with its end at Yahoo. While most discussions of telework program success tend to focus on the commitment of the teleworkers, I have observed over time that the performance of the communications and security technologies is of primary importance. Given good technology and responsive back and home office support, teleworkers are more inclined to work too much than too little. Any innovative program needs tweaking, but rather examine the roots of teleworker inefficiency and detachment Mayer simply cashiered the program, wasting the sunk costs and her talent’s goodwill. Will Yahoo lose critical talent? Could Yahoo have overcome the glitches, vulnerabilities, and dysfunctions?  What might have been done to save this popular innovation?

Technology: Teleworkers should not have to be electrical engineers unless they are electrical engineers and hired for this reason. The technology has to work. For good telework, the voice and data communications must work consistently, reliably, daily, and hour to hour, and at any given hour. Equipment should be pre-tested, regularly maintained, replaced on schedule, and made available or delivered out promptly, agreeably, and reliably. Bad equipment should not just be shuffled back out to the field to make some other teleworker miserable. Technology should be upgraded as the technology advances and as vulnerabilities are exposed. Teleworkers should not have to make sure the pipes and bandwidth work. Teleworkers should not have to interrupt work to play technician or work through diagnostic steps and time consuming fixes with remote technicians. Give them functional architecture and infrastructure.

Schedule: The network should be up and working when the teleworkers are reasonably expected to be working. There should be sufficient warning of regularly and conveniently scheduled maintenance, updates, upgrades, integrations of systems, and other notorious interrupters so that teleworkers can get done what they have to do during reasonable work hours. Don’t let IT schedule a major system upgrade or integration of two systems when a major work project is coming due or in the peak workflow days or seasons. The point of establishing a telework environment is not to establish department dominance but to get the work of the business done.

Security: Teleworkers should not have to choose between a secure work environment and getting the work of the business done. Security should be tested, maintained, audited, and upgraded, and it, like the technology, should work, and work well with the technology. Equipment should not grind to a halt with every upgrade, scan, or change in settings and software. Teleworkers should not have to interrupt their daily work to troubleshoot yet another software, or hardware problem. IT security seems often to become the primary security concern of the telework environment, but the protocols of the work should not be ignored. Insiders as well as outsiders may decide to profit through theft. Beyond IT security, management must be vigilant for teleworker breaches of protocol. Mistakes do result in risk of loss or loss. Breaches of protocol may actually be deliberate acts to steal or otherwise misuse the work of the business.

Teleworker Culture: The back office and ‘home office’ must facilitate the flow of teleworker production, physically and substantively. ‘Home office’ oversight should be sufficient to generally know who is working when, set milestones and goals, provide both pace and quality feedback verifiably, remotely and in person. Management must provide for and integrate teleworkers into a remote and ‘home office’ culture, neither isolating the teleworkers nor letting the teleworkers isolate themselves as individuals keep up with the daily workloads and peak periods. IT should see itself as the telework accelerator, rewarded for the efficiencies it provides and the headaches it eliminates, and not as the gatekeeper disciplining or manipulating teleworkers. Unless teleworkers actually do work for IT, they are the employees of the business, and not IT, after all.

Teleworker-IT Conflict: IT controls a multiple chokepoints in the flow of teleworker progress. Not only does IT thus have prominent power over the individual teleworker, including teams, projects, and departments, IT personnel have been known to scorn those whose technology skills do not match their own. Whether in envy or disdain, some IT personnel have indeed made mischief and others have crossed the line into crime. Critically, the ‘home office’ should watch for and take seriously indications of and complaints about IT resistance, interference, obstruction, and breaches of security and protocol.

Commit to overcoming glitches, vulnerabilities, and downright dysfunctions. Where the innovation brings real benefits, attracts talent, and reduces costs, work to resolve the negatives. Improve it don’t trash it. Expect to tweak.

© 2013 Copyright. S Caroline Schroder. All Rights Reserved.

Venture Planning & Care

Whether a limited project or an entirely new company, every venture requires pretty much the same daily dedication, planning,  oversight,  and diligence every teen needs.  Ventures no more run themselves than any teen actually does, (psychobabble however to the contrary).  Slip up on any one of these and the venture is just as certain as any adolescent to lose  its way.

They need good genomes:  Just as it’s easier for both of you if you can give teens good DNA, your venture needs good DNA. The venture must have a good basic business model.  You must produce a solution that fulfills your potential customers’ needs better than their alternative options.   Even if those potential customers don’t know that they have any need for what you do, you have to convince them they need exactly what you do. In  this newly  loyalty-free world, your customers are never much more than potential customers.   And just as DNA gone bad causes cancer,  product quality, efficiency, flexibility, adaptability, improvements, or price points gone bad kills the business model.

They need good bones: The best of models won’t run unless it’s supported by good systems, processes, and facilities.  Just as the going gets painful for teens without good bones, so too will the venture grind down without good structures and systems.   Your venture needs adequate feeding with talent, imagination, knowledge, and cash.

Know what they’re good at: Teens need to do what they are good at in order to keep moving ahead.  To keep moving forward, your venture needs people who are good at what they do.  You need to know who’s good at what so that you can allocate resources and fill in the gaps.

Know what they’re doing: Just as teens left to their own devices will drift off course and not recognize trouble when they hit it, so too will ventures run aground and spin off course unless you keep the pulse of what is actually going on.  As with teens, you need to know day to day, ready to step in at any hour to redirect, correct, or pick up the pieces.  Your people can’t do it all themselves on the fly.

Know where they’re going:  Teens are learning to direct themselves, but sometimes toxic forces push your teens towards the edge of the cliff,  and they need you there to push them right back.  So too with the venture, you have to  keep step with your people’s direction and push them back when they slide off on a tangent or alter the course out of turn.

With ventures, as with teens, long after you would have thought you would be pretty much dispensable, you still can’t lose a beat.

© 2013 S. Caroline Schroder. All rights Reserved.

The Goosefish and The Dovekie: Bottom-dweller Predators and You and Your Supply Chain

You’ve heard ad nauseum of the ‘black swan’ of risk, but have you heard the one about the dovekie and the goosefish? The dovekie is a little Arctic puffin that flies out into the open ocean from its rocky nests in the cliffs onshore to scoop small fish and insects from shallow depths offshore. Until now its greatest risks have been thought to be the gull, the fox, and the occasional Nor’easter disrupting its feed and blowing it inland. Strange then, to find dovekie bits in the stomachs of goosefish, bottom-dwellers, mottled like the mud and sand in which they feed, found out even at depths of more than 3,000 feet. Rather disturbingly flattened into an appearance of teeth and mouth, they are mostly netted by bottom-trawling; goosefish don’t even swim particularly well. In fact they skulk down in the bottom mud and wave a fin, luring even large swimming fish for an apparent bite to eat, and open their own wide mouths for the prey to swim right in. How do dovekies and goosefish even meet, worlds apart? Is the goosefish the dovekie’s ‘black swan’ event? Or is the goosefish lying in wait for feeding dovekie, offshore, nearshore, an ever-present predatory danger?

Neither. Anne Richards, a NOAA researcher, concludes from tagging studies that goosefish merely meet hapless fishing dovekie in the water column from spring to fall as bottom-dweller goosefish migrate with surface currents to spawn over deep water. A marine opportunist, the goosefish will apparently eat whatever prey comes its way.

So what can you take home about risk from the hapless dovekie? We know that beyond the “black swan” risks, beyond the risks that you can clearly see, some risks you can only see from the perspective of your predator, that ultimate of ‘stakeholders’ that lie in your way. However, you can only think like a predator if you know who they are. It’s not enough to know your predator when you see one. You have to anticipate where they are.

You and your supply chain are in no one single place and every place changes over time. You have to examine all of your environments over time to see what predators migrate in from season to season, economic cycle to economic cycle. The most potent predator may not be the one coming in for prey. Yes, sometimes when you think they are out to get you, predators are really out to get you, but sometimes they are just the opportunist, happy with what ever might swim in.

How often, in reality, do you confidently dive in for your own prey only to find, too late, that you have become the proverbial ‘sitting duck’? By all means, think like your predator to secure your risks, but it takes some environmental study and the turn of seasons to know who your predators are.

© 2013. S. Caroline Schroder. All Rights Reserved.

Boards Back To Business:

 Thoughts for the Prospective Director

The year ahead promises to extend last year’s interest in risk oversight, a longtime dusty corner for most boards, while also extending that long-term trend, short-termism, and the chronic runner-up, innovation.  Once proxy season is finally over, U.S. boards will get back down to the rest of their detail and back to the business of the business.  Although a board’s role is properly oversight and review, boards have been worrying about the fundamental parameters of policy, strategy, and opportunity in recent years.  The same dynamic matrix of state and federal laws that drives different rules for different categories of boards across different industry sectors nonetheless sparks new general trends in governance every few years.  Prospective directors might prepare points on how they could bolster a board with their unique experience and perspective in one or more of these areas.

Boards are, of course, not guarantors of company performance, (however shrill various disgruntled stakeholders’ voices have become from time to time).  Boards do have a right to rely on management…until, of course, they can’t.  It is that “when” of when they can’t rely which is, of course, the (complicated) rub.  Best considered in the context of specific situations, this rub is one of the many reasons a prospective director must inquire about D&O insurance before joining a board and continue to be aware of D&O long-term.

Given the activist pressures on boards in recent years, prospective directors are likely to be confused about the role they seek, and, at times, even whether they want to seek the role at all.  The differing demands of state and federal laws on different boards can add a daunting uncertainty for a director.  Moreover, although SOX or Dodd-Frank may not apply to a specific company, the laws, regulations and stock exchange rules wash through all boards.  The board a prospective director sat on years ago may be little preparation for the board environment that director finds now.   The right balance between engagement and intrusion was always difficult to achieve; fear always prompted boards either to detach or to intrude.  That balance is at least as fuzzy now but subject to much more debate, scrutiny, and costs.

In recent years, boards have been overwhelmed with the sheer bulk of internal and external information and the new “expertise”.  What do boards need to know and how much can they reasonably be expected to learn to make decisions?  Where once the rationale behind choosing CEO’s and others of a certain level in business and the professions was that such directors would come to the board largely trained and know generally what each other knew, the rationales and prospective directors’ backgrounds have changed.  Now business and the professions are highly specialized.  As specific experts are imposed on boards, care must be taken to make sure that all directors on a board are making decisions based on equal knowledge and understanding of the industry.

Specialized expertise on the board is not enough.  In order to comment on strategy, let alone risk, and to prevent crisis, the entire board must understand the business of its company.  All directors are likely to be confused, even about comparatively minor decisions, if knowledge is not equal across the board.   Board judgment and decisions being what they are in the evolution of a company, the effects of such confusion are cumulative.  Disasters such those HP has experienced over the past once-improbable decade are reminders of the difficulty of understanding the business amidst a changing industry sector.  A board must have very deep understanding if it is also to be prepared to step into the fundamental crisis where senior management itself must step aside.

Today’s prospective director thus will find a complicated board environment even if the director is not new to boards.  The large public company requirements up the ante for all boards.  Therefore, the prospective director must be prepared to accommodate the latest governance trends, all of which currently aspire to a certain perfection in board action and foresight and board expectations of senior management:  Long the ideal, board and senior management must achieve stability but must also take risks; both board and senior management must be reliable but must also embody ambition and innovate out of stasis.  Senior management compensation long deemed an efficient tool is now subject to minute scrutiny.  The board must effect all while not taking over the strategy or the plan–or displacing senior management until such time as it must replace senior management.

 ©2013. S. Caroline Schroder. All Rights Reserved.