By Verne Harnish “Growth Guy”

Customers experience your company’s processes, not its functions.  Yet executives spend most of their time focused on making sure the functions of the firm i.e. sales, operations, finance, HR, IT, etc. are properly led, staffed, and driven by appropriate key performance indicators (KPIs).

For the sake of customers and the sanity of your team, it’s important to turn your company on its side and focus on those processes that flow across your various functions.  This is a critical activity in building a sustainable and profitable growth firm – and building a firm that isn’t driving everyone increasingly insane as the company gets bigger.

It’s poorly designed and executed processes that suck up large amounts of money, time, and energy – and ultimately lead to a frustrating employee and customer experience.

What Are Your 4 to 9 Processes?

There are normally four to nine of these horizontal processes that cut across your various functions, processes like “how do we bring on a new customer” which can involve sales, operations, IT, and even finance.

And like with functions, they must be properly led, staffed, and driven by appropriate KPIs – and they must be designed with the end customer in mind.

So the first step is to gather your executive team in a room and name these processes.  While several of the processes are similar across many companies (“how do we bill and collect from customers”) there are some that are specific to your firm.

For instance, GrupoIntercom, the internet incubator I’m working with in Barcelona, has a special process for attracting and selecting entrepreneurs to join the incubator.  They also have a specific process for helping an internet entrepreneur go from concept to monetizing their internet portal. We identified eight key processes that drive this incubator.  What are yours?

Process Accountability

The next step is assigning accountability for each process to a specific leader.  And because a process cuts across several functions/departments there might be some perceived turf battles.  However, assigning someone accountability for a process doesn’t mean they are the new boss of everyone that touches the process nor do they necessarily have increased decision making authority.

Their job is to monitor the process (time, cost, accuracy), let the team know if there are any issues, and lead a regular meeting to fix or improve the particular process.  As such, its best if the person with process accountability has some cross-functional experience.

So, who are your key process owners?  It’s as critical of a decision as who heads up each function in the business.

Process Mapping

This leads to the third step – mapping the process.  Gather together someone from every function that touches a specific process, including a few customers that are impacted by the process (if possible).  Using colored Post-It Notes to represent each function (sales is green, accounting is blue, etc), map out the steps and decision points as the process presently flows.  Then step back and begin streamlining the processes, eliminating wasteful steps and removing obstacles.

For instance, think about how a certain piece of paper (physical or electronic) moves from a website to an email in-box to an order fulfillment desk in the warehouse, including emailed confirmations and order tracking systems for the customer.  You’ll be surprised at the number of steps and people required for a simple process.

Along the way, set specific KPIs at critical steps and decision points so the process can be continuously monitored.  In the case of Grupo Intercom’s process for helping entrepreneurs monetize their portals, specific KPIs are tracked that let the executive team know if progress is being made.

I’m a particular fan of the Lean approach to process mapping and improvement.  It focuses on reducing the overall process time, which leads to less steps, reduced costs and improved outcomes.  Contact the Lean Enterprise Institute in Cambridge, MA for books, resources, and support at www.lean.org.

How-To Manual

The beauty of identifying and documenting the processes in your business is that it provides you an excellent “how to” manual.  I have a friend whose father is getting ready to retire from the family business.  By identifying and mapping the various processes, they were able to both extract useful information that was locked in the mind of their father and the other employees while taking advantage of his expertise in changing the processes.  And the process improvements will further enhance the value of the company should they need to sell it.

Last, it’s useful to revisit and examine one process every 90 days as part of your quarterly planning process.  Like hallway closets and garages, these processes get junked up and need to be re-cleaned periodically.  With four to nine processes, each will get examined every twelve to twenty-four months, which is sufficient to keep your company running insanity-free.

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By: Verne Harnish

Every year, since it launched in 1984, pundits have been predicting the demise of RIM, the famous makers of the BlackBerry – most recently given the success of the iPhone.

Yet for all the attention Apple and the iPhone receive, the Blackberry Curve is the best selling smart phone in the US in 2009 – and RIM, the famous maker of the BlackBerry line of mobile devices, has 56 per cent market share, up 15 per cent over last year while Apple has lost 10 per cent. This Canadian firm is also the fastest growing public company in the US according to Fortune Magazine’s recent list.

still remember Jim Balsillie, co-founder of RIM, sharing with a group of us that “if you can’t state your strategy in a sentence, you don’t have one!!” And RIM’s? In essence, “Easy in, impossible out”. RIM makes it very easy for corporations to install their e-mail system, but because the way the proprietary RIM software and servers work, it’s almost impossible to extract – or at least a huge hassle. So even though a whole host of executives may love to get iPhones, there’s too much inertia to overcome for enterprises to switch, a market in which RIM commands a whopping 74 per cent market share.

And the software and server side of the business commands 90 per cent plus gross margins given the fees carriers pay RIM per customer for the ability to collect, in turn, data transmission fees. It’s these huge margins that dwarf the margins pure handset manufacturers earn fuelling RIM’s continued market domination.

Though I’ve preached for years the importance of a one-page strategic plan, let me suggest that a precise “one-phrase strategic plan” must be the starting point.

Also defying gravity has been Southwest Airlines 38-year run. Today Southwest is the largest airline in the world in terms of number of passengers.

For Southwest, their one-phrase strategic focus is also an internal tagline – “Wheels Up.” If that expensive hunk of metal is in the air more than the competition, then they are going to make more money.

Though different than their more well-known “low fare” Brand Promise, this one-phrase strategy underpins Southwest’s unique ability to keep their promise versus the rest of their low-priced competitors. And this is why the one-phrase strategy is such a critical competitive decision.

Think of the one-phrase strategic statement as the focus for the underlying activities that differentiate your company from your competition. The key word is activities. As Michael Porter, Harvard’s famous strategy guru, emphasises in his classic 1996 Harvard Business Review article it’s going about the business in a different way than your competitors that defines your strategy.

In Southwest’s case, no advanced reservation seating and using the same aircraft type for all routes are two key differentiating activities. And by choosing activities that are impossible or difficult for others to adopt, you maintain your competitive advantage. One of the few successful IPOs this decade, Rackspace has built its business on a simple one-phrase strategy “it’s not about the servers, it’s about the support.”

Pegasystems has also nailed its one-phrase strategy, a strategy Alan Trefler, founder and CEO, has been pursuing since 1983. Captured in their tagline Built for Change, Pegasystems makes it easy for business managers to change the software underlying their systems. In all four cases, the companies have relentlessly focused on their one-phrase strategy And in the process have driven significant growth and dominated their industries.

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Yes, it’s possible. Here’s how one hospital turned the budget over to its employees and reaped a windfall.

Massive layoffs. Facilities closing. Profits declining. Full-blown economic recession. This is the stuff that creates angst and sleepless nights for today’s CEOs. While many leaders find themselves looking for a way out of this morass, they also tend to assume that the burden of doing so rests solely on their shoulders.

Between the Town Hall meetings and departmental meetings, PMC staff members came up with 315 budget-cutting ideas that were passed on to the communications and service excellence department. That department categorized employee ideas into areas like salary/benefits, recognition/rewards, patient experience, and new revenue possibilities and entered them into a spreadsheet.

The spreadsheet then was sent to department heads for their review. This group investigated the likeliest possibilities and conducted focus groups with employees. “If you start making arbitrary guesses about [where to] cut instead of strategically looking for the biggest bang for the buck,” says Mikitarian, “you can create a list and get all excited and start accepting all of the ideas, then wind up just irritating people and gaining nothing for it.”

PMC leadership was scrupulously careful with the ideas they implemented; yet the first round generated $3.6 million in cost savings for the hospital. And, because these ideas came from employees, buy-in was essentially ensured — most of the people who were affected by the cuts approved of them before they were even given a green light.

“We continue to keep people informed [throughout the cost-cutting process] about the status of their recommended cuts,” says Mikitarian. “You don’t want to turn around one day and discover that no one’s following the ideas you thought they suggested and were okay with three or four months ago. So we want to make sure that we continue to communicate where we are with their recommended cuts and keep reporting back to the employees.”

The engagement journey

Meanwhile, as PMC was beginning its cost-cutting initiative, the hospital was launching its third employee engagement administration using the Gallup Q¹², a 12-item survey that assesses and reports on employee engagement down to the workgroup level. PMC could have forgone one or the other — but the hospital realized that ignoring engagement could undermine the purpose of the Town Hall meetings. Simultaneously juggling both initiatives was, as PMC Human Resources Manager Roberta Chaildin put it, “very interesting — and a little nerve-racking,” but they managed.

Three years ago, PMC implemented its employee engagement program because it had hit performance plateaus. The hospital wanted to know what was driving outcomes so it could improve its performance results. So while employees were evaluating their work environment for ways to trim costs, PMC was scrutinizing workgroups to see whether every employee had what he or she needed to engage. And that scrutiny was as well-organized as the cost-cutting idea spreadsheet.

After the employee engagement results had been tabulated and distributed, every department conducted follow-up action planning, choosing a couple of Q¹² items to focus on. (See graphic “The 12 Elements of Great Managing” and article “What to Do With Employee Survey Results” in the “See Also” area on this page.) Mikitarian attended the action-planning sessions of the 10 departments with the lowest engagement scores. Their action-planning sessions were more detailed than those of other departments, had more steps, and included more accountability.

All PMC employees also attend weekly huddles, an idea PMC borrowed from The Ritz-Carlton. (See “How The Ritz-Carlton Manages the Mystique” in the “See Also” area on this page.) At these 10-minute meetings, PMC employees discuss “care partner stories.” “We talk about how we are living the vision, values, and the mission of the organization,” says Natalie Sellers, PMC’s director of service excellence. The huddle ends with a “care circle discussion,” which is a guided question and answer session that encourages employees to think about applying the principles of the story to their department, their patients, and each other. “It’s a very simple concept, but very effective,” says Sellers.

It’s also mandatory. All employees are required to attend the weekly huddle. And if they are in a meeting, they bring along whomever they’re meeting with to the huddle. “We’ve done it with applicants in human resources if they’re there at huddle time,” says Chaildin. “We’ve had salespeople gather around the table with us.”

Copyright © 2009 Gallup, Inc. All rights reserved.

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By Verne Harnish

“…keeping you great”

HEADLINES:

Private Equity Firms — do any of you have connections with Private Equity Firms? If so, let me know vharnish@gazelles.com — thanks.

Eleven-Page Must Read e-book — Matt Heinz, Heinz Marketing (http://www.heinzmarketing.com), sent along his new e-book entitled Six Essential Social Media Tools for Every Small Business (http://www.heinzmarketing.com/downloads/Six Essential Social Media Tools for Every Small Business.pdf) — it’s both concise and specific on what businesses should do re: Facebook, Linked In, Flickr, Blogs, YouTube, and Twitter. Review at your next one-hour marketing meeting (you have this meeting, right?).

How Twitter Will Change the Way We Live — Raghoo Potinii, founder and CEO of Knowledge Capital (http://www.kcapital-us.com) in India, pointed me to this excellent Time magazine piece by Steven Johnson, the famous author of Emergence. In the article Johnson describes precisely how Twitter enhanced a conference on school reform he attended earlier this year (attended by entrepreneurs, VCs, educators, etc — the kind of group that could actually reform school!). Take 3 minutes and read this article (http://www.time.com/time/business/article/0,8599,1902604,00.html).

10 Ways Twitter Will Change Business — the Time article also points you to their equally excellent piece on applying Twitter to business. Here’s the link (http://www.time.com/time/specials/packages/completelist/0,29569,1901188,00.html) that provides the specific list — you can then choose which idea you wish to dive into. Again, review this at your next one-hour weekly marketing meeting — that’s all it takes to stay on top of your marketing initiatives.

Best Use for a Summer Intern — frustrated with my own lack of time to understand and execute how our company can use Web 2.0, I hired a summer intern who just graduated from high school (they get it). He has 20,000 twitter followers, his neighbor is the VC behind Twitter, and he’s launched his own social networking business. I found him through my own staff whose children and spouses knew of Greg and his talents — and who thought that working with us might be more educational than working at a Smoothie King this summer to earn some spending money for college. BTW, I used Topgrading’s five screening interview questions to interview Greg (you use them as well, right?) to make sure he was a great fit with our culture and company — it still matters even with interns.

Specific Assignment — his project is to get Gazelles up on Facebook and to figure out how best we can connect with existing and potential customers. With Facebook projected to have 500 million users by the end of this year, your customers are likely to be there. He’ll also structure a Twitter strategy to help us communicate with those customers who prefer this channel (I was up teaching at MIT yesterday and several CEOs in the class used Twitter as a way to take collective notes of my lecture which are permanently stored on Twitter and available to the other Executive Management Program attendees).

Reading and Watching Assignments — I also gave Greg several books to read, starting with David Meerman Scott’s New Rules of Marketing and PR and World Wide Rave. He also watched Scott’s two hour webcast from our Sales Summit (http://www.gazelles.com/webcast_archive.html) and is excited to tune-in to Keith Ferrazzi’s webcast (http://www.gazelles.com/growth-s3.html) next week since Keith is so well known in the marketing and internet/Web 2.0 world. In addition, I have him reading Steven Johnson’s famous book Emergence, which is the strategy behind Google, Facebook, Amazon, Wikipedia, etc. Last, I had him Google “Olgivy’s Five E’s of Marketing” which provides an outstanding PowerPoint and white paper on the Five E’s that have replaced the Five P’s of marketing. It’s been fun for me to see Greg light up over this material vs. the mind numbing stuff they teach 18 year olds in high school i.e. the need for school reform.

Cost of Intern — actually Greg wanted a high-end laptop (roughly $2200) as compensation for a summer of work. He’s in our offices each day cranking hard and reading at night — and its great having his youthful energy and insights injected into our offices. And I feel we’re helping to educate a future entrepreneur. What’s better than that! So find a young person and mentor them this summer.

EDUCATION:

Growth Series Webcasts

June 23 — Keith Ferrazzi “Who’s Got Your Back: 3 Critical Relationships”

Rockefeller Habits Workshop

Go for Growth – Four Key Decisions to Maximize Profit and Revenue in Tough Times

Melbourne — 15 Sep ’09
Brisbane — 16 Sept ’09
Sydney — 17 Sep ’09

Summits & Conferences

Growth Summit
October 20-21, 2009 Dallas, TX

Great Game of Business with Jack Stack

Gazelles DVD/Online Learning Products — Gazelles.tv

PEOPLE
What’s the Secret to Providing World Class Customer Experience
Topgrading

STRATEGY
High Stakes Negotiations
The Art of Advantage

EXECUTION
Mastering the Rockefeller Habits
Execute Without Drama

Did you miss previous insights? – read here (http://verneharnish.typepad.com/growthguy/archives.html)

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Eye on the Carriers By Johna Till Johnson , Network World , 06/10/2009

t’s an old engineering adage that you can’t have it all. As the saying goes: “Faster, better, cheaper — pick two.” The idea is that any system can optimize at most two parameters, to the detriment of the third.

But there’s another way to look at “faster, better, cheaper.” It’s also a good rule of thumb regarding the characteristics that are important in a given economic environment. And here, you only get one choice.

In a period of hypergrowth, such as the dot-com boom of the late 1990s, “faster” ruled the roost. When I was CTO during the boom, if I gave my boss two choices — “You can have it in six months, for $1 million, or in six weeks, for $10 million.” — he would invariably go for the latter. And he wasn’t wrong to do that: In those hypergrowth times, the value of getting an offering to our customers faster outweighed the cost of doing so.

In a recession, it’s all about “cheaper.” Pretty much everyone reading this has been asked to do more with less. Eighty percent of the IT professionals I work with say they expect their budgets to be flat, or to decline, for the next year. And that leads to decisions such as “cut costs at any cost” — including decreasing services to the business units, or delaying much-needed upgrades and refreshes. Again, this is often the right decision for the times: If the choice is between laying off irreplaceable employees or delaying laptop upgrades for another year, the employees might be the better bet.

Finally, in a period of modest growth, the watchword is “better” — architect a solution that’s priced right for the short term, but continues to deliver value in the long term. That’s not the same as the fastest solution, or the cheapest solution — it may be faster or cheaper than some alternatives, but it’s usually slower or more expensive than others.

This all sounds pretty obvious, right? Interestingly, it’s not. Vendors often try to pitch their solutions as “faster” (or more powerful, or more scalable) when the market is demanding “cheaper” or “better”. And IT departments tend to push harder for “better” solutions, because we tend to have an innate distrust of optimizing for extremes.

So what should folks be doing right now? As noted, most IT groups are predicting another year of flat or declining budgets, so on the surface that would argue for “cheaper.” But hidden in that gloomy data are glimmerings of a change. Back when we first started asking the question (in January) a full 98% of IT departments said they expected budgets to be flat or declining. By June, the percentage that expected budgets to rise grew from 2% to 20%.

It’s too soon to ring the bells and declare the recession’s over — but indications are that it might well be. That means the time’s about right for IT departments to start shifting their focus from “cheaper at any cost” to “what’s the right solution for my organization going forward?”

All contents copyright 1995-2009 Network World, Inc. http://www.networkworld.com

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Seasoned entrepreneurs know there’s a big difference between a great idea in the mind and a successful product in the hand. Here to bridge that gap is Quirky, a service that uses a collaborative process to actualize killer ideas that might otherwise go to waste.

Anyone can submit their business plan and sketches to Quirky for USD 99, with the aim of being selected as the idea of the week. If it is, it will be listed on Quirky’s website, where a number of ‘influencers’ can vote and advise on the product’s development. The cream of the crop are then put into production and sent to market, at which point the person with the original idea gets 12% of the top line revenue. 70% goes into Quirky’s kitty (this also funds production), with some funds left over to reward the influencers who helped make the product a success.

The site still has value for those whose ideas aren’t selected, as the USD 99 supplies the wannabe entrepreneur with a market evaluation and details of the community’s response. And anyone can sign up as an influencer and make a few bucks based on their feedback, if an idea goes into production.

Asking idea-holders to pay a submission fee adds a useful element of self-selection, motivating people to submit only their best ideas and think them through before throwing them out into the either. And the selection process is one to observe and learn from, especially if you’re interested in tapping the wisdom of the crowds without ending up with something like The Homer. Meanwhile, Quirky’s parent company, Kluster, is building a business out of enabling selection processes. See NameThis for more crowd-selection at work.

Website: www.quirky.com
Contact: tinydino@quirkyinc.com

Spotted by: Troy Tessalone

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From: www.cio.com

– Ron Ponce, CIO

May 20, 2009

Businesses of all sizes embark on thousands of projects for new products and services every year. Unfortunately, most projects are doomed to fail outright, or at launch, because the original success criteria were not met. Some project failures lead to delays in product launches, such as the AirBus A380; others, like Boston’s Big Dig, incur huge cost overruns. These examples, as well as the results from survey after survey, show that American businesses have not been able to figure out how to consistently get products and services delivered on time, on budget and with the highest quality.

Why is that?

Businesses invest a great deal each year in people, consultants, processes and technology to improve project success rates, but to no avail. Don’t get me wrong, there are individual examples of excellence, and success rates have improved over the years, but there has not been the kind of dramatic increase that one would expect given the size of the investments businesses have made.

The bottom line is, businesses can talk a good game, but the majority are not ready or willing to make the “true” investments needed to achieve meaningful change—the type of change that will deliver on time, on budget, and with high quality near 100 percent of the time. There are eight steps that, if followed as a single unit and truly embraced by the entire organization, provide the roadmap to project management perfection.

1. Definition
It is critical to start with a solid foundation. The foundation must be built at the organizational level and not with individuals. It is imperative that, from the CEO down, there is understanding and buy-in when it comes to defining or redefining the following items:

• Roles and Responsibilities: This can be painstaking, but the effort will pay off when it’s time to execute. The exercise may outline the need to develop new organizational structures to better support efficiency and communication within the delivery teams.
• Standards: The creation of a project management methodology will allow for consistency in delivery and terminology. An added benefit can be bringing new employees on board who rapidly move up the learning curve and thereby provide immediate value.
• Policies: Having a set standard and a consistent methodology provides the platform to document and enforce policies. It’s difficult to document when things are moving quickly and always changing, but taking the time to do so will provide benefits such as improved control measures. Performing audits allows you to proactively identify risks and gives you the ability to mitigate them before they turn into a true problem.

2. Evaluation
It’s important to know where and when to make investments to achieve the goals of the business. Unfortunately, there are always more ideas than there are resources to execute them. Therefore, organizations need to formalize a process for evaluating which new projects should be approved. The process must define the decision-making criteria that will be used during the evaluation, and also take into consideration the firm’s capacity and capabilities to successfully deliver the projects.

3. Resources
Without people—or more importantly, the right people—the ability to succeed as a business is near impossible. Your resources were hired for specific reasons, such as unique skill sets or deep industry experience. Creating an environment for success is crucial to your business and to their careers. Taking the time to match the staffing needs for a new project with the skills you already have is critical.

4. Goals and Objectives
It happens way too often that team members don’t understand why they are doing what they are doing. They don’t know how important their project or task is to the success of the business. It is critical that goals are clearly defined for every project, from corporate initiatives down to one-off departmental projects. It is also important that they all tie together. Even the smallest project should support corporate goals in some way.

5. Control
One of the true single points of failure to the success of any project is the lack of control, specifically around scope and budget. Most people realize that for every action there is a reaction, but for some reason that logic goes out the window when it comes to a project. How many times have you heard, “My request is easy” or “This is just a small change.” Project stakeholders say these things without realizing the impact of their “small change” on the project plan or budget. In order to succeed, project stakeholders must understand that a change to the scope, timeline or budget for a project will produce a failed project if those variables aren’t subsequently adjusted to accommodate the change. As well, project managers need to define a strong change control process that is embraced from the highest levels down. This is not easy, but if accomplished, it will allow you to deliver your product and services on time and on budget.

6. Monitor
“Joe, how’s the project coming along? Well Frank, let me check the Magic Eight Ball.” I say that in jest, but it’s true that many businesses do not formally and concisely track the status of projects. It is critical that you and your team fully know and document a project’s progress, stakeholders’ commitments, results achieved, and the leading indicators of success as well as potential failure. The knowledge from the information gathered from your monitoring will determine the decisions that are made; the course of corrections that may be needed; and the comfort that your projects are being tracked. There needs to be transparency into and accountability to the plan, goals, budget and scope in order to achieve confidence that the information is accurate and actionable.

7. Measure
Goals have been set, plans have been created, and commitments have been made. After all that work, it would be a shame to not know if project objectives were quantifiably met. Being able to define, capture and track the metrics surrounding each project and the entire portfolio of projects is a must have for any executive and management team. There are many methodologies, such as Six Sigma, that place a great deal of importance in the ability to capture and quantify success or failure. There is a lot of power in black and white data. You set the bar and there is only one answer—yes or no—at the end when asked if it was a success. The data and the history that is captured will pay benefits when making initial decisions during the evaluation step. You can baseline the proposed project against those in the past and determine what changes may be needed in order to give a new proposal the best chance to succeed and not repeat past problems. You can only learn from your past if the past has been documented for reference.

8. Improve
Even in the most successful projects there is always something that could have been done better. Being able to capture those lessons will enable an organization improve its project delivery capability and deliver more complex and challenging projects in less time, for less cost. I highlight the following three areas for improvement:

• Invest in people: Improve the skill sets of your people with training and by giving them challenging project assignments.
• Continual improvement: Formalize a process to capture the lessons learned for each project. That process should also outline how recommendations for change are prioritized, approved and implemented. As with other items, measure the progress of each step and each approved recommendation to determine if its goals were met.
• Project technology: Be on the lookout for how technology can help increase the efficiency and quality of your project delivery.

These eight steps, if individually implemented, can improve your ability to get your products and services to market on time and on budget. But if you implement these eight steps collectively as a single unit, your business will gain a greater competitive edge, increase quality, enhance its agility, and most importantly, improve client satisfaction. Your clients will sing your praises if they are able to get their products and services delivered when promised and on budget. So don’t wait! Take action now and implement your eight step program today.

Ron Ponce is president of Fog City Consulting, a San Francisco-based program and project management consulting firm, which specializes in determining and implementing unique solutions for small businesses that enable them to scale their capacity, efficiency and delivery, thus allowing them to take control of their business project initiatives. He can be reached here.

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By Matt Marshall for Venture Beat

Chris Shipley and I hosted a breakfast last week with 16 leading Silicon Valley investors about the state of the start-up community.

It was frank and engaging.

Some participants requested their comments remain off the record. Below are summaries of some of the remarks of participants who agreed to be referenced.

Here are the two main trends I picked up from the conversation:

1) The art of VC dealmaking is changing — Investors are no longer just investing in the two guys just of out Stanford with a new idea. They’re doing things like joining with boutique investment banks to craft new sorts of financings, or hooking up with entrepreneurs to buy portions of companies and spinning them out. (Examples: Real estate company HomeAway raised $250 million to conduct a rollup strategy. Another group of investors bought StumbleUpon, spinning it out from eBay a year and a half after eBay bought it.)

2) VCs are in serious danger of strangling companies by depriving them of cash in their early years — There was significant disagreement between investors about how much companies should be allowed to go into the red while building their businesses. Some investors said they prefer to invest in businesses that can be profitable quickly. Others feel this is short-sighted, and runs the risk of forcing them away from building bold new platforms. Companies with big ideas (Facebook, for example) should focus on growing those ideas and not worry about being profitable from day one or two. See bold below for highlights on this theme.

The breakfast was part of our preparation for the DEMO conference in September. Chris and I are looking for the very best companies to launch on a stage before the world. Here are some notes I took from some of the participants (not direct quotes).

Asheem Chandna of Greylock — He agrees that the nature of deals is changing. His firm bought public stock in a company (Aruba networks) for the first time ever. Public tech companies are cheap. His firm also has a couple of companies with large revenue increases in the first quarter, suggesting there’s opportunity even in the downturn. The online security sector, for example, is robust because of the continuous rise of new threats. Virtualization remains a key macro trend.

Rob Theis of Scale Venture Partners — Contrary to what we’ve seen in past downturns, there’s still a robust angel investor network willing to invest. However, these angels have gotten smarter. They’re getting close to actually resembling VCs in that they’re actually raising small funds. As for trends, there’s an increased awareness among the younger population for new technology. Kids are carrying RIM BlackBerrys very early, and they’re learning about computing much earlier, skipping the whole desktop learning process of the previous generation. He agreed with others about the trend towards new types of deals, including more spinouts, as companies focus on core competencies (Symantec focusing purely on security, for example). He’s concerned about clean-tech, because companies in the energy sector generally have higher capital investment requirements. A lot just won’t make it.

John Lee of Silicon Valley Bank — Big questions also surround the hardware sector, which requires large capital expenditures. Prospects of raising capital are not very good right now. Semiconductor companies, in particular, are facing a challenge. Later stage companies are increasingly seeking to work with groups like Inside Ventures (which is a new company trying to hook up mature private companies with institutional investors for investment in those companies while they’re still private, even though institutional investors have typically preferred to wait to invest in public companies).

David Chao of Doll Capital Management — A lot of what we’re seeing now is deja-vu from 2001, 2002 and 2003. The difference is that the value chain of capital has been restricted, which is making investors more panicky. The problems we’re having are caused by the subprime crisis, not tech. If you look around the corner, there are some interesting shifts going on, and he’s optimistic. One is that kids these days are playing on Facebook, and Facebook apps. They’re doing it on MySpace. These companies have become open platforms and are thriving. His guess is that Apple is going to fall flat on its face again for being too closed. Another trend: a lot of cleantech companies are going to die. However, in Europe and Japan, anything green sells. Finally, the globalization of technology is exciting.

Phil Sanderson of IDG Ventures — He’s going to do deals locally (responding to some VCs who said they were increasingly investing globally). He said there’s a migration of Silicon Valley companies to San Francisco over time. The original chip and computer wave decades ago saw most companies located in San Jose or Cupertino. Then the software boom was headquartered in Mountain View and Palo Alto. Now new media companies are locating in San Francisco. More than half the returns from his last fund were from companies within San Francisco, even though fewer than half of the companies he backed are actually located there. You’re seeing other SF firms emerge, such as Alsop-Louie and True Ventures. The amount of money a company needs to raise before getting to liquidity is about $10M, compared to $50 million during the bubble era a decade ago, and $20M before the bubble. The reduced costs today stem from things like open source, viral marketing, cheaper Web infrastructure. He gets scared if an early stage companies needs to raise more than $10M and agrees with others that new dealmaking is on the rise. More public companies should consider doing PIPEs (private investments in public entities).

Sergio Monsalve of Norwest Venture Partners — The venture industry, like its other financial industry brethren (hedge funds, ibanks, etc) are woven into the global economy. His view is that the VC industry will have be more globalized than today and will include more action in Asia. It will resemble later-stage investing. His firm has made as many early as late stage deals in the last six months. He hasn’t seen a tectonic shift in the industry that resembles the client-server or web movements that happened in previous decades. He doesn’t see the same sort of multiple returns on investments. He sees mobility and telepresence as interesting areas (his firm invested in LifeSize for conferencing, seeing it as a way to help people needing to travel).

Jeff Clavier, angel investor — He says things have changed significantly over the last last year in angel investing. Beginning in 2004 with the emergence of cheaper Web 2.0 technologies, angels backed a company with an initial check of $20,000 to $100,000 each, for a total angel round of about $250,000. It would then take another $500,000 or $1 million to get to market. Now that capital is scarce, he’s backing companies with slightly more money — $750,000 to $1.5 million –because they need to be able to get enough traction to be either attractive to venture capitalists or already profitable. Also, while before, a company needed about 500,000 users to prove it had traction, it now needs to have 1 million. So he’s funding a company to last it 24 months, enough for about 18 months of execution and then six months to look for capital. This is what keeps him awake at night: Are the new realities forcing him to build a company so cheaply that the company isn’t being given a chance to build a real business? By focusing on getting a company to profitability too early, investors may be stunting their ability to build real platforms. Prices are down 50 percent. A company raising a first round a year ago at a $4M pre, would today raise at a $2M pre. (He’s got a $15 million fund, raised in mid 2007. He’s done 37 deals from that fund so far, and his goal is to have done 50 total by next year. He’s done five deals this year.)

Reid Hoffman, angel investor, Chairman of LinkedIn — Typically, angel investors have used their “house money” to make investments. When the market dries up, they stop investing. Many have been uncertain about how to move to become more of a VC (by raising a fund that is not based on house money). The good news is that many angels are now making that transition.  He started LinkedIn in 2002 because he thought social networking was going to change the way people do business. Now, in addition to that, there’s been a knock-off effect: People are using tools in the cloud, applying more data and analytics to their businesses, making them more efficient. With the emergence of Facebook’s platform, he decided to invest in social games. He backed Zynga. Much of the transformation in this area is still being played out.

Gus Tai of Trinity Ventures — One big problem has been the over-capitalization of the VC sector. He points to respected venture firm Sequoia Capital as an example of how firms have become larger. Its fund in 1990 was merely $31M. By 2000, during the bubble, it became $1 billion. Now, in 2009, it’s $450 million — down from the excess of the bubble, but still significantly higher than the early years. The shakeout will continue. A few years ago, Harvard professor Josh Lerner chose 40 VCs firms to put in a database he used to analyze the VC sector. However, of those 40 firms, 10 are no longer in business and five have changed their business model. Tai says he thinks another 15 will disappear over the next three years. That means entrepreneurs may be wasting more time raising money, because VC firms will be less decisive as they change their model, or back off from investing.

Josh Hannah of Matrix Partners — He’s brand new to investing, having only recently joined the firm. He says he’s been talking with his new colleagues in the industry and finds that they are enamored with investing in capital efficient businesses. He said entrepreneurs are thus trying to be more capital efficient in order to get that funding. However, he suggested they may be putting the cart before horse. He said that successful entrepreneurs have always sought to be capital efficient. He spent $100,000 at eHow, and returned capital to investors within 1.5 months. Survey Monkey was boostrapped: Nine guys built a business that had $40M in revenue and $30M Ebita and took it to an investor who paid a nine-figure valuation to invest.

David Hornick of August Capital — He vehemently disagreed with Hannah, saying he doesn’t think there are a lot of interesting companies in that category. Maybe three? When companies get interesting, they often require an enormous amount of capital. He did say the model of VC investing has to change. He agreed with Clavier that the “just-in-time” VC backing of companies that had previously been supported by angels has disappeared. He fears that the 18 to 24 month “runway” set up by Clavier and other angels for a company to find backing from VCs may really be a proxy for “forever.” In other words, startups are being forced to recognize they won’t get funding and are curtailing their ambitions. Fewer real businesses get built. When you focus on getting cash-flow positive on $100,000, you’re under-optimizing.

Justin Fishner-Wolfson of The Founders Fund — Uncertainty has clouded the fortunes of every player in the cycle. If a venture firm doesn’t know where its money is going to come from, even if it’s a good venture firm, then the angel is going to feel the same uncertainly, and then the entrepreneurs are too. He’s worried that many entrepreneurs are getting sidetracked by going after dollars from the U.S. stimulus package in areas such as cleantech, healthcare or genomics, for example, creating businesses where they get tax rebates if people buy more of their service. Washington’s spending may be creating a massive dislocation. He also says the tools for building a company have never been easier to get. Before, you needed to rely on an IT guy. Now you can just call on services provided by companies like Amazon, and you don’t have to do any work.

Michael Goldberg of Mohr Davidow Ventures — He’s investing in healthcare companies. He’s looking for capital efficient companies that have no risk from FDA regulation, especially those using measurement, computation, information technology and material science in new ways. He’s looking at personalized medicine. He’s looking at companies building wearable devices, such as those that use wireless and bluetooth technology to message vital sign information straight to the cloud.

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