Taking off on the wrong runway - follow up

This just appeared on CNN…. Lexington's airport director says a repaving project a week before the fatal Comair crash altered the taxi route commercial planes take to get to the main runway, The Associated Press reports.

Remember – aircraft accidents don’t usually happen on day 1… they are a combination of events that started either days or weeks before the actual accident.

Here’s how you end up on the wrong runway – someone changes the taxi route. Now of course the pilots are still required to check the actual runway heading against the compass when they line up.

However it’s early in the morning, they’re not fully awake yet, the air traffic controllers in the tower are still downing their morning coffee and probably not even looking out the window – why not? Because there is no other morning traffic to worry about. The pilots get clearance to take off and then the tragedy unfolds in the next 120 seconds or so.

The irony is that this accident probably wouldn’t have happened an hour later, when everyone was up and alert. I was an airline pilot for 10 years and even to this day I never take the first commuter flight out of an airport. I remember how tired I used to be in those days... it's not worth the risk.

Taking off on the wrong runway

This is in relation to the ComAir jet which crash yesterday shortly after takeoff. Now it’s still speculation about what happened, however it appears that the jet departed from runway 26 – 08 rather than the longer 22 – 04 runway. I know some people out there must be wondering how it’s possible for a well trained crew to make a mistake like this.

Well it’s easy than you think. Years ago I used to be a pilot for American Airlines. I was a commuter Airline Captain based in Nashville, TN. When I started I was a First Officer paired up with an experienced Captain. It was our first flight of the day and we were headed to Tri-Cities, TN… we were cleared for landing on runway 27… the Captain acknowledged the clearance and then executed a perfect landing on runway 22. Nobody caught the mistake.

You can imagine the scenario at the airport yesterday morning. The flight was due to depart at 6.10 – that means that the crew had been up since at least 4AM… they drove to the airport, got breakfast and a cup of coffee and the morning flight weather. The First Officer (FO) did the preflight and then they climbed aboard to wait for the passengers.

Prior to departure the Captain would have signed the manifest that indicated how many people were onboard, the amount of fuel on board as well as any luggage. All of this would be used to compute the various take off speeds… V1 (point of no return) Vr (rotate speed) V2 climb out speed, which in turn tells you how much runway you will need.

Everybody is settled in, they call for taxi clearance to the runway. The tower gives them the weather and clears them to runway 22. Approaching runway “26” they call the tower for takeoff clearance…. The tower acknowledges the call, wind is calm, cleared for takeoff…. Nobody catches the mistake.

Now they are rolling down the runway, fully loaded with fuel and passengers. As they hit V1 speed (from this point it’s too late to abort the takeoff roll) the Captain notices they are fast running out of runway. He has no choice and hauls back on the stick at the last moment, probably before Vr… the jet struggles into the air, however it’s barely flying and approaching a stall…. As every pilot knows – to avoid a stall you need airspeed and that can only come from lowering the nose of the aircraft. The Captain had no choice and lowered the nose. The result, the aircraft plowed into the ground.

This is all still speculation, however I know how easy it is to make a mistake in flying a plane. Usually there is no grace and the result is tragic.

As a flight instructor I used to teach my students the three things that are useless to them…

1. Fuel in the bowser

2. Airspace above you

3. Runway behind you

The ComAir pilot didn’t need the extra fuel, he didn’t need more airspace above him, what he really needed was more runway.

What makes this story all the more poignant is that I know the founder of ComAir… he was one of the Angel funders behind my first company.

RSS needs this feature

Here’s an opportunity to offer a feature for RSS that it doesn’t currently support (are you listening NewsGator?)

Here’s the problem – News “Rivers” (the latest buzz word) have a feed size of 50k – 70K for the main page. Ordinary mobile phones like the RAZR for example, and just about anything without a keyboard or touch screen have a page size limit of between 10K and 30K.

Now years ago AvantGo had a very cool solution for this. They would compress the data being transmitted to the device – they would then unpack the data and load it into memory as the user hit the page down on the browser. Very neat.

However things are a little different with RSS. On the desktop nobody cares because even with a dial up the data still loads pretty quickly and if you’re delivering content to a browser then essentially you’re displaying HTML which can be compressed with a utility like mod_gzip.

As we head to “mobile land” as the Bard says “herein lies the rub”. How do you solve this problem? Most of the players out there have their own thin clients (or they are developing them). The trick will be for someone to come up with the decompression client on a mobile device.

Not as easy as it looks. The main player out their in Apache land is mod_gzip (public domain/open source). It does a great job and can compress data upwards of 90% in some cases. This is a HUGE savings when transmitting for a mobile device! EVERY RSS server should have compression enabled.

All you have to do now is embed the gzip decompressor in the client and have it unpack the “data” in 15K buffers. This will now deliver a great user experience for the customer and save a ton of bandwidth in the process.

In the US most people are on flat rate data plans so they don’t care about the cost of bandwidth, however they hate to wait. In the rest of the world, users pay for bandwidth. So if you want your RSS feed to be read anywhere by any device then consider building in real time compression/decompression.

The server side has already been done – the client side will take some hard work, however it’s very doable.

I wonder who will solve this first?

The Critical Importance of Customer Validation

Every CEO knows he has to execute – what startups sometimes fail to remember is the importance of customer validation. Techies can and usually will build anything. It’s what they do, however what makes it valuable is what the customer says about what you’ve built.

I’m on my 4^th startup… we have this wonderful 32 page business plan and a set of financial's – we call them “mum-bers” as it’s impossible to forecast anything with any real accuracy (however it helps people understand “how” we think).

As usual we’re doing the VC talk show, our PowerPoint is short and to the point (10/20/30) and by slide 3 you know what the problem is, by slide 6 you know what our technology magic is and then on slide 7 you get to see everything run live in real time.

So far – so good. Everybody is nodding their head, things are looking good. Slides 8 – 9 talk about the “product” which makes us money and how we intend to go to market. It’s all very simple.

Next comes the slide that wakes everyone up… it’s the customer validation slide. On that slide are some “multi-billion” dollar companies who are testing our software. One of those companies is actually evangelizing our solution to other companies and also to other divisions within his own company.

Business plans and PowerPoint’s are all talk – what matters is the customer and what they say. It’s the last three pages of our business plan that counts – it’s the current customer evaluation list. You can’t cheat here – people get to say what they think and what they feel.

So far they think it’s worthwhile and solves a meaningful problem. Those customer testimonials started just over 30 days ago.

Today we are shipping the latest rev of the demo to a very large company. I can’t wait for the feedback – why? Because good or bad we’re able to refine our product and go to market strategy in real time and so far the cost has been zero dollars to the company.

Every CEO needs to be talking to customers every single day. It will turn your product into something meaningful and that will generate revenue. Which in turns creates value. You know the rest.

The results of a "C" round

This is courtesy of Techcrunch…

<begin> We reported last month that blog search engine Technorati had raised $7.6 million in Series C funding in June from previous investors Draper Fisher Jurvetson and Mobius Venture Capital. Today’s PE Wire now says that Series C funding has hit $10.52 million. The previous investment left many mystified about the implications, today’s news really begs the question of where Technorati is going.

Now three years old, the site just released a major upgrade. We said last time that we assumed this round was done at a flat or down valuation. This may be a bet for the long haul and it may be an attempt to kick the site into action so it can raise more revenue. It’s hard to say, but today’s news that the round C funding was almost 50% larger than previously reported certainly makes things all the more interesting to watch. <end>

In my last post “Beware the C round” I wrote: “The C rounds can be all over the place – however it probably means another $10m cash injection.” & “dilution really starts to bite here and as the outstanding number of shares climbs so does your management’s requirement to really execute and grow value”.

A guestimate would be that Technorati now has in excess of 20 million shares outstanding and needs to grow value (read revenue). For a 10x multiple the company has to be sold for $10 per share or $200 million. Is it worth $200 million? I’ve no idea, one metric could be a multiple of future revenues, and (it doesn’t sound like they are cash flow positive or profitable).

Depending upon the burn rate which I would estimate at $1.5 million a quarter, Technorati now has about 18 months more runway. Now management has to kick it into high gear and really differentiate themselves, at the same time plan on finding a buyer for the company. If it only sells for $50 million that would be roughly (depending upon the outstanding) $2.50 cents per share. The C round makes nothing at that valuation.

For entrepreneurs this is a graphic example of what happens when execution doesn’t go as planned and or you’ve taken more money at a higher valuation than necessary. In an irrational market they’d be able to get by with at least another round or two, in a rational market the rules favor the A and B round investors as long as you can find a buyer.

Beware the "C" round

For all software/hardware entrepreneurs out there, take some time to comprehend (vs. just understanding) what the Cap table means. The general “rule of thumb” in the industry is that it takes $20m for a software company and $30m for a hardware company to get into the “end zone”. Which in the old days meant IPO, but now in a rational market it means M&A.

Entrepreneurs must understand their Cap table (capitalization). It’s the structure for your business. In today’s rational marketplace you only have room for three rounds of dilution. That means an Angel round, an A round and then a B round. Valuations are all over the place, however if you can get your Angel round at between $1.5m - $2.5m that’s pretty darn good. As long as you execute correctly you’ll be able to close an A round for somewhere in the $5m pre money range. Which leaves you with one more round to go? The B round will really be to accelerate sales – and so I would guestimate you would need to be in the $20 - $30m pre-money range. Total dilution i.e. number of shares outstanding and that includes a reserve for employees should be NO more than 15 million by the time you close the B round.

Why?

Well it’s simple math really. When someone comes along to buy you company they will look at all kinds of metrics. They will distil everything down to a “share price” for all of the outstanding shares. Let’s say that you have 15 million shares outstanding and the buyout share price is $3 per share. The exit is $45m – not bad for the Angel and the A round players, who got in for a buck or less. For the B round it’s probably not so good.

Remember we’re in a rational market where the M&A is in the $45 - $90m dollar range. Depending upon the number of shares outstanding (I’ll work the math on 15 million outstanding) that’s $3 - $6 bucks on the exit. For all three investor classes it’s a great deal. 3x – 6x is very good in a rational market. It’s not a Google, but then how many of those are there?

So what about the C round…. Let the buyer beware. The C round invariably means there isn’t quite the traction in the marketplace that you need, hence the need for more money. By now the Angel, A and B round will have consumed upwards of $15m in funding. The C rounds can be all over the place – however it probably means another $10m cash injection. Depending upon the valuation (i.e. price per share) you could be adding another 5m to 10m shares to the pool. That one action lifts you out of the 3x – 6x exit and moves you into another category. Remember the higher the number of shares outstanding at the exit the lower the share price if you’re under a $100m buyout.

Don’t believe me? Then ask your friendly VC to show you their returns from all of the C round investments over the last 10 years. I’m willing to bet they’re not going to be very impressive. Risk diminishes (or should with each round) until it hits the C round. After that, if history is an indicator the risk starts going back up.

Beware the C round – dilution really starts to bite here and as the outstanding number of shares climbs so does your management’s requirement to really execute and grow value.

Pie’s not free at the truck stop – the cost of scalability….

One little sentence in a 10Q tells the story:

“The annual rate of growth in 2006 of our spending on property and equipment will be substantially greater than the annual rate of growth of our revenues.”

Now who would be saying that?....... Google

This is the real problem behind service plays. On the Internet as your user base grows so do your costs. Think about YouTube – the demand for FREE has never been greater. The cost to support FREE goes up with each transaction. Hold on a minute aren’t costs meant to go down? Yes. As you streamline processes and become more efficient your profit margins should rise.

So what’s fascinating with Google’s statement is that CapX/opX growth is rising faster than the growth in their revenues. What happens when they hit a peak in their ability to charge for adwords. Adam Smith will eventually determine the price. When it does, supply and demand have peaked for the revenue generator – however costs will keep on rising as they try and maintain their status as the lead search engine. Google HAS to find additional revenue streams. Right now they are seen as a “mile wide and an inch deep”.

Google is an incredible success story. What will be fascinating to see is what happens to Google in the next 7 years. Can they add another string to their bow to support their mounting and never ending CapX/opX expenditures?

A Rising Tide Lifts All Boats (except One)

Right now it’s a great time to start a business. Why? Because resources are relatively cheap, there’s plenty of ideas floating around and of course there’s lots of capital out there for “meaningful ideas”.

I was remarking with my partners only yesterday on how much progress we’ve been able to make with our product… some of the ideas we are using are 10 years old. Except 10 years ago, doing what we are now doing was impossible.

Let me give you an example – on Saturday I was out riding my bike and happened upon another rider. We got chatting as we climbed the hills and naturally things turn towards “what do you do”… well instead of telling him about it, I simply said, why don’t we stop and I’ll give you a demo. I then pulled out my PocketPC and gave a full demonstration of our software. I was done in a couple of minutes. And that was all it took to explain how and what we are doing.

Try doing that 10 years ago. There simply wasn’t the infrastructure in place to support it. Now there is and this is great news for the entrepreneur.

So why does the tide lift all boats except one? And who is the one. Well the one is the VC and here’s why. Right now we are in a rational market situation. This means that smart people are in charge of the finances and are not over paying for acquisitions like they did in the bubble. Things that were going for $500 million back then, go for $50 million now. That’s much more rational.

However here’s the problem – how do you make money in a rational market. Well it’s hard work, nights and weekends. For the VC’s it’s even harder. They need home runs to move their funds “needle”. To get that movement you need one or two things to be present, a strong IPO market and or an irrational market. Currently we have neither. So if a VC needs to put money to work, the more he does the less his eventual return if the company sells for a rational number.

Ignoring dilution for a moment – VC’s expect to put at least $20m - $30m to work on a good prospect. If that company only sells for $60m then he’s only got a 2x – 3x on his investment. Factor in the actual percentage return over the time of the investment and it’s pretty dismal. However for the entrepreneur whose basis in the company is some sweat equity, the VC’s money lifts him into the stratosphere.

I’ve lived through irrational markets and IPO’s – the old phrase was “all the fools are dancing while the bigger fools were watching”… Well we’re now in a rational market place. Meaningful ideas will ALWAYS get funded, simply because the VC’s HAVE to put money to work (if not they give it back to the LP’s). This is a rising tide, lifting the boats of all the entrepreneurs who have survived the nuclear winter of 2002. It’s not quite as much fun for the VC’s though. Lots of hard work, lots of guess work and maybe if they are lucky a 3x return.

It’s good to be an entrepreneur right now, the tide is coming in.

The Three Dimensional Web

(This weeks post comes from my business partner Liz Coker. Enjoy the read.)

Typically, I am happy to keep my head down, analyze data, and quietly build businesses. But my partner, Peter Cranstone convinced me to write a guest blog based upon a recent epiphany.

Over the past 24 years I have had the privilege to participate in the growth of the computing industry. It is always exciting and there is always something new to learn. I’m not a technologist. I’m the translator. I’m the one you send off to work with the guys who are “out there” to figure out what they’re saying and translate it into something your grandmother can understand. I get excited about the practical use and the psychological and social impact of technology - not the bits and bytes. So allow me to indulge myself by getting “out there” in my domain.

For the last seven months our team has been working on some amazing stuff. Everyone who has seen a demo gives us two thumbs up. And everyone ranges from multi-billion dollar companies to my 70-something neighbor. They simply get it. I’ve never seen this type of response before and have been trying to figure out if its luck or something deeper. That’s when it hit me. Our product was conceived in three dimensions. We solve a business problem. We solve a social problem. We solve a technical problem.

Simply put, we live in a three dimensional world. (Okay, I’m excluding time for the moment, along with the other six dimensions that physicists theorize exist, but cannot yet prove). I believe that the Internet has become an extension of our world. We work, play, learn, explore and some may argue that there are those who “live” on the Web. To assume that the Web is flat and exists in just one or two dimension is naïve.

The Internet is an electronic replica of our universe. The dimensions may not be labeled the same as those on the time-space continuum, but they are there. Daily forces between social, business and technical uses exert themselves upon each other. Energy is conserved. A momentary balance is achieved. The cycle changes form, but begins again, creating new and exciting information, opportunities and challenges. The closer we get to replicating two-way conversations and human interactions that build trust and foster respect, the deeper and richer each dimension becomes and the value of the Internet expands exponentially.

Liz.