Reflections on Mach37 F13 (and some news)

We at Mach37 have decided to modify the terms of our initial investment in each company in our Spring 2014 cohort to double our financial commitment to $50,000.  This additional financial investment will not only help Mach37 entrepreneurs attract complementary team members, but also will provide them with additional resources necessary to expand target market validation and further accelerate technology development. 

Earlier this month, Mach37 completed its first Cybersecurity Investor Demo Day.  Along with six CIT GAP Fund cybersecurity entrepreneurs, our four F13 (Fall 2013) cohort participants presented their companies to an audience of over 100 information security investors.  By all accounts, their presentations were successful and I believe they foreshadow many future successes by Roy Stephan (PierceGTI), David Lehrer (Conatix), Ethan Allen (Sikernes) and Shawn Key (Key Cybersecurity). 

As I think about each of their presentations, it seems almost unfair that they were limited to eight minutes each.  The brevity of a demo day pitch belies the immense amount of work each of these entrepreneurs delivered over the past four months.  As anyone who has ever built an effective investor pitch will attest, the significant majority of the work is conducted weeks and months ahead of time. 

Roy, David, Ethan and Shawn sprinted through Mach37’s 14-week curriculum:  Fully analyzing their competitive environments; effectively positioning their respective product concepts; developing unique technical capabilities; and generating significant market validation from target market customers.  As all four of them will attest, the Mach37 program is not for the uncommitted. 

Based on our collective observations from F13 and the amount of work delivered by its entrepreneurs, the partners at Mach37 want to make an important recommendation to future Mach37participants:  Find capable, full-time partners.

To encourage future applicants to find complementary partners, we are placing a greater emphasis on having multiple founders as part of our core selection criteria.

The amount of effort required to develop and implement a business concept over a brief 14-week period while also designing and delivering a functional prototype is more work than one full-time founder can reasonably manage.   The best founding teams usually include full-time technical and entrepreneurial founders, all of whom understand the customer problem they are solving and how to share responsibility as they build their respective businesses. 

Achilles Heel … Sales

Over the years I have been a part of several startup teams and am now involved with the birthing process of security start-ups. What has become evident is that great and innovative solutions to BIG problems, better mousetraps, and totally obsessed start-up CEOs far too often fall short of the goal line… Why?: because they do not see their job is to sell.

Startup CEOs fail to understand that getting and keeping their first customer is far harder than finding outside investment… they may well find someone to invest the first time, but without real paying customers the game is over.

Last year was an exciting year for entrepreneurs as investment firms ponied up more than $1.4 billion to security startups and companies in 239 deals (through June 2013). However, only 27% of companies in 2013 were able to secure outside funding within one year. Ultimately, only 36% of accelerator companies since 2005 added to their seed and angel rounds after graduating from the accelerator – due in large part to their inability to gain sales traction in the market.

 Every day, we see angel and early seed investors who usually focus on the CEO and CTO — the leader with the vision and the guy/gal who is putting hands on the keyboard — what they overlook is the sales process. Too often the CEO and CTO don’t see themselves as the sales person or closer. This is the Achilles Heel – great ideas and products don’t sell themselves: the startup founder must … sell the idea, sell the vision, sell the Proof of Concept, sell the solution, sell the team, sell … sell … sell… and get a paying customer who believes and shares their vision of the solution.

Start-up founders who are going to jump into this big pond, must be focused on selling during every waking moment. If not, their start-up dream will come to a sudden (and not so pleasant) end quickly.

TheSalmonSpeaks: Net Neutrality

Occasional rants are good for the soul. If you disagree with the opinions expressed, please take it up with The Talking Salmon.

January 15th the U.S. Court of Appeals for the District of Columbia struck down the FCC net neutrality regulations covering internet access. The press coverage digs into the arcane regulatory discussion around whether internet providers are “common carriers” or not, but of course this is really a heavyweight fight about money. In one corner are Verizon and their Internet Access Cartel (IAC) buddies, the cable companies. In the other corner are Google and their internet…well, there’s Google. Lurking in the shadows of the third corner are the traditional content providers, the axis-of-evil made up of the traditional TV networks, Hollywood, and their device friends making smart 3D super high definition large screens. Over there in the fourth corner are the cats and dogs like Netflix, HBO, and the new breed of independent short form internet content folks. OK, this is really more like one of those wrestling tag team matches than a heavyweight fight.

Here’s the deal. Going back nearly to the dawn of history when the log carvers and the log drummers fell out there has been an ongoing battle between people who develop content (those artistic types) and people who build the infrastructure to get content to the people who want it. The key lesson from history is that no matter the incentive, these tribes have utterly failed to intermarry. Content providers are bad infrastructure builders, and vice versa.

The Salmon agrees with the mantra used by broadcasters to justify letting broadcast networks wither on the vine: “Content is King”. Ultimately this is due to the “eyeball-bandwidth” product, the amount of information any individual can absorb at once (the Shannon limit for people) multiplied by the number of hours per day, generally not exceeding 24, times the 8 billion people in the world. It’s your eyeballs they want to own. As you can see, not counting a few benighted third world countries, we are nearing the theoretical eyeball-bandwidth product limit where it becomes simply a fight for market share. And people will opt for the highest value content…Content is King.

So, who’s on first? Google of course is the de facto monopoly intermediary for internet content. They want net neutrality, unless they can actually build a virtual network of Android devices, in which case they are against it. Verizon and friends are getting squeezed…land lines are dead, SMS revenue has dropped for the first time, the Internet of Things probably only needs that old 2G network, not 4G LTE, people are starting to drop cable subscriptions and there is significant pricing pressure on internet connectivity. Almost makes you feel sorry for them, and moving to extract higher revenue from the pipes through competitive access pricing is a rational move. With vertical integration the goal for everyone, you would think the broadcasters, Netflix and crew would be looking to buy Aereo instead of killing it, but then far-sightedness has not necessarily been a virtue in that world.

Technologists unite! Here’s what we could do, if we had the time. It might be that the Aereo court decisions make rebroadcast of initially free internet content OK, in which case small community ad hoc networks with one Verizon subscription, one cable subscription, etc. would be a great service to provide for your friends and neighbors. Seems like VPN tunnels to the “Free Internet” would re-disintermediate the greedy pipe guys. And of course innovation is a wonderful thing. Send your ideas and comments to The Talking Salmon, care of Daveknology. Remember: they’re your eyeballs.

David Ihrie is CTO of MACH37 and has been the lead technical person for six startup companies. He has a BS in EE/CS and an MS in Management specializing in the Management of Technological Innovation, both from MIT.

CTO SmackChat: Technology is not Innovation

In his excellent book “The Idea Factory: Bell Labs and the Great Age of American Innovation”, Jon Gertner quotes Jack Morton, who worked at the Labs on the development of the transistor in the 1940s, saying “[Innovation] is not just the discovery of new phenomena, nor the development of a new product or manufacturing technique, nor the creation of a new market”, but all of these working together to deliver things that make a difference. Or, as one of our investors puts it succinctly: “a business without customers is just a hobby”. 

As technologists, we of the nerdly persuasion tend to believe that the tech is the key ingredient in the success of any startup. At MACH37 we talk to a lot of incredibly smart technical people, some with potentially game-changing ideas…but, technology is not innovation. For a startup to deliver products that make a difference it takes a great technical idea, but also someone who knows how to build a business, someone who knows how to turn an idea into a product, and people who can find customers, understand their problems and sell them your idea. Innovation is a team sport.

So, how important is the tech? As we evaluate startups and talk to investors, a large majority consider it essential to have someone with deep technical domain expertise, as well as product development skills, as part of the initial entrepreneurial team. Many of those same people will tell you however that the initial technology contributes maybe only 10% or 20% to the success of the business, that the ability to pivot is critical, that technology almost never creates new market segments. My own rule of thumb is that your going-in idea is always wrong.

Making sense of the contradictions can be maddening…being passionate about your ideas but willing to turn on a dime; knowing what is necessary but not sufficient; being game-changing in a way that’s not too ground-breaking. This is the first of a series of posts to explore these contradictions from the technologist’s point of view. How many features make a product? When do you abandon Rev 1 and start over? When does one product become two? How do you know what customers really want? How far ahead of the market or the product can you be? And once you delegate the product design, and customer interaction and hands-on coding, how do you continue to add value to your organization? 

David Ihrie is CTO of MACH37 and has been the lead technical person for six startup companies. He has a BS in EE/CS and an MS in Management specializing in the Management of Technological Innovation, both from MIT.