Monday, October 6, 2008

Essential Do’s and Don’ts for Entrepreneurs

Suppose you’re about to start your own technology company, or have just started one. Wouldn’t you want valuable advice from veteran entrepreneurs and managers who already did it? This is what the audience at a recent meeting in Tel-Aviv got in an event called annual "Day of the Entrepreneur 2008", which was organized by the Israeli branch of the MIT Enterprise Forum.

Zohar Zisapel, founder and chairman of the Nasdaq-traded Rad Group, has started, together with his brother Yehuda, at least 27 companies. Rad Group was called "the world's most successful incubator" of telecom-related startups by Business 2.00 magazine.

Zisapel tipped the eager entrepreneurs in the audience about Do’s and Don’t’s in approaching venture capital funds (VCs).

“One of the typical lies VCs tell entrepreneurs is ‘we have all the time in the world for your company’,” Zisapel said. “Investors think that entrepreneurs are guilty so long as they are not proving their innocence. From the outset, they try to prove you wrong. Therefore, you have to be modest in your presentation,” Zisapel stressed. “Describe all the risks involved in your venture and prove that you are aware of them. During the first meeting, let the VC find one positive surprise about your venture. That’ll help them be less skeptical.”

It’s hard to get a positive answer from a VC, but it is also difficult to get a plain negative answer, according to Zisapel. “The VC fund does not want to get itself out of the game in case it does decide to invest.” So how will the entrepreneur know where he stands? Zisapel came with a prepared answer: “There is no reason why it will take more than two months for a VC to decide whether to invest in a venture or not. If you pass this timeframe, you actually got a negative answer.”

Other common mistakes, Zisapel maintained, is to first focus in the U.S. market, instead of the Chinese market, to use complex investment formulas, to simultaneously talk to many investors or to use middlemen for help with fund raising. To be practical, Zisapel reminded, you have to summarize each meeting with the VC with a decision regarding the next step.

Aharon Aharon, co-founder and CEO of Camero Inc. and chairman of Discretix Technologies, served as the CEO of Seabridge, a Siemens company. Prior to that, he was the COO of Zoran. Aharon started his professional career at IBM Research Division where he managed the VLSI and CAD tools activities.

Aharon’s test case was Zoran, a supplier of chips for DVDs (35 percent market share), HDTV, digital cameras and digital imaging products. Aharon showed how the company transformed itself through mastering its marketplace. “Zoran has set itself a goal to achieve a market share of more that 25 percent in each of its end markets. For that purpose, it reorganized so that 80 percent of the sales came from the Far East. It focused on the strategic goal, while remembering that
China, Japan, Korea are very different from each other. “You need dedicated workers for each of these markets,” Aharon observed. As a result, in 2007, Zoran had about $500 million in revenue, around $65 million net profit and more than 1,200 employees.

He urged the entrepreneurs to define strategic goals, to think out of the box, to turn goals into annual operational plans and build a healthy and professional organization.

“Don’t underestimate your competitors and remember that shortcuts are not applicable to you,” he warned. Being both a CEO and chairman, Aharon stressed the loneliness of the CEO. “Don’t count on the board,” he gave another warning. “The board helps you when you don’t need it, and doesn’t help you when you need it. Therefore, accountability and responsibility are essential, while remembering that tough decisions and dealing with hiccups are where leadership is needed. It’s very hard to drop the context in order to really focus on what matters most, but in a startup, you have just one try,” Aharon summarized.

“Invent or die” is the motto of Igal Rotem, founder and CEO of PowerDsine, the power over Ethernet pioneer which was acquired in 2007 by MicroSemi for around $250 million. Today, the PowerDsine unit in MicroSemi is responsible for sales of more that $50 million and it employs 145 workers.

Rotem doesn’t like analysts. “Don’t listen to all those research companies which are quoting you own quotes and charging you money for that,” Rotem warned. “You have to study your market by talking directly to the people who operate in it.”

PowerDsine has reinvented itself five times, according to Rotem. The company’s claim to fame was the Power over Ethernet (PoE) technology. “When we came up with this technology in 2000, people told us ‘you are nuts’. Later on, we created 70 percent of the IEEE802.3af standard. During the process, we’ve understood that part of our technology has to come as a chip and not as a box, and it helped us a lot.”

Asked about PowerDsine’s biggest mistake, Rotem replied without hesitation: “We made too many private funding rounds, we raised too little money and we did it too late.”

Other conclusions are no less important: “You have to play in a big market. You can’t be a follower; you have to be number 1 or number 2 in your space. But remember that anyway, when the market will be large, the big guys will take it…”
Some pessimism might help, according to Rotem: “Assume new markets will grow three times slower that you think. Therefore, you constantly have to look for growth engines. Invest in intellectual property.”

Rotem referred to acquisitions, a very common practice in Israel, where startup companies are bought on a weekly basis: “If you’re about to sell your company, treat it like marriage, but make sure that the bride has more than one admirer…”

Avi Cohen, who is currently COO at ECI Telecom, spent more than eleven years at KLA-Tencor Corporation, including seven years as president of KLA-Tencor Israel. During his tenure, Cohen led the creation of the global metrology group at KLA-Tencor while driving revenue and market share three-fold.

Cohen’s talk, entitled “creating value in technology”, stressed time and time again that strategy comes before tactics. “Strategy is a direction and a way to stay focused and it cannot be built without the use of cycles of understanding,” Cohen noted. “Confusing strategy and tactics is a mistake. For example, the budget process is a tactical tool, not a strategic tool.”

And a warning for technologists: “Technology is an accelerator for the strategy, not the strategy itself”.

Looking for revenue and profits? Differentiate, Cohen emphasized. “Differentiation is what drives returns. It provides pricing power and economic success and it must become a culture. You have to evolve your company’s core competence and create a culture of consistent innovation, as a way to protect against inertia. One way to do that is to create roadmaps for differentiation and discontinuities.”

Cohen described how KLA-Tencor’s optical metrology division, which is mostly based in Israel, managed to increase market share from less than 20 percent in 1994 to more than 75 percent in 2002. “The next 15-20 percent needed a change of rules,” Cohen recalled. But KLA made use of effective formal processes of annual strategic planning and quarterly business reviews, that saved it a lot of mistakes, and as a result, “the market share of the division today is perhaps around 90 percent,” according to Cohen.

Startups are often chaotic, so Cohen had a warning for that, too: “A culture of discipline does not equal bureaucracy. You can and should balance innovation with discipline. Keep you organization simple. Construct clear roles and responsibilities.” What does that mean, specifically? Cohen gave a hint: “Managers should have 6-7 direct reports and 30 percent more when they are more experienced.”

Cohen dwelled on the nature of teamwork: “A culture of teamwork is so powerful and so rare. Some of the dysfunctions of a team include status and ego, low standards, ambiguity and artificial harmony. Don’t be afraid of conflicts. Leadership doesn’t mean being the smartest or knowing everything,” he quoted a well known phrase.

He continued to talk about his current role at ECI Telecom, which has turned private and did ‘roles and responsibilities cleanup’, according to Cohen. “We differentiated between product portfolio management and facing customers. At the end of the process, about every third person at ECI had either change of boss or of role.”

What was the result? “The three pillars of the new ECI are clarity of roles and responsibilities, redefined core competencies and a ‘fabless’ model,” Cohen concluded.