In May 1996, Open Market completed a successful IPO and more than doubled on the first day of trading, ending with a $1.2 billion market capitalization.  We had recorded $1.8 million in revenue the year before. 

If investors observing this extraordinary phenomenon in 1996 were to have concluded that the technology market was in the midst of an unsustainable bubble, they would not have been wrong.  But if that observation led them to refrain from investing in the Internet sector, they would have missed one of the most stunning legal creations of wealth in history.

In 1997, a Charles River Ventures fund yielded a stunning 15x return, backing such superstars as Ciena, Vignette and Flycast.  Matrix had a fund in 1998 that yielded an eye-popping 514+% IRR.  The Internet bull market continued to run for four more years after the Open Market IPO, finally ending in the spring of 2000.  The average venture capital fund raised between 1995 and 1997 returned more than 50% per year.

Amidst all the recent talk of boom vs. bubble, there is a hue and cry that the current environment may smack of 1999.  But what if it’s actually more akin to 1996?  What if the fundamentals are good enough to support four more years of insane behavior before the music stops and the natural business cycle correction settles in?

The chart below from this week’s Economist on unemployment made me pause and consider this question.  As evidenced from the unemployment curve in the last economic cycle, these business cycles can often last 4-5 years.  2009 was the trough year of the most recent business cycle – and a deep trough at that.  2010 was a year of firming and climbing out of a hole, but the tepid IPO market and general macroeconomic malaise seemed to linger until late in the year (similar to how 1995 felt).  2011 is the first year where it feels like a real boom – much like 1996.  Employment lags economic output and is an admittedly imperfect indicator, but if you continue the analogy, it may be that the next 4-5 year boom cycle lasts until 2015!

Consider the following:

• When bellwether players go public (such as Netscape in 1995), there is a massive rush of capital and companies that follow.  Facebook will likely go public in 2012 and be valued in the $50-75 billion range.  This IPO and others like it (e.g., Groupon, Zynga) will create tremendous liquid wealth for a number of people and institutions who will likely pour that wealth back into the start-up ecosystem.  That liquidity flowing back into the start-up ecosystem will arguably fuel the boom.

• Macroeconomic choppiness is holding back more dramatic market euphoria.  Tsunamis, Middle East crises, government shutdown threats and a looming budget deficit are all dampers on the market.  But if some of these dampers clear out – if there is a period of reasonable international stability,  if a divided US government can strike another fiscally responsible deal for the upcoming budget year and begin to deal with some of the long-term, fundamental drags on growth, then the markets will become even more euphoric.  Remember, it wasn’t a straight line between 1995 and 2000 – there were a series of macroeconomic crises on the domestic front, such as a near government shutdown (sound familiar?) as well as international crises, including the Mexican debt default, Russian currency defaults and the Asian market crisis.  Let’s not forget that Time Magazine featured Alan Greenspan, Rob Rubin and Larry Summers on the cover in February 1999 with the headline:  “The Committee to Save the World.”  At times, this period saw pretty grim macroeconomic trends, while the Internet continued to boom in the trenches.

• Thanks to recent decades of strong growth, the combination of China, India and Brazil have GDPs that are 4x the size and impact on the global economy as compared to the 1990s (see chart below).  Demand from these, now larger, economies are having a very positive effect on the US tech market. They are gobbling up mobile devices, PCs, routers and other technology gear at a rapid rate.  This powerful source of economic demand didn't exist 15 years ago. 

 

• All the existing technology players are awash in liquidity and all the numbers are bigger this time.  There are eight US-based global technology companies with market capitalizations of greater than $100 billion (Apple, Google, Oracle, IBM, Microsoft, Intel, HP, Cisco).  There are a handful of companies that are very well-positioned, growing fast and could be the next $100 billion players (Amazon, Dell, Netflix, EMC, VMWare, Salesforce.com and Baidu come to mind). These companies either didn’t exist in the mid-90s or are in infinitely stronger positions than they were 15 years ago.  Internet usage, mobile phone usage, advertising dollar spend – all have grown enormously over the last 15 years to provide a stronger foundation underneath the latest boom.  See the chart below, which will only explode further when updated for more recent figures that will take into account Internet access via mobile phones.

The point here isn’t to be Pollyannaish.  I recognize that we have major structural issues in the global economy and they are perhaps more daunting than they have ever been.  And the recent run up in the stock market has many arguing that the bull market won't last much longer.  If oil soars to $150 per barrel, a few more soverign nations default on their debt obligations and gridlock persists in Washington, we could be looking at another recession as soon as 2012.

Yet, with entrepreneurship on the rise, with this generation of young people (“the Entrepreneur generation”) surging in their use and interest in technology and digital content, with some of the positive fundamental forces in innovation, it may just be that the music may not stop for another 4-5 years.  Wouldn’t that be something?

I have been thinking alot about start-up best practices.  There has been a great deal written about how to pitch VCs and how to drive towards product-market fit, but there is relatively little out there about managing your board.  I spent a very modest amount of time on it in my book and there have been very few good blog posts on the topic.

Yet a well-functioning, well-managed board of directors is incredibly critical to a start-up's success.  Whether your board is full of VCs, angels, outside directors or a blend of all three, learning how to effectively manage your board is critical to your start-up's success and your personal success as an entrepreneur.

One of the best books on the topic is the somewhat obscure Board Room Excellence by a wise old start-up lawyer I worked with many years ago, Paul Brountas.  I send a copy of the book to every CEO I invest in and it gets rave reviews.  With a dozen years of of board work under my belt, here is the play book I try to encourage my CEOs to follow in running the board meetings.

First, the preamble – what happens before the board meeting:

• Materials get sent out in advance, typically 2 days.  The materials contain:  CEO's overview, a briefing on the one or two key strategic issues that will be the focus of the meeting, financial and functional updates from each of the executive team members and the overall key operating metrics for the business.
• The CEO sends a cover email along with the materials summarizing the one or two key strategic issues and soliciting board feedback for additional issues, observations or reactions to the material in advance of the meeting. 

Then, during the meeting, the agenda flows as follows:

• The CEO begins alone with the board for 30 minutes where the CEO provides a one-page summary of the business and the key issues from their standpoint.  I often suggest presenting this in a "Red/Yellow/Green" format – what's going well, what's making you nervous, and what's not going well.  The best one-page summaries are very brief – hence the one page rule – and help focus the board's energies as well as provide a window into the CEO's priorities, thinking and "stay awake" issues.
• The CEO then invites the CFO in and perhaps members of the management team to provide summary functional and financial updates.  Because the materials were distributed in advance and each board member has read the materials, it's more of an interactive Q&A than presentation.  This portion of the meeting lasts 30 minutes.
• The CEO then invites members of the management team to join in a discussion on the one or two key strategic issues that will be the focus of the meeting.  The board has read the preparation materials in advance and so not every bullet on every slide needs to be read.  Often this is an opportunity for the management team members to present materials and get some board exposure.  The CEOs frame the  issue, present a recommendation as to how to proceed alongside their team, and then ask the board for help and guidance.   Ideally, a board decision is made at that point or in the private session that follows.  This portion of the meeting lasts 60 minutes.  The key issues may be approving the annual financial plan, the product roadmap, a briefing on a major partnership, the new product launch, an acquisition, an international launch or a new marketing initiative. 
• Then, the CEO remains with the board for 30 minutes for an executive session.  This provides an opportunity for the board to reflect on the content of the meeting with the CEO and have additional dialog around the strategic issues.  In this session, for all of 5 minutes, resolutions are voted on, options grants are reviewed and previous board minutes are approved.
• Finally, the CEO steps out and allows the board to have a non-management session.  When I was an entrepreneur, I was initially uncomfortable with this idea of stepping out of the room so that the board could talk about me and "my company".  But I came to appreciate the value of the private session for both the board and the company.  It's an opportunity for the board to gain alignment on the key takeaways, direction to give the management team, and also a forum to make decisions around compensation and bonuses, CEO performance feedback, financing, and generally build a functional decision-making unit.  This session typically lasts for 30 minutes.

After the board meeting, ideally the following would occur:

• The lead director will summarize the points of board feedback to the CEO verbally or in writing in a follow-up call or email.  If the topic is a sensitive one, this may be done face to face.
• The CEO would in turn summarize their takeaways in a follow-up email to the entire board.  This ensures alignment and clear communication so that nobody is confused about what the CEO decided to do with the advice received – particularly if there were conflicting opinions around the room and a single direction needed to be selected.

The best board meetings are working sessions, not reporting sessions.   A key role of the board, among other things, is to contribute to the company and work hard to increase shareholder value.  If the CEO isn't making the board work and creating a meeting framework that gets the most out of the board, then shame on everyone involved.

Boards should evaluate their CEOs once a year in a formal, 360-degree review process.  One of my new year's resolutions this year was to do this across my entire portfolio and, although its been somewhat burdensome, it's been a very valuable exercise.

In turn, boards should evaluate themselves every year.  The board should ask itself a few simple questions, like:  How effective is the board?  Does it work as a decision-making body?  Is the CEO getting the most out of the board?  Only through a rigorous focus on self-improvement and honest assessment will progress get made on any of these dimensions.

So that's my download on board best practices.  Would love to hear your tips and add them to my arsenal.

I almost never agree with a single thing written on the Wall Street Journal editorial pages.  Yet, I found myself muttering "amen" to myself a few times as I read this morning's editorial on "Whatever Happened to IPOs?".  It is just stunning to me how little interest there seems to be on the part of a supposedly pro-business Congress and (more recently) Executive Branch on this one simple thing that would unleash innovation and jobs – watering down Sarbanes Oxley.

The IPO market has improved somewhat in 2011 and so perhaps that has taken some pressure off, but the fact is that the regulations and costs associated with an IPO are so overwhelmingly daunting for our young venture-backed companies that they simply avoid them altogether.  I used to hear from investment bankers that a company north of $100 million in revenue and consistently profitable can find a welcome public audience.   But recent conversations that I have had with bankers has carried a different, even more depressing message.

I am now being told by investment bankers that if a company's revenue is less than $200 million and the projected market capitalization less than $1 billion, they are at risk of being relegated into the "public company ghetto" – a sad corner of the public markets where you have no analyst coverage, no float and so no liquidity.  Your stock simply drifts down and down without any institutional support.  And so even $50-100 million companies in our portfolio and others – growing profitably and creating real value – look at the IPO as an unattainable goal.  I profiled a number of companies in New York and Massachusetts that fit this criteria in response to Bill Gurley's excellent piece (IPO Anxiety) from a Sillicon Valley perspective a few months ago.  But when I talk to CEOs and board members at these companies, they roll their eyes at the IPO prospect – it feels simply too unattainable.

Some complain that the source of the problem is the lack of mid-tier investment banks.  Others complain that the lack of analyst coverage is the issue.  In both cases, it's a cause and effect problem.  The cause is Sarbanes Oxley and the lack of volume.  The effect is that bankers and analysts follow the money.  If the rules were more relaxed, there would be more bankers and analysts, for sure.  This is the Information Age – analysis and bankers will follow opportunities.  They may not be as well known, but banks like Jeffries & Co, Needham & Co, GCA Savvian and now BMO are aggressively courting companies to help them go public and would be all over a more robust market for companies in the $300-600 million market capitalization range. 

In 2009, the National Venture Capital Association (NVCA) made this topic their policy focus.  They released a series of spot-on recommendations to help bring back the IPO market.  But then everyone got distracted with the financial crisis and (yet) more regulation related to SEC registration and battles over the tax treatment of carried interest.  I don't know if there have been any hearings or serious consideration on policy options to provide more liquidity for the IPO market since the NVCA's recommendations.  But clearly there's been no action.

It's time to beat the drum on this.  Surely we can find a group of members of Congress who are willing to match their rhetoric on fostering innovation will doing the hard work of loosening up Sarbanes Oxley.  The StartUp Visa movement has made terrific progress thanks to online, grassroots support.  Let's use that as a model for the IPO market.  John McCain's on Twitter (@SenJohnMcCain).  Send him a tweet and see if he's listening.

My book, Mastering the VC Game, is going to be coming out in paperback.  My publisher, Penguin's business imprint Portfoilo, has asked me to make some edits and updates for the new edition, which I have been dutifully working on.

For fun, I experimented with getting some community input on this task.  I posed a question on the popular Q&A site Quora:  "What should I tweak in my book, Mastering the VC Game, for the upcoming paperback edition?" and got some great responses.  It is yet another example of how rich the discouse now is in the blogosphere  on the start-up ecosystem.  I am working on each of them, as well as other feedback I've gotten from reviewers.  By the way, if you want to read some of the book for free, I have made the first 40 pages available here.

One thing I was struck by was that the start-ups I chose to profile in 2009 have absolutely exploded in popularity and value.  Baidu was worth $12 billion at the time of the writing.  It is now $41 billion.  Constant Contact, LinkedIn, Twitter and Zynga were other companies I profiled.  Each of them has grown in value from 2-10x since the time of the writing a short eighteen months ago.  I don't know if it makes the lessons from these founders captured in the book that much more valuable.  I think we sometimes need to spend more time studying the lessons learned from start-up failures and perhaps this is something I will devote more energy to in the months ahead.

So, stay tuned for news about when the new release will be coming out.  In the meantime, I'm sharing this funny cartoon that Andy Cook of Rentabilities was kind enough to have drawn up and sent to me.  It brings to life the concept of "putting money to work" that I tweak VCs for in the book.  The only thing I don't like about the cartoon is that the VC is wearing a tie – very unrealistic nowadays…

I spent this weekend with my two sons in Ft Myers, Florida as part of our annual pilgrimmage to the Red Sox spring training camp.  While not chasing after foul balls (thanks, Youk!) and autographs, we spent some time talking about what the future might look like.  We ended up making a provocative list of what we called “10, 2030” – ten predictions for the year 2030.

For context, my sons are 8 and 11.  Looking back 19 years ago (1992), I realize that I had my first cell phone, dial up access to bulletin boards, a love affair with email, and was doing consulting for AT&T on Apple’s first mobile computing device, the Newton.  In short, nearly 20 years ago, the fingerprints of the future were evident in the present.  Similarly, my sons are seeing fingerprints of the future in what they see, read and hear about today.  Trying to focus on the right things to extrapolate off, and having some fun with it, provided us with great entertainment.

 So here are their top ten predictions for the year 2030:

1. Two out of three of my children, as a reflection of the entire US car market, will own an electric car (they are convinced oil will be a thing of the past, although according to the International Energy Association and The Economist, oil demand in the US will shrink only modestly in the next 20 years)
2. School classrooms will be converted into all digital environments where Individual student desks will be converted into desk/tablet computers with a touch screen per child linked to SmartBoards and the Internet with a host of applications available.
3. Advanced techniques in genomics will results in a cure for both cancer and ALS (others I’m sure, but those are the diseases my sons were most focused on due to our family history)
4. Super-fast, high speed trains will finally be installed on the Northeast Corridor, allowing Boston to NY travel to take 2 hours and NY-DC a mere 1.5 hours.  My sons seem to think magnetic technology is the state of the art.  I'm not sure where they got this factoid, but it sounded good to me.
5. Commercial travel to the moon will be possible and relatively common for super-rich thrill-seekers.  Sort of like private jet travel today.
6. Voice-controlled, self-driving cars will be prevalent.  Perhaps not even brought to you by Google.
7. No one will carry wallets any more – all functionality of a wallet (payment, coupons, identity) will be embedded in your mobile device
8. No wires anywhere – wireless power/electricity, wireless Internet, high bandwidth data will result in the taking down of telephone polls in large parts of the country.  A corollary to this one is that my sons don't think hardly any homes will have landline, wire telephones any more.
9. Hover boards will be sold commercially – still high-end devices, but useful for urban transportation as an alternative to bicycles.  This one struck me as a stretch, but they're quite convinced of it, and they haven't even seen this hilarious AliG clip.
10. A woman will be elected president of the United States.  I pointed out to them that there would only be four elections (not counting 2012 – sorry Sarah Palin) between now and 2030 for an American female head of state to be elected but they were bullish on this one as well.

Here were a few that we discussed but were ultimately rejected as plausible, but not likely by 2030:

1. Humans landing on Mars
2. Hover cars (i.e., cars that floated above roads at high speeds)
3. Cars that converted into airplanes
4. Home robots that do household chores – dishes, laundry, changing diapers
5. Life discovered on another planet
6. Electronic ink on flexible, paper-thin screens that mimic a book – but, like a Kindle, download wirelessly and electronic

At one point, I mentioned to my sons that I might blog about their predictions because I thought they represented an interesting window into the future.  My oldest got concerned and objected, "But Dad, what if we want to invent some of this stuff and people steal our ideas?".  And that's when the lecture on execution began…

I had the pleasure of teaching a new case at HBS yesterday on foursquare that I co-authored with Professors Tom Eisenmann and Mikolaj Piskorski as part of Tom's new course "Launching Technology Ventures".  Foursquare executives Dennis Crowley, Naveen Selvadurai and Evan Cohen were kind enough to allow us to interview them in preparation for the case, which framed some of their current key strategic issues and looked back on the choices they made in the early days to draw pedagogical lessons of lean start-up best practices, building a platform business, network effects and running monetization experiments.

The foursquare team was consumed this week with SXSW preparations, but we were fortunate to have as class guests Charlie O'Donnell, who wrote the original blog post on foursquare that got many in the community excited about the company, and Andrew Parker, who was an associate at Union Square Ventures at the time of their Series A investment. 

As I did with the class a few weeks ago when Fred Wilson visited, I asked the students to pull out their phones and tweet throughout the class.  You can see the rich "dialog behind the dialog" here, using the Twitter hash tag #hbsltv.  Here were some of the takeaways I had from the class discussion framed around three major questions I posed to the students:

1) Why did foursquare succeed as compared to the same founder (Dennis) in a similar venture (Dodgeball) in a different era and as compared to other teams pursuing LBS services in the same era?  

The students concluded that the context around a venture matters tremendously – that smart phones, the explosion of apps and social networking all were important enablers that allowed foursquare to succeed at this particular moment in time.  At the same time, the foursquare team was incredibly skilled at applying lean start-up best practices, specifically:

• Product-obsessed founders:  both Dennis and Naveen were consumed with the product.  Always interacting with users in bars and over Twitter, thinking less about strategy, analytics and monetization and focusing more on a great user experience. 
• Hunch-driven:  they had deep domain knowledge and didn't need outside studies or market research to guide their prioritization.  One of the key takeaways that both Charlie and Andrew emphasized to the students was to be power users in whatever area of focus they choose to develop those instincts.
• Minimum viable product:  they didn't wait years and years to perfect the product but instead got it out there to solicit user feedback.
• Modest burn:  the company only raised $1.35 million in its series A financing and kept the burn rate at less than $100k per month to make he money last.  Dennis wrote a great post at the time of the financing that showed just how product obsessed he was, even after taking the seed money.  There's no bravado or BS – just a list of the great features they're going to roll out as a result of having the extra capital.

2) What was the magic of the foursquare system that drove rapid adoption that so many other consumer Internet companies fail to achieve?

• Game mechanic - students really honed in on the playfulness of the service, both the entertainment value and the addictive nature of competing for badges and mayorships.
• NYC launch – the fact that the service started in such a perfect venue gave it great advantage – a highly concentrated, very social community.
• VC validation - having Fred Wilson invest and promote the company helped provide it credibility with an insider crowd that may have provided some strong tailwinds.
• Win-win for all constituents – unlike many services, the students understood a key insight about foursquare:  the local merchants make the service.  The fact that merchants are so incented to promote, discuss and reward consumers creates a positive feedback  loop that transcends the power of a consumer-only service.
• Online – offline combination.  Another aspect of the magic of foursquare is that it is not an online only service.  In fact, the ability to drive consumers to actually walk into local venues is a special dimension of the service.  As one student pointed out:  "Facebook tells me what my friends are doing.  foursquare tells me where they are and where I can meet them."  This is a unique and powerful aspect of the service.

3) Once a company achieves product-market fit and starts to scale, how do their priorities, and burdens, shift?

• Raising money, scaling the team.  A rich discussion ensued about what it means to raise big money.  When foursquare took $20 million in venture capital at a reported valuation of $100 million, suddently they had transformed the company from a lean, product-obsessed start-up to a company that would need to generate tens if not hundreds of millions of dollars in cash flow to justify a billion dollar valuation.  A product-obsessed management team suddenly had to transition to become an operational scale management team.
• Monetization.  Consumer Internet companies have to decide when they begin to monetize – as part of the lean start-up experimentation or only after they achieve enough scale to attract partners and advertisers.  But it's not a binary decision.  Foursquare has run monetization experiments from the beginning, but to justify the big valuation they will have more pressure to show real financing results, perhaps at the expense of the user experience.  It takes a strong founder to resist that temptation (think Jesse Eisenberg playing Mark Zuckerburg in "The Social Network", sneering:  "No advertising.  Advertising isn't cool.")
• Vision/Becoming a platform.  What does the company want to be when it "grows up"?  To be a generation-defining company and enter the ranks of Facebook and, arguably, Twitter, foursquare needs to evolve from a great application into a platform.  But becoming a platform company requires a whole different approach and set of priorities.  Do you build out your own features or expand your APIs and invest in supporting third party developers to build applications to your platform. One of the students had coincidentally tried to work with the foursquare API to develop an application and complained that it was very rudimentary and limiting relative to the Facebook and Twitter API.  

The verdict?  I ended the class by polling the students – who would buy foursquare stock at a $200-250 million valuation (my very rough estimate of the current trading on the secondary market) and who would sell?  One third of the students were buyers at that price at the end of the class.  Two thirds were sellers.  One student pointed out in a tweet that the voters were unfairly negatively biased because only 10% of their classmates had even tried the application and, besides another tweeted, 3/4 of HBS students apparently wanted to sell Amazon short in 1998!  Another student tweeted that if there was even a 3% chance that the company could be a $10 billion company, it was worth buying at $200 million.  Now there's a future venture capitalist in the making!

Thanks again to the foursquare team for letting us write the case and adding to the HBS community's intellectual capital.

It was a treat to host Fred Wilson of Union Square Ventures at Harvard Business School today – his first time attending a class at the school.  Fred, as most readers of this blog know, is a venture capital legend in the making and the investor in some of today's leading consumer Web properties, including Twitter, Zynga and Four Square [Fred's post on his visit can be found here].

Fred and I had a discussion about lean start-ups and pattern recognition with the HBS students in Professor Tom Eisenmann's class "Launching Technology Ventures".  If you want to see some of the Tweets that came out of the class (imagine a professor encouraging students to grab their smart phones and live Tweet in class!) you can check them out here (#hbsltv was the hashtag).

A few takeaways from our session that I thought were particularly insightful:

• Early on in a start-up, entrepreneurs should be hunch-driven more than data-driven.  If you are only data-driven, the risk is that you will move too slowly.  It's more important to have a hypothesis about what might work and what might not work and then see what happens in the marketplace to prove or disprove that hypothesis.
• Lean start-up as a methodology or approach is very useful, but isn't a guarantee for success by any stretch.  Think of the methodology as a machine.  If you have garbage inputs, you will still have garbage outputs.  There's no substitute for good strategy, great entrepreneurs and a very large market opportunity.
• When considering when to monetize your new product/service, think carefully about whether the monetization strategy actually improves the service or is a distraction.  Banner ads on Facebook are a distraction (as Zuckerburg supposedly said in the movie Social Network, "No ads. Ads aren't cool.")  But, for example, on Etsy if someone pays for a product, it inspires producers to create more products.  Thus, the monetization is harmonious with building the service.
• If you are going to fail, and certainly with more start-ups being created and seeded we will see more failure, be sure to fail gracefully.  How you handle yourself as you unwind / seek a soft landing will reflect heavily on you and will cement your reputation.
• Don't worry about whether you are building a feature, a product or a company.  Build something great, have huge passion for it, engender affection with a large customer base, and let the rest follow.
• If you get traction, transform your company into a platform.  The most valuable companies are those where third parties help you grow by plugging into your services like a utility.
• VCs don't make companies successful.  They can believe in and support a company, but ultimately the entrepreneurs make or break the company's success and don't let anyone (particularly an egotistical VC!) imply otherwise.

As we ended the class, we tried to inspire the students to "go for it" and become entrepreneurial.  I am always pushing students to consider if now is the right time for them (see my recent blog post:  "Should I become an entrepreneur?") and pointed out that this was a time in their lives where they could afford taking more risk.  Once they get married, have kids, buy a house and get a mortgage, it's a different ballgame.  Fred quoted a friend who once told him there were three addictions in life:  "calories, heroine and a paycheck".  If you can break the last addiction, you are well positioned to become a potent entrepreneur!

The Wall Street Journal's article today about the existence of "alcoholism genes" and what the future might bring ("imagine you go to your doctor and say 'I'm drinking I need help.' and they do a blood test and, if you qualify [based on genetic markers], they give you medicine the next day.") is a part of a larger trend that will radically change the world's health care system.  With a nod to my friends at Hubspot, I'll refer to this future phenomenon as "inbound marketing comes to health care".

First, some background.  The cost of mapping your genes is falling rapidly.  Today, you can get your genes mapped and analyzed for $10k.  In 3-5 years, that price will fall to $1k.  Harvard Medical School Professor George Church, one of the great pioneers in this field, observed recently to one of my partners that, "people will spend $10k per year on insurance but over a 70+ year lifespan are not yet comfortable spending $10k for their genome to be sequenced." As the process gets cheaper and the data and analytics gets better, that will change.  I'd be shocked if you, dear reader, did not have an analytical report in your files somewhere in 5 years about your personal genome and insight into its health implications.

And that gets me to the concept of inbound marketing.  Inbound Marketing (as captured nicely in the book by Dharmesh Shah and Brian Halligan), is the notion that the new era of marketing is about pull, not push.  Rather than producers pushing their products onto consumers, consumers have the tools and means to show up at the producer's door "inbound" and identify their needs and interests.  

It's become very clear how this technique applies to products – consumers research their needs by searching this huge information database in the cloud called "Google" and find what products and services might serve their needs and proactively contact and, eventually, purchase those products.  This technique is why many companies invest so much money in search engine optimization (SEO) and search engine marketing (SEM) – a business that has grown to tens of billions of dollars and fueled Google's meteoric rise as one of the most successful companies and global brands in business history.  Businesses are redirecting their tens of billions of "push" marketing dollars  into other mechanisms that set themselves up to be found by intelligent, informed consumers.

Now, let's go back to health care.  Imagine that in 5-10 years that tens or even hundreds of millions of people have their genomic data stored in the cloud.  Imagine that this data can be indexed, analyzed, parsed, sliced and diced.  And imagine that it is very, very secure.

What might happen with that kind of large-scale genomic data available in that format?  Inbound marketing.  Rather than pharmaceutical companies pushing drugs through their large sales force, they can access this database and alert consumers as to what drugs might fit what genomic profile.  Rather than hunt for clinical trial candidates in hospitals throughout the world, drug companies can email the relevant 1000 patients that precisely fit the indication they would like to test. 

Let's make this very personal.  My father-in-law recently died of ALS.  His older brother also died of ALS a number of years ago.  Thus, there is a reasonable chance that my wife's family has some genetic predisposition to ALS.  In today's health care environment, where genomic information is expensive and sitting in silos, there is nothing much we can do about it but wait and worry.  But someday in the future, perhaps as soon as 10 years from now, we will have the opportunity to opt-in to a service that will alert us via email or text when ALS drugs that might address this particular issue enter clinical trials.  Or perhaps even approved by the FDA.  We might all register our genomic data into this service so that we can receive alerts and information about any range of insights or treatments that might be relevant to our personal make-up.  This is "personalized medicine" in the extreme.

One of our portfolio companies, Predictive BioSciences, is pioneering a urine biomarker technique – pee in a cup, and Predictive will tell you if you have cancer.  In the future, we might all be swabbing our cheeks, peeing in cups, and pricking our fingers to tell us much, much more.  And when that information is available to our trillion-dollar health care infrastructure, imagine the possibilities.

With big tech companies awash in cash, nearly every analyst out there is predicting that the M&A market will heat up in 2011.  At a (pre-blizzard) conference I attended today run by Gridley & Co, this theme was reinforced, with rosy predictions of an M&A boom.

If this boom comes to pass, everyone will cheer.  Yet a strong M&A market won't be a panacea for all.  It will cause good companies to face perhaps the singular hardest decision in their lives:  whether to walk away from an opportunity for positive liquidity. 

Two of my companies have just gone through this process.  In each case, a strong unsolicited offer came in that would have yielded "VC-like" returns (5-10x) and many millions for the founders and senior executives.  But in both cases, everyone around the table unanimously, courageously (and hopefully not foolishly) voted to turn down the offers and walk away.  Having just lived through two of these episodes in the last few weeks, and having lived through many others in the past, I thought I'd share a few observations on this classic conundrum.

When to sell a company is one of the hardest decisions a board and entrepreneur face, and it's a decision made even more difficult if there is a lack of alignment around the table.  If different investors have invested at very different prices, or if the entrepreneur has not made money before and this is their first shot, there can be greater tension inserted into a naturally tense situation.  For example, if the Series A investor has a blended average post-money valuation of $20 million across three rounds, they may be happy with a $100 million exit.  But the Series C investor who just invested at an $80 million post-money valuation would be bitterly disappointed.  Meanwhile, the founder who owns 10% is looking at a $10 million payday – a heady sum for someone who still has a mortgage and is worried about saving enough money to pay for her kids to go to college.

It's all very theoretical, of course, until an actual offer is put on the table and everyone starts to calculate their share of the proceeds.  There is no easy answer to help determine which path to pursue, but here are five considerations that can help an entrepreneur frame the decision:

1. Passion. Do you still love running the business? Does it feel like you can’t imagine doing anything else with your life? Do you still feel like you have something to prove or do you feel tired and worn out?  Do the problems in the business energize you or drain you?
2. Belief.  Do you still believe in the business’s potential? Does it appear that the major proof points are still ahead of the company?  Do you feel as if the value will be meaningful greater after you have achieved a few more milestones – and that those milestones are well within reach?
3. Economics.  How much is the offer as compared to what it might be a year or two from now if the company were to successfully execute on its plan and hit its numbers? What might the company’s value be in a year or two if it falls short of its plan by 30 percent? How would you assess the probability of either path and then calculate the expected value of holding on for a few more years as compared to taking the money off the table by selling now?
4. Dilution Risk.  Does the business require more capital and, if so, can that additional capital be raised easily at a reasonable (and therefore not too dilutive) price?  What must the business be valued at after the additional capital to be equivalent to your dilution-adjusted payout today?  In other words, let's say you own 10% today and can sell for $100 million.  If your post-financing ownership will be 5%, then you are betting that you can sell for more than $200 million down the road.  Risk adjust this number and take into account the time value of money, and then assess the trade-off.
5. Team.  Do the people around you (i.e., your management team, your VCs, your family) want you to sell out or are they encouraging you to keep going?  When you look your team in the eye and tell them they are walking away from $x million each, do they stiffen their spines and project bravado – or do they look at you longingly, with regret?

It can be hard for VCs and entrepreneurs to be aligned in these situations, because the VCs have the luxury of a portfolio approach to investing in start-ups – they are looking for home runs that can move the needle on their funds.  Entrepreneurs, on the other hand, have no such luxury.  This may be their one shot to change their lives and their family's lives.  

I have found that the entrepreneurs who have made good, not great, money in the past are more likely to be both hungry and risk tolerant enough to go for the big win.  Having saved enough money to pay down their mortgages and pay for the kids' colleges, these entrepreneurs are willing to take more risk to make the kind of money that can really change their lives.  That sweet spot tends to be $2-5 million in liquidity.  More and more, I have seen investors show a willingness to allow partial liquidity for founders who have built enough value to raise money at high prices to soften the sting of walking away from an outright sale.

So the next time you hear about how robust the M&A market is going to be, remember that the real trick is for founders and boards to find that right balance between taking advantage of the robust market, and putting their collective heads down and focus on trying to build a big company. 

Thinking back on 2010, the smash hit of the iPad and the continued proliferation of great iPhone and Android apps was one of the most striking aspects of the year.  As a user, I have fallen in love with five apps and find myself using them almost daily.  Millions of others are discovering these apps – and others like them.

But the gap between product success and business success is a large one.  There's an old saying in the venture capital business:  "Fund great companies, not great products or great features." The key question for 2011, therefore, is whether these great apps will mature into great companies.  Will they cross the chasm and move beyond the early adopter market into the mainstream market?  Will they build sustainable business models?  Twitter and Facebook were in a similar position a few years ago – great utilities that initially felt niche, and are now on their way to becoming great companies (OK, some of you will argue that Twitter still has a ways to go, but you have to admit, turning down $1 billion from Google in April 2009 is looking like a good decision in retrospect given the latest round of financing, led by Kleiner Perkins, at a $3.7 billion valuation).

So, here are my picks for the Top 5 Apps of 2010 that will face the challenge of becoming great companies in 2011:

1. Flipboard.  If you aren't addicted to the Flipboard app on the iPad, you can't consider yourself an information junkie.  Beautiful graphics and layout characterize this app, but what makes it brilliant in my opinion is they way it turns Twitter and Facebook into curated content channels.  I am naturally interested in reading the articles the editors of the New York Times and the Economist think I should read.  But I am also interested in reading the articles my friends are linking to in their tweets and posts – they are also relevant editors and curators for my interests.  The Flipboard business model is obviously still evolving and the leadership and backing of this company suggest they need to be taken seriously as a next generation content curation cum general information browser.
2. FourSquare.  I have long admired FourSquare and as part of my part-time duties at Harvard Business School, I decided to co-write a case on the company, which I will be teaching in a few months.  As part of this effort, I had the opportunity to interview the management team and learn more about the company's history and future plans.  The vision for the company is compelling and what appears in the application today is a fraction of the possible (Dennis Crowley observed that he has only implemented something like 20% of his 2004 NYU thesis on location-based services).  2011 will be a pivotal year for the company to turn some of their business model experiments into something scalable. 
3. Instapaper.  The only one on my top 5 list that isn't venture-backed (as far as I know), I love this app.  It allows users to bookmark things to be read later and then turns those links into an attractive content layout – in effect, your own newspaper.  The benefit is immediate and obvious.  The long-term business model isn't  immediate and obvious to me yet, but perhaps it will emerge in 2011.
4. TweetDeck.  I am totally addicted to TweetDeck.  This leading Twitter desktop and mobile app claims to have millions of subscribers.  When I am visiting start-ups, I often notice employees have three apps open and running at all times – Google Chrome, Facebook and TweetDeck.  I use TweetDeck to pull in my Facebook updates so I can keep track of my friends and those I follow on Twitter in one app.  Again, 2011 will be a critical year for them to begin to scale their business model.  Twitter hasn't yet tipped mainstream but is well on their way.  TweetDeck is following close behind.
5. Disqus.  Another quirky pick, perhaps, but I think Disqus is awesome as a blog response tool.  I use it for my own blog and I love when I see it on others' blogs as it makes it so easy for me to respond via email off my mobile device and track feedback.  I don't know how they make money and I presume they're still in lean start-up mode given how little they've raised (only $500k according to Crunchbase), but as a user I'm finding myself as dependent on Disqus as I am on my blogging platform.

So those are my picks for great apps in 2010.  What are yours?  Will any of them  become great companies in 2011?