Amidst all this financial doom and gloom there’s a whiff of a familiar scent in the air. It’s the smell of irrational exuberance and, in some camps, both entrepreneurs and venture capitalists are partying like it’s 1999. Is this a bad thing? Not necessarily, but remember the dotcoms that were booming in 1999 started bombing a mere year later.
For those with short memories, a lot of the trouble back then was a result of companies with no discernable means of monetization getting massive amounts of venture capital (massive for small businesses at any rate). You’d think when the financial times are as tough as they are right now, this couldn’t happen again. But you’d be wrong. To get an insider’s point of view I talked to Scott D. Sullivan Reinhart, an Internet pioneer, entrepreneur, and veteran of the dotcom boom. The California-based Reinhart’s background as an Internet software architect put him at many a meeting (“I’ve ridden the roller coaster, in good times and bad.”) where hopeful entrepreneurs were pitching VCs. Reinhart learned a lot “sitting at the tables” and shares his view of what went wrong, how to do it right, and why long-term planning just might be the key to success.
Rieva Lesonsky: I am seeing some signs of the irrational exuberance of 1999. Not quite as widespread, but still there.
Scott D. Sullivan Reinhart: Agreed. Many people are being funded based on API apps. There’s a lot of money being tossed at platforms that have not yet been monetized. The influx of applications being made for Twitter and other public APIs is setting us up for a flop if capital runs short.
Lesonsky: So it seems no one learned a lesson. Why?
Reinhart: These days everyone seems to believe in the FREE-mium model — meaning you give your core services away in exchange for a large user base, in the hopes you can develop premium services that people will pay for. [The VCs assume] entrepreneurs are adopting this model, but many times the startups haven’t given any thought to how they’re going to make money.
The VC mindset is always about making money. So they assume [the monetization] has all been worked out by the smart people. They assume we know what we are doing in terms of strategy and technological implementation. But usually we [entrepreneurs] lack foresight.
Lesonsky: Are you saying entrepreneurs lack foresight into their own companies?
Reinhart: Most of us do not even have a two-year plan, let alone a five- or 10-year one. In the old days before dotcom madness, brick-and-mortar companies had things worked out. They took a strategy and made it work. They made commitments. Now everyone is so caught up in being dynamic, the startup that plans on making games could end up selling analytics. Everything is a moving target. So they have six-month plans, which make sense for the ADHD generation, but they need five- and 10-year plans in order to succeed.
Lesonsky: The economic downturn is cyclical. So if an entrepreneur is prepping today to go to a VC in nine months or so, what do they need to do now to get ready?
Reinhart: Make sure you have a technically grounded pitch. While [showcasing the] technology may not seem like a glamorous way to bring money in, many VCs have been burned and [are looking for it]. Put your best face forward. Let the peacocks (the marketing folks) tell your story. Then your technical team can take some of the BS out of the pitch
Lesonsky: Would you pitch to VCs today? A year from now?
Reinhart: I would be cautious today. The terms might be a bit vicious. A year from now? Maybe. The terms might be more rational and expectations less extreme. People are still dizzy from the recent financial hits and are hoping to recoup any way they can. But we are still drunk on this new Kool-aid called social media which, in my opinion, isn’t so new. So let the buzz wear off, let the stink of all the failed investments die down, and come in fresh. We need to be radical to get attention. Look for what’s out there and take a new direction. Mimicry is too common right now. We have thousands of YouTube clones. Everyone wants to make the same thing.
Lesonsky: Which is the opposite of entrepreneurship.
Reinhart: Exactly. Just try something new. I am from the school where you come up with something no one else is doing — and you win. Most entrepreneurs and VCs have forgotten what the spirit of the game is. Find a longtail and fill the gap. Being one of thousands [pursuing the same idea] doesn’t add value.
Lesonsky: So if you were to give advice to emerging entrepreneurs, you’d say, tighten up your technical bona fides, be original, and be patient?
Reinhart: Definitely. Also, VCs do not want paper anymore; they want a product. So you have to prototype. Otherwise, they see your ideas as unripe fruit and assume you’re not done thinking things out. And they’ll take a higher ownership of your company in exchange for their capital investment. Today, paper means nothing, thought candy means nothing. The money is in a working prototype
Lesonsky: It’s still about scalability, though.
Reinhart: Yes, scalability is what they are paying you money for. So when that [investment] check is signed, you better be ready to make the thing work with millions of users.
Lesonsky: So your advice is create, plan, and go?
Reinhart: Yes, if you do nothing, your idea is worth nothing. Imagine if Tesla (Nikola Tesla, often described as the most important scientist and inventor of the modern age) had just written his dreams on paper. How different would the world be now? He had the courage to dream, the knowledge to test, and the faith to implement. And when he did this he made our present existence what it is. We live in Tesla’s dreams.
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