John Stockton's Venture Capital Blog
Opinions on high tech Venture Capital Investing
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June 19, 2013
1. Cash Bonuses Revisited
  Continues to be the work of the devil
Cash Bonuses Come Back Around

I recently was involved with a start-up company where the CEO decided that he and his team should get cash bonuses in addition to the regular compensation that they would get otherwise. The issue that I had at the time was that the proposed plan gave them bonuses on a sliding scale starting with about 60% of the revenue forecast that was a part of the Annual Operating Plan. When I suggested to the CEO that it created a reward for missing the operating plan and that these parts should be removed, he reacted very negatively to the thought. This led me to rethink the whole idea about start-up companies and cash bonuses.


The idea of paying for performance isn't all bad, but the problem with bonuses at start-ups is that generally cash is the thing that the start-up has the least amount of. Giving it away in bonuses just shortens the time till the company either runs out of cash or has to raise some more. This should be avoided as much as possible and then only done for very limited purposes.


Salary Matching - The one place that I've seen cash bonuses used effectively is when a prospective employee is being sought and there is a big mismatch in their base salary. Sometimes using a cash bonus as a way to create a short-term bridge provides a way to get the employee on board and let them justify their ultimate higher (permanent) salary. If the employee proves they are worth the money, no problem - management will raise the salary. If not - the employee will either have to adjust their lifestyle or find someplace else to work.

Greed is good - Many people are motivated by money, but some are motivated by doing something important for the world, even if there isn't the same cash reward. I suspect that if you lined up people from left to right according to how motivated they were by cash, you would find the sales personality types on the left and the engineer personality type on the right. If a person is a natural gambler, a bonus is an effective motivator, but only if tied to a relatively low base salary.


Alignment - One of the problems in constructing a bonus and MBO plan is the construction and management of the plan. Things usually start-out well, but it doesn't take long before things are change and the bonus and MBO plans actually lock people into old behaviors and keep them from working together. For instance, take a company that has a bonus plan built around R&D and a Sales budget assumptions. The CEO will have a more difficult time moving money between the buckets if it will ultimately result in one VP getting less of a yearly bonus than another one. The net result is that the CEO will spend a lot of time on people issues, where he could have been working on customer issues instead.

Entitlement - The idea of an Annual Operating Plan is to give the company a can't miss revenue plan and a set of expense targets that gets the company to the next level of risk reduction. By constructing a bonus plan where the team gets paid even if they miss the plan tells the team that plans aren't all that important since they are going to get even more money even if they miss the plan.

Big company mentality - The personality type that likes bonuses is often that of a bigger company where the overhead is higher and the productivity is lower than typical start-ups. Big company people have their place in start-ups, but having them there too early creates tension that management shouldn't have to deal with.

Gaming the system - I worked with a company one time that was late delivering their product to the market. The CEO argued that he should give a bonus to the sales guy, even though he hadn't sold anything since it wasn't his fault that the product wasn't ready to ship. That mentality leads to a pretty mediocre company where nobody is accountable for anything, particularly since they are going to be paid a reward for exceptional performance anyway. The company ultimately went out of business because it ran out of cash and new investors didn't like the way money had previously been spent.

Kills Teamwork - I also worked at a bigger company that had a bonus program, and observed that several managers had a zero-sum attitude that anything they did to help you would hurt them, so unless there was an obvious quid-pro-quo, they weren't interested in helping out. The creation of a zero-sum mentality can permeate an organization as well.

Cash is the most precious resource - As if the pressure of starting something new, dealing with new people, pioneering a new market, dealing with aggressive competitors and managing a new team weren't enough, adding the pressure of running out of cash sooner really hurts. There are a lot of stakeholders that wind up losing out because of this management greed.

Makes the investors wonder - As a potential investor in deals, it is important to look at cash flow statements and expense charts to figure out how money has been spent in a company. If the company has a history of doing dumb things with investor money, they probably will continue to do dumb things with your money as well. Spending money on practices that many consider as controversial can lower the chance of getting future funding into the company and that could threaten the existence of the company.


Of all of the experiences I've had with start-up companies, the biggest arguments that I've ever had with CEOs have been over the use of cash for bonuses. Fortunately they are relatively unheard-of in the start-up world, but they do occur often enough to merit some thought. This leads me to the conclusion that cash bonuses in start-up companies are a really bad idea - there are some potential upsides, but the numerous downsides outweigh them. I often have said that cash bonuses in start-up companies are 'the work of the devil', and now I am even more convinced. If I were an investor in a pre-earnings company that was giving out cash bonuses, I'd question the wisdom of the management and be mad that my money was being wasted.

Category: Management Submitted by: John
February 13, 2011
1. Risk vs. Risk
  Public Equity vs. Private Equity Risk

Background: In the financial world when trying to assess how risky an individual stock is, the common way to do this is by looking at the standard deviation of the price of the security. The more it varies from time to time, the higher the perceived risk. I've seen this measurement technique used the same way for Private Equity, where the Capital Account of the security is periodically updated to reflect the lower of the purchase price or the current value of the security. One of our financial advisors recently made the argument that a particular PE investment we had was actually lower risk than most of our public market stocks. I found this hard to believe and wanted to suggest some other ways of looking at Private Equity risk.

Private Equity Risk:  The issue with PE risk is that the investment is not liquid.  Its value is usually the lower of the acquisition cost, or of the most recent financing transaction.  There is an inherent bias to try to keep from writing the value of investments down, since that would signal defeat and also invite within a PE firm, so more often than not, the value of a PE investment stays on the books at some arbitrary value for years.  The fact that is doesn't have much, if any, standard deviation is not a measure of reduced risk, but instead just a reflection that there isn't a market for these securities and the valuation technique is sometimes inefficient.

Category: Finance Submitted by: John
Feb 9, 2011
1. Fouderitis
  How to keep someone from Nuking a company
Important Disclaimer - these events took place at an unnamed company during the 2005-2007 period.  It's been long enough now that  it is safe to talk about it now.]

Summary: I (among others) recently had to deal with a company founder that had a severe case of "Founderitis", where he was convinced that the BOD, investors, and everyone else in the company was an idiot and he was the only one who had the insights and skills to manage the company. Never-mind that he had been the CEO of the company for a number of years and managed to show little, if any, technical progress and certainly no commercial progress. These situations take careful maneuvering to fix, and here are some notes about how we got through it.  The conclusion was that it did turn out OK, but the in retrospect, it took way too long to get there.

Background:  The person I'm talking about here is a college professor who had a novel insight into how to solve a particular technical problem.  The insight mostly worked, but never could be scaled into production.  Many of the professor's insights were correct, but for some reason, they never could be reduced to commercial practice.  He managed a R&D group that tried in vein to make the process work for a couple of years before the BOD stepped in and started making changes in the company.  The BOD was aware of the need to deal with things, but also had a philosophy of keeping the technical founder in the company for as long as possible.  This professor was a winner of numerous technical achievement awards and considered himself to be a real "rock-star" in this field, which only made things harder.  The company was also located in a remote city where few outsiders had been before, so recruiting people to this geography proved to be exceedingly difficult.  Pretty much the only people who would consider it were ones that were born in the area (or their spouse was) and they wanted to come back for family reasons.

First Change: The BOD recruited a CEO to the company who had a great reputation in the industry (also his wife was from the area), but because of the professor's strong position in the industry and the company, the decision to split the President/CEO position into "two in a box" and make the professor President (dumb idea in retrospect).  The CEO tried for a number of months to make things work, but soon it became obvious that the technology problems were not being solved and that the situation was largely out of his control.  After several months on the job, the CEO pretty much gave up on fighting and just decided to go with the flow.  The BOD noticed the complacency and soon fired the CEO.  The professor wanted the company to all report to him, but by now the BOD was tired of his antics and decided to have the Chairman of the Board become the acting President/CEO.

Second Change: The next change was to recruit into the company a number of experienced operations people to see if they could help bring some commercial best practices to the situation.  They fixed many small things around the edges of the real problem, but the main issue remained and the company still could not produce the product in volume yet.  The professor decided that the operations people were idiots, so they wound up leaving the company.

Third Change:  The Chairman recruited one world class technology expert into the company to start a more systematic approach to solving the problem and to bring more current industry practices to the table.  The new technologist made great progress, but the main technology problem, while it was much better, was still not good enough to go into production.  This new person took over all R&D, and the professor became Chief Scientist of the company.  There was a natural tension that developed between the professor and the new CTO.  The professor didn't think the CTO understood the nuance of the technology and didn't appreciate all that had been done previously.  The CTO thought that the professor was not very systematic about his efforts and that conclusions had been reached based on gut feeling rather than hard data.  The tension sometimes escalated to the point of shouting matches.

Fourth Change:  After about a year of struggling with the technology and watching the very slow convergence on a solution, I suggested that it was time to consider a technology "Plan-B" where we would implement something that was well known in the industry, but that could be produced in a unique-enough manner to allow the company to have differentiated products in the marketplace.  This proved to be one of the right things to do, but it is always a matter of timing on when to pull the trigger on it.  This further added to the tension between the CTO and the professor, since the professor's technology was no longer the only focus of the company and the CTO was no longer working on the professor's dream.

Fifth Change: After the new technology started to work, some amazing developments started occurring on the old technology and soon enough, there were product ranges where the older technology made sense to commercialize.  The old technology is not robust enough to be used across all product ranges, but there were places where it definitely made sense.  The company started shipping commercial volumes of both types of products and now the issue was how to get margins improved enough to make a good company.

Sixth Change: The company was really starting to hum along now.  Both versions of the technology were showing where they are good and where there are still problems to be addressed.  The employees are pumped up because they are busy and are starting to see results.  The management has done a good job of communicating to them, so they are in the phase of development where "success breeds success" so they were definitely in a good spot.

Conclusion:  The company has since gone public and made a good return for the investors, team and even the professor.  The Professor is now back at the University with an enhanced position given his industry recognition.  There were a few lessons along the way that are worth repeating:
  • Be careful with geographic location - people who move want a viable "plan-B"
  • Splitting the job of President & CEO is a dumb idea
  • Don't try to produce a technology before it is ready for production
  • Competition is good - even inside a single company
  • Employee's motivation is never static - there is either a "virtuous" cycle, or a "vicious" cycle - nothing else
This was a tough problem to deal with since it involved strong personalities on every side.  Even when you set aside all of the human issues, the lessons on what we did right and wrong are worth remembering for the future.
Category: Management Submitted by: John
January 24, 2011
1. Board of Directors Package [Updated]
  Simple set of charts to hack

I recently sat through a BOD meeting where I thought that there was too much emphasis on day-to-day activities (who had a meeting with who - and, of course, they were always "good meetings") and not enough on the Big Picture of what was really going on with the company and their prospective customers. I recall one of my other companies having a BOD presentation that felt to me like it had the right combination of high level (dashboard charts) and detailed information in it, so I made an outline from it which I've attached here. Feel free to download it, use as you see fit and hopefully improve upon it. If you have any really good suggestions, please pass them onto me so I can update this for myself and others.

There are multiple things that a CEO should try to accomplish in a BOD meeting, but the biggest one is to provide the Directors with a snapshot of what is happening at the company and get their non-cluttered view of key decisions that the company faces.  Sometimes it is easy to get caught up in the detail and "Not be able to see the forest for all of the trees".  An outsider's uncluttered perspective helps sort this out.  There isn't anything magic or particularly insightful about this perspective, but it just it's just that it has some distance associated with it.  There are other things that the CEO always must keep in mind as well, such as when he/she is going to be raising the next funding round, and how to create an "exit scenario" that benefits everyone around the table well.

Expect to spend a fair amount of time going over key customer activities and have a summary of what is working and what isn't.  While the business is young the basic value proposition of the business is fairly flexible (undeveloped) and the insights of the Directors can help shape it.  Also, pay keen attention to competitive developments and have strategies to defend your company against these developments.

Since Directors only see the company every one to three months, having charts that show previous forecasts, action items and status is a good idea.  The use of "Waterfall" chats in financials is particularly good.  It shows the BOD what was forecast and when, and of course how it changed as the actual month/quarter became reality.  One of the benefits of these kind of charts is that those that prepare them become increasingly realistic (as they can be) about their forecast and try to minimize the wishful thinking that often goes into them.

Example BOD Presentation Template: Link
Category: Management Submitted by: John
January 1, 2011
1. Predictions for 2011
  An update on my predictions from last year

Predictions for 2011: Here is an update on what I posted from last year at this time.  Where possible, I've tried to indicate what is a continuation of a trend that started last year.

Hot technologies (largely same list from last year - new comments):

  • SSDs - next design iteration finally gets it right. OS support for TRIM increases perf. Costs drop.
  • LEDs continue to impress.  Market is just lifting off of the flat part of the 'S' curve.
  • Android-based handhelds - generic OS finally gets good enough (already out shipping Apple's iOS)
  • Tablet Clones - Now comes the wave of tablet makers trying to experiment and differentiate
  • Silicon Carbide goes main-stream to meet electric car requirements; slow growth
  • 4G actually starts to take-off and make sense as a data-offload for cellular network
  • Network infrastructure upgrade for video - core and edge need 10x capacity growth
  • AJAX applications continue to impress - creates alternative UI for applications (UI design is hard)
  • 3D LIDAR camera technology gets into other applications beyond the Microsoft Kinect
  • Lighting control systems for big building applications that let light levels be optimized for power
  • Embedded Linux everywhere - 1 second boot times for QT applications
  • Face-less applications that switch emphasis from traditional UI design to a web-UI style design

Disappointing Technologies:

  • Solar - slow market, low energy prices continue, will take a long time to make a dent
  • Wind - good technology, takes a long time and a lot of money to make a difference
  • Natural Gas - slow to grow in application, but good to keep in reserve
  • Electric Vehicles - Charging is the flaw in the usage model (idea for start-ups)


  • Connectivity in home appliances finally makes sense, e.g.:
  • Alarm clocks that show the weather and first appointments (Chumby)
  • Picture frames that always have latest home picture files
  • Energy monitoring systems that track home energy usage
  • Automotive electronics:
    • Weather maps in cars with reasonable geographic precision
    • 3D sensors for back-up and blind-spot detection
    • IR Imagers for safer night-vision - some with head's-up displays
    • Mobile hot-spot for Wi-Max and WAN phone service
Economic Environment:

  • Interest rate rise just after 2012 election season - the only time the stock market won't count
  • Continued de-valuation of the US$, reduces debt and makes US manufacturing competitive
  • Serious competition for US Reserve currency from mix of Euros, Yen and RMB
  • VC Industry starts to come out of the doldrums, still too many firms for the market
  • Semiconductor industry recovers, but continues to consolidate - like the airline industry
  • On-line vs. brick & mortar - symbiotic existence continues (shop at store, but online)
Category: Trends Submitted by: John
November 1, 2010
1. Biographical Summary for John Stockton
  The Longer Version
Biography for John F. Stockton
512-825-3336 (cell)

Summary:  Broad experience in Venture Capital as well as being a part of start-up companies ranging from a few people to a few hundred in size.  Usually heavily in technology evaluation and selection for companies as well as financial analysis and risk assessment.  In almost every case, involved in fund raising and strategic partnerships for companies.  Recent emphasis in the VC related work has been on clean-tech opportunities that involve hard sciences, such as new semiconductor processes for solar cells and light emitting diodes, circuit design techniques for power reduction and new materials combinations for better performing power transistor devices.  Some recent assessments of new technologies include low cost fabrication techniques for Silicon Carbide and Gallium Nitride.  Also recently investigated high efficiency GaAs solar cell designs.  Evaluated multiple companies in the micro-inverter and distributed MPPT space.  Served as a director for multiple companies (public - UK:LSE and private - although almost exclusively private).

Work History:  
  • Present: Working part-time with Mayfield Fund, GSR Ventures and multiple portfolio companies.  Serving on Board of Directors for Silicon Hive (semiconductor intellectual property company based in Eindhoven, The Netherlands) and for Camgian Microsystems (defense related electronic systems company based in Starkville, MS).  Board Observer for Mayfield Fund investment called LatticePower (silicon-based LEDs based in Nanchang, Jiangxi province, China).  
  • 2001 to 2010: Worked off-and-on with multiple portfolio companies including Ubicom (consumer grade network processor), Dafca, Ponte Solutions, Arteris, Sirific Wireless, LV Sensors and Mobert Semiconductor.  Developed a smart thermostat system for Zeta Communities, a fabricator of zero-net-energy homes.  The thermostat managed a thermal mass, airflow dampers a skylight vent as well as indoor, outdoor and basement temperatures and humidity.  Did enthalpy-based control and adaptive set-back based on weather patterns.
  • 1999 to 2001: Worked in various capacities with ARC International, a UK-based semiconductor intellectual property company based in UK. Started out as an Independent Director, became Chairman and helped company go public on the London Stock Exchange in September of 2000 (just as the internet bubble collapsed).  Raised $250M on a $1B valuation.  Later became interim CEO and dealt with pressures of being a public company during a very bad economic cycle.  Managed reduction company by about 30% in size while holding revenue relative steady in a rapidly declining market.
  • 1996 to 1999:  Worked with Mayfield Fund as a Venture Partner, helping evaluate companies and later helping companies that were having financial difficulties (in a work-out and disposition mode).  Did interim management roles at multiple companies including Synergy Semiconductor (high speed bipolar components for the telecom market) and Stream Machine (MPEG-2 CODECs for the consumer electronics market).   Helped start sVISION (CTO), a Mayfield funded liquid crystal on silicon display company targeting consumer projection equipment.  Did independent consulting with Primarion, a company specializing in high performance voltage regulator modules (switching power supplies) for PC applications.  Helped to technology performance analysis (some circuit simulation using SPICE) and helped with general technology direction.
  • 1992 to 1996:  CEO and co-founder of Tamarack Storage Devices a spin-off of MCC in Austin, TX that was trying to commercialize a holographic optical storage technology invented by MCC.  Raised significant funding ($30M) from government entities to leverage a relatively small private investment.  Dealt with significant technology development and risk-management challenges.  After several years struggling with the technology, decided that it was about 20 years too early and that it was time to go onto other things.
  • 1984 to 1992:  VLSI Technology, Inc. in multiple roles ranging from strategic marketing to being an Engineering Fellow reporting to the CEO.  Responsible for technology direction and prioritization across multiple product lines.  Prior to that, co-founded a PC Chip Set business which ultimately became about 50% of the company's total revenues.  Also organized the funding and spin-off of ARM Ltd from its parent company Acorn Computers Ltd.  Sold Apple on the idea of working with the ARM 32-bit RISC processor in the Newton handheld device.
  • 1978 to 1984:  Worked at Motorola as part of the M68000 microprocessor team.  Started out in the design group and later worked in the marketing department.  Transitioned to the 8-bit embedded processor group and helped build a large part of a $2B semiconductor operation.  Did strategic marketing and product planning for multiple product lines.
  • 1974 to 1978:  Worked at Applied Research (part of the University of Texas) on submarine sonar signal processing and power supply design.  Participated in the design of a compact high reliability power supply that could achieve a 100,000 hour MTBF for use in a large submarine sonar system.  Participated in the creation of the switch-mode power supply field.
Education:  BS Engineering Science (hybrid EE and Nuclear Engineering) from University of Texas at Austin.  Graduated with honors in 3.5 years while working 20-30 hours per week at ARL.  Multiple patents (four issued, one provisional) involving IC testing, holographic optical memory and energy controller design.

Personal:  Runner (occasional do marathons - 3:45 PBT and other distance races), father of two college-age kids both at the University of Texas (Aerospace Engineering and Physics Major).  Interested in home theater, computerized home control, CNC Milling, autonomous RC helicopters and distributed tiny database/application servers for web applications.

Category: Biography Submitted by: John
John Stockton
About this Blog

This blog contains John Stockton's views on venture capital investing in semiconductor, storage, EDA, display and other (mostly) hard technologies. Tune in for one person's opinions about investing in the chip and materials industries. Also, feel free to use reference materials provided here - they are meant to be helpful to the average early stage start-up company.

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