John Stockton's Venture Capital Blog
Opinions on high tech Venture Capital Investing
Found: 24 Entries
June 19, 2013 Format for Print
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
March 6, 2007 Format for Print
2. IRS Sec. 409A Valuation Reports
  The work of the bureaucrats (aka devils)

During the past two years there has been a lot of discussion about making sure that discounted employee stock options have been properly priced relative to some unknown standard for private companies - and the new IRS penalty for getting the valuation wrong is a 20% excise tax on the misappropriated value. While this might make sense for later stage companies that are cash flow positive and potentially getting close to a liquidity event, IMHO it doesn't make much sense at all for very early stage ventures that might be years away from customer revenues.

The other bothersome aspect about these valuations are that they presume that some outside firm (typically an accounting or legal firm) will know more about how to value early stage private companies than the venture capitalists that make their living doing just that. The goal is to have a definitive source that knows how to plug numbers into a Black-Scholes spreadsheet and interpret the results. The old rule of thumb that common stock, which doesn't have the rights and preferences of preferred stock, is worth about 10% of the value of the preffered stock isn't supposed to hold up anymore in these days of CYA bureaucracy.

One of my companies recently spent about $12.5K on an outside service provider to take in a bunch of documents, answer a bunch of questions and get back a lengthy report which after all of the pain and effort concluded that the common stock price should be 10% of the preferred stock price. The funny thing is the underlying assumption that an accounting firm that has never priced a deal before suddenly can rely on a stock option value model to have a more insightful view of what a company is worth than the investors that put money into the company in an arms-length transaction. All of this defies common sense to me - but it is part of the game going forward thanks to crooks at Enron, WorldCom and many other companies. This bureaucracy amounts to nothing more than a private company tax that will affect all of us. I for one think that it is time for common sense to come back into vogue and such CYA craziness to end.

BTW - this 409A stuff was created as a part of the so called American Jobs Creation Act of 2004 - the one thing they forgot to tell us all was that the jobs they had in mind creating were those of lawyers and accountants - ones that transfer value rather than actually creating original value.

Just an opinion.

BTW - to download the outline and discount ratios of an example 409A valuation: Link

Category: Governance Finance Submitted by: John
August 15, 2007 Format for Print
3. MEMS Applications are emerging
  More than what I thought

During a conversation today with a couple of entrepreneurs today, we started enumerating the current applications of MEMS beyond the obvious Ink Jet printer heads, DLPs and automotive crash sensors. Here is what we came up with during our few minutes on the topic (no particular order):

Mature applications:
  • Pressure sensors (automotive, medical, consumer, ...)
  • Accelerometers
  • Display Light Modulators (TI DLP, Sony Grating devices)
  • Bio-Assay devices (Lab on a chip)
Emerging applications:
  • Gyroscopes
  • Relays (ATE and RF applications)
  • Microphones
  • Memory elements
  • Crystal and filter replacements
Future ideas:
  • Microfluidic pumps (gasses and liquids)
  • Micromotors
I'm sure there are others that I've forgotten or am not aware of - but this list had more items on it than I thought that it would. Let me know if you know of others too.
Category: Trends Submitted by: John
August 24, 2007 Format for Print
4. The IP Business Model Revisited
  Still a winner take all business

Introduction: After doing a couple of IP deals (ARC and getting ARM Ltd going), in most cases, I'm not sure why anyone would ever do one again! The idea is sound, where a bunch of people with deep domain expertise set out to create something like software, but in much more of a hard form - namely RTL for chips. The idea is to take very complex behavior and reduce it to a HDL description, test it and sell it to a number of customers for a bunch of money. The problem is that only a few companies have been successful doing it!

Industry Problems: There are a number of problems common to this industry, that are shown below:

  • The first problem is that most of the functions are (almost 100%) digital only and standards-driven. That creates the issue that any great team of coders in another country can create designs that are just as good. This also tends to reduce the value of the IP. Lots of supply, some demand.

  • The second problem is that most customers haven't figured out yet that paying for IP, either up-front, or in a combination of up-front and with royalties, is in their interest. They tend to treat IP vendors as one-shot purchasing arrangements - not one where they contemplate a long term relationship with future designs. This tends to give the buyers much more power in the selling equation.

  • The third problem - is that most Mom-and-Pop semiconductor IP vendors never bother to actually put their designs into silicon. They might go through the entire design flow one time, so they can prove they can hit certain timing targets, but there is something reassuring about knowing that a design has been used successfully in silicon a number of times before your team actually starts to try to use it themselves. This tends to reduce the value of the IP.

  • The last problem is that creating IP for a narrow range of applications is difficult, but creating IP so that it is configurable to be used in a very wide range of applications is extremely (>>2x) difficult. The other issue that goes with this is that most interesting IP is a combination of software and gates. The software must be automatically changed to support the changes in the gates. This overwhelms most smaller IP vendors (eg, at ARC the compiler would automatically be changed to support changes to the instruction set architecture).

Industry Characteristics: There are a number of characteristics in common for IP companies. A short summary of them follows:

  • While it's not necessarily a problem, an important characteristic of this industry is that it has exhibited a Winner-take-All characteristic where the number one company in a particular market segment gets the vast majority of revenues and the number two and three players are left far behind picking up the scraps of business that the number one couldn't service for some reason. A particular example comes to mind with ARM Ltd vs MIPS and ARC Cores. ARM is clearly in the number one market position with MIPS and ARC trailing way behind. Tensilica is also in this race, but with revenues slightly less than ARC's.

  • Another important characteristic of this business is that before there is a major customer with a highly visible design-win, the value of a license is very difficult to defend, usually boiling down to an argument over how much effort it takes the customer to make vs. buy the same technology and the risks associated with the make side of the equation. In the early days of IP at VLSI Technology (we had PC building block chips called MegaCells), some IP blocks were more difficult to use due to design styles, documentation or other implementation issues than they were worth. In multiple cases, we brought in IP from some other group only to throw it out and start from scratch.

  • Another issue facing IP vendors is the Horizontal vs. Vertical decision. On one hand, they can create a very large market by making something that is useful in a very broad range of markets. This takes lots of work and rarely meets all of the specific needs of customers. The other approach is to make something very Vertical - or focused on a single market application. This is usually done with lots of domain-specific knowledge in the design team. This creates the dilemma that to add a new vertical segment requires adding people from that area, some of which are very difficult to find or recruit.

Opportunities: With these difficulties - there are two bright shining spots in the IP business: multi-domain patent protected IP (e.g., Qualcomm & Rambus) and physical IP (e.g., Rambus).

  • The first category consists of problems that require deep insight in two or more domains, such as in the case of Qualcomm, spread-spectrum RF, cell phone radio, modem and baseband knowledge. Each of these areas requires specialized understanding of an area that is not commonly known.

  • The latter category of physical IP is more common, but still is a lot of work. For each new process variation from TSMC or others, the IP company has to alter their design to still meet all of the critical specs. It really is a treadmill - but one where customers are willing to pay for the work.

Conclusions: With all of this said - the IP business is inevitable, but the industry has a lot of growing up to do before it is a (relatively) low-risk investment category.

Category: Trends Submitted by: John
November 6, 2008 Format for Print
5. Carbon Trading
  Sounds better than it will likely be

Carbon Trading: With the presidential elections behind us, one thing that comes to mind as a virtual done-deal under the new Obama administration will be a Carbon Cap-and-Trade System. Sort of like the Obama tax cut for 95% of Americans, this one sounds better on the surface than it will likely turn out also. The essence of this system is the worst combination of a Federal tax along with a private enterprise implementation system.

Background: The real problem starts with a noble desire by governments (not just the US) to force businesses into reducing their carbon footprint. This is a result of a recognition that the real cost of energy (including all associated costs for clean-up, pollution, ...), is much higher than the price of delivered energy, or "price at the pump". How much higher is up for debate, but most estimates that I hear are at least 25% more and as high as 100% more. For some businesses, such as coal-fired power plants, this is a real problem, since they run quite efficiently to start with (at least in the US) and produce energy at very low costs which allows us to grow our economy and enjoy a great life style. Other businesses will finally be forced to take the easy steps to reduce their emissions, but those will quickly become increasingly difficult as the low-cost solutions are implemented and only higher cost solutions remain. The result of these cost increases will obviously be passed onto the consumer in the form of higher energy costs.

In its implementation, the Cap-and-Trade system will set an upper-bound limit on emissions at either their current level, or some previous years level - such as 1990's level. From that point forward, any excess in emissions will come with a price-tag in the form of either a purchased offset or a penalty. The real question will be how the system is implemented. If it is done as a tax, then it will have predictability, certainty and one level of cost. If it is implemented as a free-market system, it will obviously not have predictability, certainty and it will have at least two levels of cost as those involved in the exchange will extract their profit margin and the governments will continue to expect their energy tax windfalls.

Problem: The system that has been proposed is a combination of rewards and punishments. The rewards are permission to continue to operate at some historical level of gas emissions, and the punishment is effectively a tax on growth (or a penalty). To avoid the penalty, businesses must buy carbon credits, either from industries that were granted caps in excess of their current usage, or from others that reduce greenhouse gases through reforestation or other means of carbon sequestration. These credits will be traded on for-profit exchanges and herein lies the rub. Not that I'm a fan of taxes or government bureaucracy, but I'm afraid of government moving too fast and creating a huge financial disaster similar to the well intentioned housing bubble hang-over that we currently are in the middle of. In the past, newly deregulated markets such as electricity trading in California have been set up with rules envisioned with the best efforts of regulators, but with unforeseen loop-holes that were quickly taken advantage of by companies such as Enron, and others. The early days of electricity deregulation in California included a huge spike in electricity costs and almost caused collapse of the system, or at least the state government's ability to meet its budget.

Gaming the System: The first thing that comes to mind is an incredible new round of lobbying efforts to set emissions caps to artificially high levels, which would give existing industries head-room to meet their emissions targets. The next thing that will likely happen is for countries to try to protect their economic growth, by either claiming that the system doesn't apply to them, or by asking for credit for some unrelated activity. An example of this is China's recent claim that they should be given credit for their one-child-per-family rule, saying effectively that if they hadn't have implemented such a program previously, their population and carbon footprint would be much higher. These are just the games that will be played at the beginning of the program. An exchange-based program will add volatility to the system, thus making is more difficult for everyone. Utilities will have to move to adjustable rates, new businesses will become energy market forecasters, banks will have to discount cash-flows from financial forecasts due to energy cost uncertainties,... In essence, this uncertainty will make the system unworkable.

Solution: As hard as it is for me to say it - the best solution will likely be a federal-level tax that is administered by one of our existing taxing entities. This would have certainty, which would allow our financial system to continue to operate in a reasonable fashion. I would like to think that the proceeds of the tax would be directed to clean energy programs such as building utility-scale wind mills, or even nuclear plants. I'll hold my breath to wait and see on this one.

Category: Cleantech Submitted by: John
November 11, 2008 Format for Print
6. Fund Raising Presentations (revisited)
  It is never easy to raise money - much more so now

Fund Raising Presentation Revisisted:There should be a course taught to all engineers and would-be entrepreneurs that would show them what should be in a presentation for raising venture funding. Actually it could be just one lecture, as the topic isn't really all that complicated. To illustrate my point, I'll make a quick pass as what the lecture would look like here:

Objective: The objective of the entrepreneur should be to get the Venture Capitalist to want to fund the company, which is often a committee decision rather than just that of an individual partner. The committee is there to make sure that all aspects of the investment have been considered and that the idea just isn't some individual partner's wild idea of the moment. At least in the firms that I've worked with, the process is a structured one where a "deal memo" is usually created, presented and defended in a full partnership meeting. The advantage of this process is that multiple people look at the merits of the deal, independently of what they think of the founders or the investment space in general. This unbiased, objective review generally sets a bar high enough that half-baked or too risky ideas don't get through. Thus, the goal of the entrepreneur should be to supply everything that the VC needs for a deal memo in his first presentation. The only problem is that there is no fixed format for these deal memos, or agreement as to what their contents are. To help deal with this situation, I've included an outline with some comments about the kinds of deal memos that I'm used to preparing and reviewing. Hopefully this will help entrepreneurs prepare more adequately.

Fund Raise Presentation Outline:

  1. Summary - try to make this into a one page "fact sheet" - do it last
    1. Stage of company
    2. Founders
    3. Market
    4. Technology
    5. Competitive landscape
    6. Customer base
    7. Finances
    8. Fund raising status
    9. Likely Deal Terms - put down your wishes here, but don't be too unrealistic

  2. Team - don't get too verbose here, just keep it to relevant experience
    1. Execs: Few line history of relevant work history; Bullet for employment history.
    2. BOD: Who they are, affiliations, value-add
    3. TAB: Who they are, affiliations, value-add
    4. Service Providers

  3. Products
    1. First product
    2. Second product
    3. Product Roadmap
    4. Alternatives & hedges

  4. Market
    1. Forecasted major market trends - what are the "mega-trends" and why is this changing the industry
    2. Initial market and size - what are customers spending today and why
    3. Future markets
    4. Industry analysts that are referencable
    5. Note 1: Many VCs, myself included, don't like market risk. The usual case for emerging markets is that the entrepreneur is correct in that the market will change, but almost always they are way off in terms of how long it will take to change. Usually its the case that they are 5-10 years too early. This makes it a non-starter for a VC investment where the life of the fund might only have 5-6 years remaining.

      Note 2: Most VCs don't want to bother with small markets, so they set a minimum size and growth rate combination. Typical numbers might be a $1B market size currently with a 2x industry average growth.

  5. Technology
    1. Description
    2. Uniqueness
    3. Risk
    4. Critical suppliers & Partners
    5. Patents
    6. Technology experts that are referencable

  6. Customers
    1. Who they are and how many (watch our for concentrated buying power)
    2. Industry Food-chain
    3. How profitable are they (watch out for price pressure)
    4. Observation: Some businesses enjoy high margins - not just because they have unique products with lots of Intellectual Property value. The other factor that is often under appreciated is how concentrated the customer base is. Take the case of analog RFICs for the cell phone industry. Normal intuition would say that with such a large market (1 billion units per year and continuing to grow) along with the "black-art" of RF chip design would make this market very profitable for start-ups. The missing factor is that there are only about 5 or 6 big customers and they have further constrained the market by requiring radio chip vendors to work with only two or three different baseband chip providers. The result has been 10's of venture backed companies that have never made any money. Contrast this with the low-end of the mixed signal market, dominated by companies such as Linear Technology or Maxim. Their products are not nearly as complex as a cellular radio chip, but they have much higher margins - mainly because they have 1000's of customers instead of just a few. This is an important lesson in buying-power.

  7. Competitors - this is commonly the most neglected portion of any plan
    1. Who they are and how many (competitive pressure)
    2. Industry Food-chain (threat from upward or downward integration)
    3. How profitable are they (price pressure)
    4. Note: This section is critical, as if you don't do a good job here, you can really lose credibility. If the VC knows more about the competitive landscape than you do - prepared to be roasted, or at least plan on finding funding from someone else. The last thing a VC wants to do is to invest in someone who doesn't know what they are up against.

  8. Milestones
    1. Technology risk reduction steps
    2. Market risk reduction
    3. CFBE
    4. Table of Measurables vs. time (progress, revenue, heads, burn rate)

  9. Risks
    1. Technology
    2. Operational
    3. Marketing
    4. Team
    5. Competitive
    6. Geographic (multiple sites, needing to relocate, ...)
    7. Financial

  10. Finances
    1. Funding required (current & future)
    2. Operations
    3. Revenue Model with GPM%s
    4. Cap Table with option pool
    5. Comparable companies and liquidity events
    6. Exit strategy

  11. Investment Thesis
    1. One paragraph summary of why this investment is going to be a home run

Conclusion: Hopefully this will help out in raising your next round of funding. Try to keep the presentation to about 25 charts with real content (title pages and back-up materials don't count). Make sure it is complete and good luck hunting!

Category: Management Submitted by: John
January 2, 2010 Format for Print
7. 2010 Predictions
  My multi-faceted forecast for 2010

Predictions for 2010:Now that we are off and running in the new year, and since it has been quite a while since I've updated this blog - that I'd start with my predictions for major things this year.  I usually limit these to technology and devices, but this year I decided to go all out - and include Politics, Social and Financial trends.  Have a look - I'd be interersted in your views on these items.

Hot technologies:

  • LEDs everywhere - finally they get low enough in cost to make sense in high-end apps
  • SSDs - next design iteration finally gets it right. OS support for TRIM increases perf.
  • Android-based handhelds - generic OS finally gets good enough
  • Apple Tablet - Industrial Design sells; Apple is the 'Ultimate Marketing Machine'
  • 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
  • Windows 7 - performance pays; get rid of sluggish software; takes advantage of SSDs
  • AJAX applications continue to impress - creates alternative UI for applications

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


  • 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
    • Wireless connectivity for E-Books makes them very successful
  • 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 election season - the only time the stock market won't count
  • VC Industry stays in 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 stores - symbiotic existence continues


  • 3D displays - first generation won't go anywhere but will get a LOT of attention
  • 3D sensors - impressive technology, all depends on a hit game or two to drive it
  • Android wall-powered devices - new software platform becomes default embedded OS
  • Electronic noise continues - like Twitter, not real useful
  • Facebook continues to be the alternative web-mail interface for the teenage generation


  • Diet-awareness in general - if you measure it, people will (finally) pay attention (good news)
  • Continued ethnic shift in the south-western states - Mexico continues to come to the US
  • The US continues to have slow economic growth due to de-leveraging of credit


  • Centering of Obama administration, hopefully no knee-jerk corrections
  • Search for leadership in the GOP; The party of 'No' needs some answers.

Category: Trends Submitted by: John
March 1, 2010 Format for Print
8. Update on Semiconductor Company Valuations
  Good times and Bad times

Summary - The semiconductor industry, like many others, goes through good times and bad times (although it seems like it has had a bias recently for more bad than good). This cyclicality makes it difficult to get a company funded during bad times, and it can lead to false hopes during good times. This blog entry shows the range of valuations between the good and bad times and demonstrates that GPM is probably the second most important metric for growing a business (behind growth rate).

Data - The plot that follows looks at a variety of semiconductor companies, including mixed-signal companies (LTC, MXIM, SLAB), big semiconductor companies (TI, NXP), and a few power chip companies (IXYS).

Plot - The relationship between Price to Sales ratio versus GPM% is shown on the figure below. The significant point is that the slope of the line is almost 10x GPM% during bad times, and 20x GPM% during good times.

Conclusion - The bottom line is that anything a company can do to offer higher GPM products is really worth it. When we get back to good times, for each 10% increase in GPM, the value of the company goes up by about 2x!

Category: Trends Submitted by: John
Feb 9, 2011 Format for Print
9. 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 1, 2011 Format for Print
10. 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
February 13, 2011 Format for Print
11. 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
January 13, 2007 Format for Print
12. 2007 Consumer Electronics Show
  My take aways from a brief visit to Las Vegas

Displays: The race between LCD and Plasma continues at the high-end of the display market. 1080p (actually 1080 horizontal lines per vertical scan) displays were everywhere. TI finally has a version of their DMD, aka DLP, that supports 1080p through a technique they call wobulation : where they physically move the reflective die by a few microns to create the illusion of a second pixel for each mirror (actual array is 960x1080 to get to a 1920x1080 display). These units were everywhere and price points getting down to $599 retail for a full 1080p rear projection unit.

Big flat-panel displays : there were monster displays everywhere with some of the remarkable ones being 102 to 108 inches diagonal (Plasma and LCD). The image quality of these displays has reached a point where the source material is now the limiting factor, not the display.

3D Display: LG had a demonstrator 3D display that provided very good depth viewing without any glasses. I talked to their engineer and he said they did it by taking 25 versions of 2D images and sequentially replaying them through the display with special filters that allowed the image to be demultiplexed. It uses only proprietary content, but it looked great. I'm sure it will be marketed to digital signage applications for the next several years.

Micro-projectors: there were lots of pocket sized LED projectors that could display very small images (like 1 foot square) with low brightness (100 lumens). These looked OK in a dark room, but are not ready for primetime anytime soon. They were driven with LEDs and therefore the technology curve alone will make them viable in 3 to 4 years (~1000 lumens gets them into the game).

LEDs: Both pocket projectors and rear-projection displays are now starting to use LEDs as light sources. These displays have better color range (gamut) than arc lamp based displays and never wear out. In addition to the display applications, there were decorative LED apps such as desk lights, strip lighting and incandescent light replacements everywhere. One company was offering designer desk lamps that used 60 3 candela LEDs in a strip as a desk light replacement. It looked great and used only 8W of power. Unfortunately they are going after premium pricing initially - $95 each!

GPS: There GPS units everywhere : small handheld devices and larger form factor units. The interesting thing I saw was multiple vendors shipping silicon for indoor GPS (-160 dBm sensitivity). In addition to eRide and Global Locate, u-blox and SiRF have shipped silicon.

UWB: There were multiple companies displaying UWB devices of all flavors (proprietary, ISM-band compliant and MBOA). None of the displays that I saw went more than about 2 feet. I asked vendors what kind of range they were able to get and most of them said there was so much RF noise in the convention center that they were lucky to have it work at all.

Software and Content: Microsoft had their usual HUGE booth with several hundred visitors at any one time. The Windows Vista demo was compelling, but they had the usual demo glitches when they guy presenting different features found that some of them didn't work during the demonstration. He found a way to quickly switch to the next topic.

MSDN-Live: It was interesting to see the MSDN-Live products which finally started to look pretty interesting. MSDN-Live is the datacasting service that was started to feed the Spot watches. That never went anywhere, but the killer application for this seems to be integration of real time traffic information into GPS receivers. This allows roads to be color coded according to the average traffic speed and icons added to maps where there are accidents or disruptions. Microsoft charges both an up-front fee and yearly service fees for the data streams.

Sony: they did their usual focus on consumer electronics for about 3/4 of their display, but the other 1/4 was a theater showing previews of Spider Man 3. They made each viewer check their phone and cameras at the door, so there were huge lines to get in and out of the theater. It shows their emphasis on content.

Automotive Electronics: It was amazing to see a whole convention hall devoted to aftermarket automotive accessories. This hall had the best demonstrations with all sorts of custom cars (ranging from a small Lotus Elise all the way to a HUGE jacked up GMC truck). Cars with 24 low profile tires were common. Amplifiers (multiple KW in a car) were everywhere. LCDs were also everywhere.

Media Players: Streaming video and IPTV players were very common also. This technology has been around for a few years with very mixed results, but Sigma Designs has a new chip set out that really supports very high performance streaming of 1080p content directly to HDMI outputs. Netgear, Linksys and lots of no name companies demonstrated boxes that looked great.

Category: Trends Submitted by: John
January 12, 2007 Format for Print
13. Annual Operating Plans
  An important chore at the beginning of each year

During the past week I've reviewed Annual Operating Plans from a number of my companies, some were better than others. One of them was so good, that I thought I'd create an outline of it and post it here so others might have the benefit of the wisdom of the entrepreneurs that came up with it (LV Sensors, Inc.). The other CEOs that I work with had their own versions of the same document, but not quite as succinct or as well organized as this one. Below is a link to the Rich Text Format (RTF) version of the document, save-as to download to your machine. At some point in the future, I'll try to make Excel versions of the financial charts, but for now, the indent-organized text versions should be enough to get going with.

I also recommend that VC Firms adopt a common AOP format, which they should push down to their investments. This would make life so much easier when managing a portfolio of investments, since there would be a common format for where to find things. Until that Utopian world exists, try doing this on a company-by-company basis.

AOP Outline: Link
Category: Governance Submitted by: John
October 25, 2010 Format for Print
14. VC Due Diligence Template
  Checklist of things to include in your pitch

During the past week I've had two instances where I've had to dig up my standard Due Diligence template to email it to someone who was just starting the process of raising money for a new business. Since this seems to come up fairly often, I thought that I would just post the template here on my blog, and then refer people to it online and save the effort on my part. To get to the template, just follow this (link). This template isn't necessarily the most sophisticated or best in the world, but it is what I use routinely when evaluating a new investment opportunity. The idea is to summarize in a relatively standard (and short) form all of the critical aspects of a new business. Before a deal gets funded, there is typically a four to six page document created that contains all of this information and a 10-20 minute summary presentation made to a VC partnership where tons of questions are asked, assumptions challenged and general knowledge about the business environment are tested. Assuming all of this passes muster, the deal funding process moves onto the next step of negotiating terms of investment (Term Sheet).

After the investment is made, this document is still useful because there are times that as an investor, you will wonder why you did this investment (usually when things are going wrong), and what they originally forecasted they would have done by a certain point in time. It is useful to have a short, but detailed, summary of all of the critical aspects of a deal handy to review periodically.

For those that are new to this process, I hope this helps. For those that know more about it than I do - please feel free to pass on your wisdom!

Due Diligence Template: Link

Category: Management Submitted by: John
January 13, 2007 Format for Print
15. John Stockton's Biography
  A quick summary

I am a Semiconductor Industry veteran currently focusing on development-stage companies in the fields of semiconductors, MEMS, Intellectual Property and EDA. I spend the vast majority of my time as a Venture Partner with Mayfield (US and Mayfield/China), a top-ranked venture capital firm based in Menlo Park, California. When I'm not in California working with Mayfield, I work in Austin, Texas. I help with the BOD of LV Sensors in Emeryville, CA. and am on the boards of Mobert Semiconductor (Shanghai, China) and LatticePower Semiconductor (Nanchang, China). I also have some independent board roles with a number of companies including Camgian Networks, Sirific Wireless and Silicon Hive.

Prior to working with Mayfield, I was Chairman and Interim-CEO of ARC International plc (London, UK) a Semiconductor Intellectual Property Company. I have also previously been CEO of Synergy Semiconductor (high speed bipolar ICs), CEO of Stream Machine (MPEG-2 CODEC company), and have served as a senior executive of several high technology companies.

Prior to being a small-company entrepreneur, I was a VLSI-Fellow at VLSI Technology, Inc., where I co-created the PC Chip-Set Division of VLSI and organized ARM Ltd., a UK-based processor design and intellectual property licensing company.

In my spare time I read about business, emerging technolgies and I try to get a run in every now and then. During the past 8 years, I've managed to complete 7 marathons. Mostly at a slow pace (PBT=3:45), but none the less, I finished them!

I have a BS Degree in Nuclear and Electrical Engineering with honors, from the University of Texas at Austin which I earned a long-long time ago.

Download PDF of Long Form Version: Link
Category: Biography Submitted by: John
January 1, 2007 Format for Print
16. What's Hot and What's Not - 2007
  Annual update of industry trends

Recently I had a chance to make a presentation at the fourth annual Semiconductor Venture Fair in Redwood City, California. I've done this for two years in a row, and it is interesting to revisit a forecast annually to see how things have changed. In this presentation, I went over my views of what is hot in the industry right now, and what is cooling off. Here is an abbreviated version of the key points:

What's Hot:

  • Cell Phone as a platform
  • Cameras everywhere
  • Wireless (anything)
  • MEMS
  • Flash Memory & alternatives
  • Security (many forms)
  • Nano [mostly anything]
  • Virtualization
  • China & India
  • M&A Exits (where are the good old days of IPOs?)
What's Warm:
  • Optical Infrastructure components (making its way back)

What's Not:

  • MHz alone as a performance benchmark
  • Stand-alone PDAs
  • Optical Infrastructure components
  • ASICs and Custom Silicon
  • Digital-only SOCs
  • CCD Imager Chips
  • Network Processors
  • Infiniband
  • IPO Exits

Some Specific Examples

  • Cell Phone as a platform: As the mobile infrastructure offers faster data rates, the cell phone will emerge as the primary way that people will get to the internet. From discussions with coworkers about the way people use phones in China, this is already the primary way people think of for getting to the internet (instead of using a PC). More and more, the phone platform will offer integrated tunes, video capture, television playback and even financial services. It is truly the most personal of computer and communications devices
  • Cameras everywhere: Post 9/11, everyone is worried about security. Maybe they can't monitor everything in real time, but they can record videos and look for clues to what happened after the fact. If you look around and take notice of the number of cameras that have popped up, you will be surprised. They are everywhere you go. Not only for security monitoring, but also in places that are useful - like in your car for backing up and blind-spot elimination. I think we've only seen the tip of the iceberg in the camera market.
  • FPGAs & MEMS: This is a collection of technologies that don't necessarily go together, but they are both ones that are going to be getting a lot more attention in the near future. First, the FPGA as we know it will continue to take business away from the bottom end of the ASIC market. The next thing I'm expecting is for a class of more coarse-grained FPGAs to be created that have less flexibility to fit any application, but are more efficient than the current 5% (transistors actually used for logic computation vs. overhead).
  • Wireless (anything): This seems to be the year embedded wireless devices. Stand-alone PDAs are pretty much a thing of the past - the only issue now is how many bands do they support (Bluetooth 802.11 or 802.11 and GSM/GPRS). Also in the low-end of devices, smart sensors are starting to be wirelessly connected. The ratification of the IEEE 802.15.4 standard and the higher layer networking standard called Zigbee (tm) has created a number of suppliers that are all offering low cost medium performance embedded wireless devices.

  • Flash Memory & alternatives: The flash memory market is almost as big as the DRAM market, not by units, but by revenue. It is a pretty exciting time with all sorts of new applications for embedded storage. A new class of video cameras is showing up that does away with the tape mechanism and simply records to a flash card (or in some cases, a CF-format HDD). Unfortunately, as technology scales to smaller geometries, it gets harder to make flash memory cells. This will ultimately create an opportunity for new non-volatile storage technologies. There are lots of efforts going on, everything from FERAMs to Carbon NanoTubes. This field is due for a major technology shift in the next couple of years.

  • Security (many forms): Suddenly the unfiltered internet has become unusable. From spam, viruses to spyware and pfishing scams there has never been more of an assault on the small business and home users of computers (larger organizations at least have IT departments to deal with all of this nonsense). Look for biometrics to become a big thing in the near future. The finger-print imaging companies suddenly look like they are doing very well. The software layers above that will be the next great opportunity.

  • Nano [anything]: Maybe it's just a naming convention, but suddenly everything has a nano label put on it. Maybe because some of the US Government types said that anything measured in nano-meters should qualify (like the entire semiconductor industry). With that said, there are some truly interesting things going on in that space. Sorting the commercial opportunities from the science-fair projects is going to be a chore.

  • RFID Wireless Sensors: The big buzz around at the moment is RFID and the more general category of active sensors. The RFID experiments have been driven by a couple of high profile users - Wal-Mart and the Department of Defense. It will take a couple of years for them to work out the bugs, but ultimately it will become an interesting opportunity. It's a shame that a number of start-up companies are all working hard on something that will ultimately sell for $0.05 each. The wireless (anything) comments above cover the wireless sensor space.

  • China & India: Outsourcing has finally moved to beyond just menial tasks and now is clearly on the path to taking a bite out of the US brain-trust. Many smart and motivated ex-patriots are moving back to their home countries. This is going to ultimately catch up with us. Hopefully the US will be able to avoid what happened to England in the early 1900's.

  • M&A Exits: IPO's just aren't what they used to be, not that they are bad, there just aren't enough opportunities for them right now. As a result, start-up companies need to be thinking the most likely way to liquidity is a Merger or an Acquisition, rather than a great IPO. The financial returns traditionally are about 3x less for a M&A rather than an IPO, but that's not always bad.
  • MHz: Processor speed alone is no longer the figure of merit fo
    Category: Trends Submitted by: John
    October 27, 2006 Format for Print
    17. Officer Titles at Start-Ups
      Make tough choices up front

    Too often I meet with an early stage start-up company and get four or five business cards from the executives which include titles like Chairman/CTO, President, CEO, COO and so on. While these are standard titles, the odd thing is how they get combined. This blog entry gives some very simple advice on titles - which is to make some tough choices up front and figure out who is really in charge.

    The first card I usually look at is the President/CEO's card. Often a red flag immediately jumps out at me when the President and CEO title are split among two different people - meaning the people in the company really don't know who is in charge. A slight variation on this theme is when there is a COO as well as a President/CEO, which leads to the same conclusion. All of these combinations basically mean that the management team hasn't come to grips with who does what yet.

    From a venture capitalist point of view, there needs to be one person in charge that will take responsibility for getting things done. This splitting of titles can be avoided if the management team spends a little time up-front making some tough choices and answering questions like:

    1. Who is going to be in charge and why?
    2. Do you really expect to have more than one person on the BOD?
    3. If so, how long do you expect them to stay on the Board?

    My advice to start-up company executives is to make the choices up front - get rid of any ideas of having someone with a COO title and get on with running the company.

    Category: Management Submitted by: John
    January 24, 2011 Format for Print
    18. 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
    June 9, 2006 Format for Print
    19. Silly Things to Avoid
      Serialized Business Plans
    As attractive as it might seem for the entrepreneur to send out Serialized Business Plans to VCs, this will almost always back-fire on the entrepreneur. Many VCs pride themselves (and justify their existence to LPs) on their Proprietary Deal Flow which infers that they get to see a deal even before industry leading VC firms might see it. One way for an entrepreneur to disabuse a VC of that notion is to send them a hard copy of a business plan (or Power Point presentation) with a number on it such as Serial Number 30. Instantly the VC knows that they are at the back of the bus, and even if they like the deal, it is likely to have something wrong with it that has slipped by them since so many others have already looked at it. The simple advice here is: Don't do it! With email and PPT slide presentations these days, it is much less of an issue than previously, but surprisingly it still comes up (it was mentioned to me last night at a dinner with some of my German VC friends).
    Category: Management Submitted by: John
    August 18, 2005 Format for Print
    20. The good news is we're ahead on the budget
      The bad news is that we are behind schedule

    I recently sat through a Board Meeting with an excellent group of entrepreneurs who have not quite come together as a functioning team yet. The reason I say this is that they put together a very professional Board Package with all of the usual financial, marketing and engineering charts that you would expect, but after looking over the financial and marketing charts, you would have little hint of the seriousness of the problems in the engineering group and their development schedule. The one person who owns the total picture and sets relative priorities in a company is the CEO. In this case, maybe the CEO was trying to not dominate the meeting, or maybe to get the team used to pitching to the BOD, or maybe it's just the CEO's personal style, but the CEO rather than the VPs needs to drive the organization and content of the meeting.

    Maybe it's a personal style issue on my part, or one of management focus, but I'm personally a

    Category: Management Submitted by: John
    August 13, 2005 Format for Print
    21. Cash bonuses in Start-Up Companies
      They are the Work of the Devil

    It hasn't come up many times recently, since we haven't yet forgotten the lessons of the last crash, but every now and then the issue of cash bonuses in start-up companies comes up. My sentiment about these is that they clearly are

    Category: Management Submitted by: John
    June 1, 2006 Format for Print
    22. Gross Profit Margin and Market Cap
      It's worth more than you think

    Venture Capital common knowledge is that companies with higher Gross Profit Margins are worth more than their relatively poorer performing counterparts. While this is intuitive, the reasonable question is: How much more? This blog entry documents a very simplistic analysis where high GPM% Analog-Mixed Signal (AMS) companies are compared with their more broadly defined Integrated Device Manufacturer (IDM) counterparts. The conclusion is that simply that for each 10% of extra Gross Profit Margin, the company's market cap approximately doubles.

    This analysis involves taking a small set of about 20 publicly traded semiconductor companies, breaking them into two groups, one representing the relatively small-cap Analog/Mixed Signal (AMS) companies and the other that represents a more broadly defined set of larger market cap companies. These groups are compared for Price (Market Cap) to Sales ratio (P/S) versus Gross Profit Margin percentage.

    These companies were then subdivided into two groups, the first being the smaller AMS companies that are representative of the types of companies that are interesting for venture investing (yellow symbols) and the second representing a very broad view of the semiconductor industry (blue symbols).

    From the scatter plot shown below, the companies that occupy the upper right hand quadrant of the chart are mostly small-cap AMS companies. The companies that dominate the lower left hand quadrant are large-cap Integrated Device Manufacturers. There are a few poor-performing AMS companies below the line which are PowerDSine and Sigmatel and Silicon Labs.

    One thing to note is that the R-Squared value (correlation coefficient) of these data for large cap AMS companies was much higher (~0.9) than the value for the total population of companies (~0.7). This correlation makes you think that the analysts simply look at GPM% and growth to forecast their valuation of AMS companies.

    This work supports the idea that differentiated, high gross margin products are worth a lot more than commodities. The value of a company roughly doubles (1.9x) with each 10% increase in GPM%. A pre-IPO start-up company with 70% GPM could have a P/S ratio of 8x (assuming CFBE and reasonable revenue growth). While the small-cap AMS of companies have better statistics, they also are more difficult to predict. With all that said, small-cap AMS companies are better investments than their large-cap counterparts.

    Category: Management Submitted by: John
    May 12, 2005 Format for Print
    23. Multiple geographic sites
      Why make things more difficult than they have to be?

    Even being in this age of great electronic connectivity, the idea of having an early stage (Seed or Series-A) company with multiple sites just sits wrong with me. There is a lot to say for having all key staff members able to see each other, drop-in, have ad-hoc meetings and generally be around for each other. There is another factor beyond the obvious that is often not discussed, which is the self policing that occurs in an organization. I've worked with people in start-ups that were very quick to identify slackers and people that didn't pull their weight. The peer pressure on the under-performers was intense. They rarely lasted more than a few months. When there are multiple sites, all of these aspects are hidden from the other team members. There often emerges an us vs. them mentality due to the fact that people who don't see each other every day often don't give each other the benefit of the doubt. Particularly people that don't already have established strong relationships. My bias as an investor is to discourage companies that are thinking of it from doing so, and to not seriously consider companies that are already there.

    Even if you feel like you have the most dedicated team in the world that happens to be located at a remote site, don't fool yourself into believing that every additional person that is hired into the team will be as committed to the vision. This matter of scale simply doesn't work out.

    There is, however, a way to make multiple-sites work, but the scheme doesn't fit early stage venture investments. It really works the best for Series-C and later stage-companies. I worked with a company a very long time ago (VLSI Technology) that wanted to start a remote site, but (wisely) did it by having the early founding team move into the same facility as the existing company. This was a long-term assignment, with the overlap lasting 6-12 months (depending on when people were hired) instead of the 2-3 months that you might have thought. Only after the core team was in place and integrated with the existing site was the move scheduled. This also gave the new team a chance to plan their business and prove that they could actually deliver something. The long-term effects were that relationships had been established between people at the old and new site, and a company culture was learned by the newcomers which was carried to the new site. At least for the first generation of employees at the new site, there was a very strong bond and understanding between them and the headquarters site. This, along with a lot of back-and-forth travel between sites kept everything working smoothly. Relatively short, non-stop flights also helped make this a manageable solution.

    What does all of this mean to an early-stage entrepreneural team? The short answer is to bite the bullet early and get the team all in one place. Forget the idea of splitting development between sites. Pick a location that is good enough for everyone and get them there. Save the idea of multiple sites for after there is customer revenue and the company has a view to cash flow break-even. Only then can the team afford the overhead and inefficiency caused from having multiple geographic sites.

    Category: Management Submitted by: John
    November 1, 2010 Format for Print
    24. 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