Congratulations to the Stanford BASES Final Winners May 23, 2012Posted by Barry Eggers in Entrepreneur, startups.
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Yesterday afternoon, I had the opportunity to join the Business Association of Stanford Entrepreneurial Students, known as BASES, as a judge for its end of the year finale in which student-run start-ups compete for $150K in prizes. This was my third year as a judge. As with prior years, I was impressed by the quality of the presentations and teams this year.
Congratulations to all of the finalists and this year’s winners:
- Calcula Technologies – an innovative treatment of kidney stones that are traditionally determined to be too small to be operable, but that are very painful for patients.
- RAVEL – a legal search platform for lawyers and law students that helps reveal the most important cases, the connections between cases, and the evolution of legal principles over time.
- Wello – an online marketplace that connects consumers with fitness professionals over live, interactive video for group and individual workout sessions.
Lightspeed has been a proud sponsor of BASES for the last few years and continues to be impressed with their impact on the start-up community at Stanford and beyond.
Two is a good number of founders May 14, 2012Posted by jeremyliew in Entrepreneur, founders, start-up, startup.
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I’ve long held that two is a good number of (co)founders. One is difficult because you don’t have a true thought partner to talk to, or to tell you when you might be being crazy. To everyone else, you’re the CEO and the boss, and that power dynamic mitigates what they are willing to tell you.
Three can lead to a “two on one” situation, which can be destabilizing. It doesn’t always have to be unstable, but it is a risk.
Four or more and the equity cuts start getting pretty small for cofounders.
Douglas Merrill (CEO of Zestcash, one of our portfolio companies) has a nice post in HuffPo about how to work best with a cofounder that is well worth reading in its entirety. I paraphrase his five rules as follows:
- Be different, but not too different
- Share core values
- Compromise on work styles
- Overcommunicate to the team about your relationship, agreements and disagreements
- Find a trusted tie breaker
Launching new businesses from the ashes of failure August 31, 2009Posted by jeremyliew in bankrucpcy, Ecommerce, Entrepreneur, turnaround.
One of the great stories of Silicon Valley is how Josh Hannah and Jack Herrick bought eHow’s assets at a distressed price after the company went out of business, turned it around with a very low cost model and sold it to Demand Media two years later for a big profit. As Wikipedia notes:
eHow.com was founded in March 1999. The company raised close to $30 million... , hired 200 professional writers, and … employed a 25-person engineering team. By 2001, eHow had created thousands of articles. The professional writing, combined with a TV and radio advertising campaign, briefly made eHow one of the Internet’s top 10 news and information sites. Despite the popularity, eHow was not profitable and was forced to declare bankrupcy when funding ran out.
In 2001, IdeaExchange.com bought eHow out of bankruptcy with the hope of charging eHow’s readers to access how-to instructions. eHow remained unprofitable and in early 2004, IdeaExchange sold eHow to Jack Herrick and Josh Hannah.
“When I told people what I was doing, they thought I was crazy. Conventional wisdom said content was dead, and there was no way to make money on it. We had a different view. In my experience, the foundation of a great business depends on having a different idea from conventional wisdom and pursuing it in spite of a skeptical market.” says Josh.
Josh and his partner restructured eHow by outsourcing content creation to the community and employing then-new advertising and search engine optimization techniques. In six weeks, they had earned enough from advertising to pay off the cost of the purchase. They increased revenue and traffic 30-fold before selling the company to Demand Media in 2006 for a 400X return.
The NY Times has an interesting article in this Sunday’s magazine which notes that much the same may be happening with Linen’s and Things:
In this instance, control of the Linens ’n Things brand, meaning its trademarks and the like, and its Web site, were acquired for a reported $1 million by a joint venture between Gordon Brothers Brands and Hilco Consumer Capital, divisions of firms with long histories in the bankruptcy business. This entity helped run the Linens ’n Things liquidation, spending four or five months immersed in its unwinding operations in the process. “We learned a lot about the brand and the consumer,” Carlyle Coutinho, vice president of Hilco Consumer Capital, says. “We knew we’d have a very strong e-mail list and a very strong customer base that was very loyal.”Time will tell how loyal shoppers turn out to be to what the Gordon Brothers-Hilco crew concocted: a Web-only version of Linens ’n Things. But a database of five million e-mail addresses isn’t a bad thing for a “new” business to have at its disposal, and certainly not something an online retailer starting from scratch would be likely to have. Nor would a start-up have a nationally recognized name the day it opened…
The proposition of this distinctly Great Recession model is snapping up a valuable asset on the cheap and using the low-labor tools of Web commerce — outsourcing, electronic ordering, etc. — to simulate a version of the original business.The new version of lnt.com that celebrated its “grand reopening” a few months ago may not strike the typical shopper as anything radical. The interesting stuff is in what’s behind the site, or maybe even what isn’t. For instance, the actual operation of lnt.com has been jobbed out to a third party: a San Diego firm called TorreyCommerce that bills itself as “a leading provider of outsourced e-commerce to the home-furnishings industry.”…
Linens ’n Things itself now has few direct employees, or even a full-time chief executive. And while the comeback announcement included a mention of plans to “reinvigorate” the brand, the marketing efforts so far revolve around Internet search ads and promotions sent to the e-mail list.
As companies both big and small go out of business during this great recession, I wonder which of them may yet be reborn by smart, thrifty, scrappy entrepreneurs who know how to keep costs low and, more importantly, variable. Anyone leveraging someone else’s invested capital out of a bankruptcy like this – please email me!
One difference between VCs and Entrepreneurs April 20, 2009Posted by jeremyliew in decision making, Entrepreneur, VC.
Steve Blank had a great post last week about speed and tempo in startup decision making recently where he says:
… think of decisions of having two states: those that are reversible and those that are irreversible. An example of a reversible decision could be adding a product feature, a new algorithm in the code, targeting a specific set of customers, etc. If the decision was a bad call you can unwind it in a reasonable period of time. An irreversible decision is firing an employee, launching your product, a five-year lease for an expensive new building, etc. These are usually difficult or impossible to reverse.
My advice was to start a policy of making reversible decisions before anyone left his office or before a meeting ended. In a startup it doesn’t matter if you’re 100% right 100% of the time. What matters is having forward momentum and a tight fact-based feedback loop (i.e. Customer Development) to help you quickly recognize and reverse any incorrect decisions. That’s why startups are agile. By the time a big company gets the committee to organize the subcommittee to pick a meeting date, your startup could have made 20 decisions, reversed five of them and implemented the fifteen that worked.
I think this is great advice.
Entrepreneurs will find that almost all of their decisions are reversible. As a result, good operators get into the habit of making decisions quickly even with incomplete information. Entrepreneurs make 1000s of reversible decisions per year.
On the other hand, VCs will find that almost all of their decisions are irreversible. You can’t really “ask for your money back” once you’ve made an investment. This is one reason that fundraising can take so much time and effort for entrepreneurs. VCs want to know as much as they can before making a decision. VCs make one or two irreversible decisions per year.
That’s a big difference in decision making style
What entrepreneurs need to know about Founders’ Stock September 15, 2008Posted by jeremyliew in Entrepreneur, financing, founders, start-up, startup, startups, VC, Venture Capital.
When entrepreneurs start a company, there are four things they need to know about their stock in the company:
• Vesting schedule
• Acceleration of Vesting
• Tax traps
• Potential for future liquidity
The typical vesting schedule for startup employees occurs monthly over 4 years, with the first 25% of such shares not vesting until the employee has remained with the company for at least 12 months (i.e. a one year “cliff”). Vesting stops when an employee leaves the company.
Even Founders’ stock vests. This is to overcome the “free rider” problem. Imagine if you start a company with a co-founder, but your co-founder leaves after six months, and you slog it out over the next four years before the company is sold. Most people would agree that your absentee co-founder should not be equally rewarded since he was not there for much of the hard work. Founder vesting takes care of this issue.
Even if you’re the sole founder, investors will want to see your founder’s stock vest. Your ability and experience is one of the key assets of the company. Therefore, venture capital firms, especially in the early stages of a company’s development and funding process, want to make sure that you are committed to the company long term. If you leave, the VCs also want to know that there is sufficient equity to hire the person or people who will assume your responsibilities.
However, many times vesting of founders’ shares will follow a different schedule to that of typical startup employees. First, most founder vesting is not subject to the one year cliff because founders usually have a history working with each other, and know and trust each other. In addition, most founders will start vesting of their shares from the date they actually started providing services to the company. This is possible even if you started working on the company prior to the issuance of founders’ stock or even prior to the date of incorporation of the company. As a result, at the time of company incorporation, a portion of the shares held by the founders will usually be fully vested.
This vesting is balanced by investors’ desire to keep the founders committed to the company over the long term. In Orrick’s experience, venture capitalists require that at least 75% of founders’ stock remain subject to vesting over the three or four years following the date of a Series A investment.
ACCELERATION OF VESTING
Founders often worry about what happens to the vesting of their stock in two key circumstances:
1. They are fired “without cause” (i.e. they didn’t do anything to deserve it)
2. The company gets bought.
There may be provisions for acceleration of vesting if either of these things occur (single trigger acceleration), or if they both occur (double trigger acceleration).
“Single Trigger” Acceleration is rare. VC’s do not like single trigger acceleration provisions in founders’ stock that are linked to termination of employment. They argue that equity in a startup should be earned, and if a founder’s services are terminated then the founders’ stock should not continue to vest. This is the “free rider” problem again.
In some cases founders can negotiate having a portion of their stock accelerate (usually 6-12 months of vesting) if the founder is involuntarily terminated, or leaves the company for good reason (i.e., the founder is demoted or the company’s headquarters are moved). However, under most agreements, there is no acceleration if the founder voluntarily quits or is terminated for “cause”. A 6-12 month acceleration is also usual in the event of the death or disability of a founder.
VC’s similarly do not like single trigger acceleration on company sale. They argue that it reduces the value of the company to a buyer. Acquirors typically want to retain the founders, and if the founders are already fully vested, it will be harder for them to do that. If founders and VC’s agree upon single trigger acceleration in these cases, it is usually 25-50% of the unvested shares.
“Double Trigger” Acceleration is more common. While single trigger acceleration is often contentious, most VC’s will accept some double trigger acceleration. The reason is that such acceleration does not diminish the value of the enterprise from the acquiring company’s perspective. It is arguably in the acquiring company’s control to retain the founders for a period of at least 12 months post acquisition. Therefore, it is only fair to protect the founders in the event of involuntary termination by the acquiring company. In Orrick’s experience, it is typical to see double trigger acceleration covering 50-100% of the unvested shares.
If things go well for your company, you’ll find that its value increases over time. This would ordinarily be good news. But if you are not careful you may find that you owe taxes on the increase in value as your Founder’s stock vests, and before you have the cash to pay those taxes.
There is a way to avoid this risk by filing an “83(b) election” with the IRS within 30 days of the purchase of your Founder’s shares and paying your tax early on those shares. One of the most common mistakes I’ve encountered with founders is their failure to properly file the 83(b) election. This can have very serious effects for you, including creating future tax obligations and/or delaying a venture financing of the company.
Fortunately, over the years, I’ve developed a number of work-arounds (depending on the circumstances) and we can many times find a solution that puts the founder back in the same position had the 83(b) election been properly filed. Nevertheless, this is one of the first things that your lawyer should check for you.
Of course, you’ll still owe tax at the time of sale of the shares if you make money on the sale. But by then, I’m sure you’ll be able and happy to pay!
POTENTIAL FOR FUTURE LIQUIDITY
Founders’ stock is almost always common stock because VC’s purchase preferred stock with rights and preferences superior to the common stock. However, recently my law firm (Orrick, Herrington & Sutcliffe LLP) has created a new security for founders which we call “Founders’ Preferred” which enables founders to hold some of their shares in the form of preferred stock. This allows them to sell some of their stock prior to an IPO or company sale.
The “Founders’ Preferred” is a special class of stock that founders can convert into any series of preferred stock sold by the company to VC’s in a future round of financing. The founders would only choose to convert these shares when they plan to sell those shares to VC’s or other investors in that round of financing. This special class of stock is convertible into the future series of preferred stock on a share for share basis. Except for this conversion feature, this class of stock is identical to common stock.
The benefit to you is that you are able to sell your shares at the price of the future preferred round. This avoids multiple problems associated with founders attempting to sell common stock to preferred investors at the preferred stock price.
Furthermore, the benefit to the preferred investors is that they can purchase preferred stock from the founder as opposed to common stock.
“Founders’ Preferred” can usually only be implemented at the time of the first issuance of shares to founders. Therefore, it is important to address the advantages and disadvantages of issuing “Founders’ Preferred” at the time of company formation. I normally recommend for founders who want to implement “Founders’ Preferred” that such shares cover between 10-25% of their total holdings, the remainder being in the form of common stock. The issuance of “Founders’ Preferred” remains a new development in company formation structures. Therefore, it’s important to consult legal counsel before putting this special class of stock into effect.
Many VCs do not like to see Founders’ Preferred in a capital structure.
As discussed above, there are a number of issues to address when issuing founders’ stock. In addition to business terms associated with the appropriate vesting schedule and acceleration of vesting provisions, founders need to be navigate important legal and tax considerations. My advice to founders is to make sure to “get it right” the first time. Although here are many companies on the web that specialize in helping founders by offering forms for setting up companies, it is important that founders get the right business and legal advice, and not just use pre-packaged forms.
This advice should begin at the time of company formation. A little bit of advice can go a long way!
Being wise versus being smart September 4, 2008Posted by jeremyliew in Entrepreneur, start-up, startup.
Great post today from Sim Simeonov about being wise vs being smart that I’ll quote in its entirety since it is so short:
There is a set of interrelated concepts I’m fond of reminding entrepreneurs about but I’ve never found a really good way to summarize them into a sentence that conveys the right meaning and tone. Here are various renditions:
* Be different, not best
* Do less, not more
* Go around a wall, not through it
* It is better to figure out how not to have to solve a problem as opposed to having to solve the problem.
A while back I was talking to my friends at Kaltura about this and CEO Ron Yekutiel told me about a saying he’d heard about the difference between smart and wise people.
The difference between a smart person and a wise person is that a wise person knows how not to get into situations that a smart person knows how to get out of.
Post mortems on two failed startups from their founders July 19, 2008Posted by jeremyliew in Entrepreneur, failure, management, start-up, startup, startups.
Monitor110 recently shut down after raising $20m over three rounds. One of the co-founders wrote a portmortem of Monitor110, highlighting 7 mistakes that the company made:
1. The lack of a single, “the buck stops here” leader until too late in the game
2. No separation between the technology organization and the product organization
3. Too much PR, too early
4. Too much money
5. Not close enough to the customer
6. Slow to adapt to market reality
7. Disagreement on strategy both within the Company and with the Board
(found via Brad Feld)
At the other end of the spectrum is a post mortem of a bootstrapped two person startup that shut down last month after building for 1.5 years but not raising any venture capital. This founder’s lessons learned are more tactical, but no less important:
1. If your idea starts with “We’re building a platform to…” and you don’t have a billion dollars in capital, find a new idea. Now.
2. It’s a marathon, but it’s a marathon made of sprints
3. Initial conditions matter. A lot.
4. Developing in a vacuum never works.
5. Beware the chicken and the egg.
6. Prototype any 3rd-party libraries that you’ll be depending upon, before you base your product on them.
7. If you’re doing anything other than building your project and getting users, it’s premature.
8. The product will take longer than you expect. Design for the long-term.
9. People have an incentive not to crush your dreams. Take everything they say with a grain of salt.
10. Know your limitations.
(found via Brian Green)
I would recommend entrepreneurs to read both posts.
“Those who cannot remember the past, are condemned to repeat it.” — George Santayana
Entrepreneurs who scale February 8, 2008Posted by jeremyliew in Entrepreneur, management.
…the traits that help an entrepreneur succeed in the early days actually work against them as the business grows. And worse yet, by the time the entrepreneur figures it out, they’ve either run their company into the ground or gotten themselves ejected by the board. The article gives some examples that will seem familiar to most of us.
The four traits are:
* Loyalty to team mates. A great trait while recruiting the early team, but as Hamm points out, “a potential liability when managing a large, complex organization.” Someone told me a few years ago that first time CEOs are quick to hire and slow to fire while seasoned CEOs are the opposite. There’s some truth to that.
* Task orientation. Getting things done is important in the early days, particularly when you are CEO and janitor at the same time. But as the company grows, it can lose its way without a focus on strategy and vision.
* Single mindedness. Think about how much stick-to-it-iveness is required in the early days but how that can turn into tunnel vision as the company grows.
* Working in isolation. Building a large organization is a team sport, however in the early days there may not be much of a team.
The article goes into much more detail about each trait. With respect to both John and Furqan, I deeply disagree with the premise that the successful traits in entrepreneurs turn into failure modes as their companies scale. Rather, I’d suggest that often good entrepreneurs turn into great CEOs as their companies grow. The traits listed above lead to failure modes at any stage of a company.
1. Founders need to be able to make hard decisions about when people are not working out. This is even more important in a small company than at a big company. There is no room for error in a small company. If someone isn’t pulling their weight, everyone knows about it. If poor performance is tolerated by the CEO and founders, it is demoralizing to the whole company. Founders need to be willing and able to let employees go when necessary.
2. Founders need to be able to focus. Sure, it is important that everyone rolls up their sleeves to get things done at a startup. But a startup is always resource constrained. A startup has to pick the small number of things that it can execute well on, and make sure that those are the things that move the needle for the company. Trying to do to much is a recipe for disaster at a startup, just as it is for a larger company.
3. Founders need to learn the whole business. Perhaps in a systems company or an infrastructure company where there is real and deep technology to be built, founders can focus on the technology for a couple of years before surfacing again. But in the internet industry, where the technology is just one driver of success, and product, distribution, sales and marketing are also critical, a founder can’t focus on one area and ignore the others. As companies scale up they can afford to bring in experts, but early on the founders need to be able to address all the success factors for the company as there is no one else to pick up the slack.
4. Founders need to build a team. This is perhaps the most obvious failure model of all at any stage of an organization. There is a limit to how much any one person can do.
Many of the most successful companies that the partners at Lightspeed have funded have had founders that went “all the way”, including Jerry Kennelly of Riverbed, Mark Vadon of Blue Nile, Alain Rossmann of Phone.com (now part of Openwave), Jasvir Gill of Virsa (now part of SAP), Tom Riordan of QED (now part of PMC Sierra), Mike Turner of Waveset (now part of Sun) and Zaki Rakib of Terayon (now part of Motorola) to name just a few. Lightspeed believes in finding and funding entrepreneurs like these who have the capability to scale with their companies.
Seven things entrepreneurs should know about PR October 15, 2007Posted by jeremyliew in Consumer internet, Entrepreneur, PR, start-up, startups.
The following is a guest blog posting by Laurie Thornton,the principal and co-founder of Radiate PR, a boutique public relations agency representing emerging growth companies in the Silicon Valley and beyond. Radiate is also Lightspeed Venture Partners‘ PR firm.
While attending the Lightspeed Internet User Acquisition Summit last month, three of Silicon Valley’s most respected journalists – Matt Marshall of VentureBeat, Rebecca Buckman of the Wall Street Journal and Erika Brown of Forbes — offered some insider tips on PR. Whether you’re familiar with the ins-and-outs of the process, most agree that public relations can deliver tangible results: drive significant Web traffic, fuel user acquisition and contribute directly to a company’s bottom-line. Here’s a snapshot of what was shared that afternoon, plus a few more thoughts on the ABCs of publicity, aimed at first-time, do-it-yourself entrepreneurs.
-Know Your Target – Take Careful Aim: Any practitioner will tell you that tailoring a story pitch is essential. It’s well worth the time to thoroughly research the target outlet, understand the readership and know what the specific journalist covers. Sought after reporters receive upwards of 200 pitches a day. You won’t even make the first cut if your story idea isn’t spot-on.
-Implement the 30-Second Rule: The editorial world is saturated, so engaging a journalist at the outset is the hardest part of the job. Make the pitches brief – no more than a few short paragraphs. Too much text is a turn off! Craft your story idea as a well devised teaser and the reporter will be more likely to respond. You’ve got very little time to get their attention, so make it count.
-It’s Not Just About You: The majority of journalists won’t write about Company X’s new product, but they might cover it within the context of a larger category article or trend story. Consider Jaxtr, a VoIP contender. Here’s an opportunity to tell a David vs. Goliath story about how their service stacks up against Skype, the reigning industry behemoth who is generating some negative headlines at the moment. Package a timely story idea about how your company is making its own notable impact, or uniquely competing in the broader market.
-Users Tell it Best: During my firm’s nearly four-year tenure representing LinkedIn, we frequently parlayed user success stories to demonstrate the tangible value of a social network for business – one that could help you land a job, get a trusted referral, etc. With these editorial placements, user sign-ups measurably increased. Then there’s PeerTrainer, a social network for diet and fitness, who utilized astonishing ‘before and after shots’ of a successful user. The compelling story of this woman’s personal journey landed her on the cover of People Magazine, where she directly credited PeerTrainer with her 100-pound weight loss. For both companies, the testimonials proved the most convincing and powerful way to attract and secure new users, and motivate existing ones.
-Patience, My Friends: The PR process can be likened to the sales cycle. Can you imagine your business development guy closing a major deal with a coveted strategic partner with one intro email and a single follow up call? Coverage doesn’t always happen overnight.
-Play Fair, or Don’t Play at All: We expect journalists to be fair, accurate and truthful in their reporting. Conversely, we need to play by the same rules. Always be straightforward and don’t cover up or candy coat the facts. Also, if you ever offer an exclusive – stick to your commitment. Forge reciprocal relationships with journalists. They pay off for both you and the reporters – everyone can win.
-Oh, Yeah — Please Don’t Forget About the Product: A solid product that tracks to its promised claims is a check-box requirement for any successful PR program. Expectations are extremely high, even in the early Beta phase. Budget and bandwidth constraints aside, don’t rush out before a product is adequately tested and refined. The press and other critics will take notice. Not even a really clever PR pro can compensate for an offering that doesn’t deliver. Resist the temptation to simply get your offering out there as quickly as possible before it’s really ready. If you can, take that extra time to make your product shine from day one. The great publicity will follow.
I recently met a company that I really liked; an innovative online financial services product. It hit a lot of my criteria for investment; it had a working product, it paralleled existing offline behavior, and it had achieved some early success in gaining distribution. And it had done all this on just $1.5m of angel money.
However, although I really liked the company, I didn’t seriously pursue an investment. The reason is that the $1.5m was raised at a $30m valuation. The company was still very early stage, with very limited usage and an unproven revenue model. Any sort of investment that we we would have made would have been at a much lower valuation than $30m.
The company is still pursuing financing, but it is currently focusing its efforts on raising more angel money.
This made me think about the asymmetric risk that an entrepreneur faces when pricing a round.
An example of asymmetric risk is catching a plane. If you arrive early, you waste some time sitting in the airport. This is unfortunate, but it’s tolerable. If you arrive late, you miss the plane altogether. This can be expensive and very inconvenient.
The same situation exists when an entrepreneur determines at what valuation she can raise money. So if she raises at a valuation that is too low, she suffers more dilution than she needed to. This is not desirable, but the negative consequences are linear in that they are roughly in proportion to the degree that the valuation was cheap. [Disclaimer: As a venture capitalist, I benefit from investing at lower valuations.]
On the other hand, if she raises at a valuation that is too high, she runs the risk of a future “down round“, or even worse, being unable to raise more money at all. Valuation is always based on some combination of past performance and future potential. When valuations creep up and are based more on future potential than past performance, more pressure is put on the company to hit its potential and justify its valuation. If things don’t go to plan, when the company next needs to raise money it may not be able to justify its past valuation at all.
The American Bar association has a good article describing some of the likely consequences of a down round. In this case, the negative consequences are not linear, but look more like a cliff. A downround can be highly disruptive and cause significant damage not just to ownership stakes, but to overall company morale and the relationship between investors and founders
Marc Andreessen recently posted about fundraising for a startup and answered the question “So how much money should I raise?” as follows:
In general, as much as you can.
Without giving away control of your company, and without being insane.
Entrepreneurs who try to play it too aggressive and hold back on raising money when they can because they think they can raise it later occasionally do very well, but are gambling their whole company on that strategy in addition to all the normal startup risks.
Suppose you raise a lot of money and you do really well. You’ll be really happy and make a lot of money, even if you don’t make quite as much money as if you had rolled the dice and raised less money up front.
Suppose you don’t raise a lot of money when you can and it backfires. You lose your company, and you’ll be really, really sad.
His rationale is the same as the one for thinking about valuation – asymmetric risk.
Today’s startup funding environment is buoyant, much like it was in the late ’90s. It’s a good time to be an entrepreneur. However, entrepreneurs should also be careful not to repeat some of the mistakes of the ’90s. Inc magazine has a case study of one company that raised money at too high a valuation that is worth reading as a lesson in the dangers of asymmetric risk.