FCC Should Lease - Not "Sell" - New Spectrum

The FCC (Federal Communications Commission in the United States) has been done well to project the demand for wireless data, understand the importance for our economy, and aggressively free up more spectrum for carriers.  A recent report said the FCC will release $120 billion of spectrum value through 2014, when wireless data traffic will be 35 times the level in 2009.

My wish is for the FCC to auction this spectrum for annual lease payments rather than one-time payments.  I have wanted to see this for the past 20 years, applying the practice of some other major nations around the world.  The advantages are clear:

• Make the spectrum affordable to new and smaller companies.  The multi-billion-dollar actions are affordable by only a small handful of companies (such as AT&T and Verizon), and industry watchers hope from time to time they will attract other major companies such as Google and Comcast.  Capital markets are tight and are likely to remain so.  With a one-time payment we are unlikely to see new blood come into the wireless world.  Remember the challenges that NextWave had with the PCS auctions in the 1990s, that were designed to bring in new companies, and that spectrum is now mostly in the hands of Verizon.
• Earn money for the public on the license renewals.  Spectrum actions are usually for some fixed period of time, between 10 and 20 years, with the potential of renewals.  This is in recognition that the spectrum belongs to the people and cannot be sold.  To date no government has refused renewal of a major spectrum block, and as a result the "owner" can spread the effective cost of the spectrum over 30, 40, or more years.  If the spectrum required an annual payment, the people would make money from a spectrum renewal, because it would extend the payments.
• Avoid the government "cash grab".  Many economists lament the fact the government accounts for expenditures on a purely cash basis, especially when they are the stewards of long-lived national infrastructure.  Somehow the Eisenhower administration was able to build the interstate highway system with current cash, yet modern administrations can barely cover the upkeep of the interstate while running deficits.  With the current cash-up-front auction system there is too much incentive for an administration to get aggressive about auctioning spectrum to raise money to cover today's costs, which is another way of robbing the future to pay for today.  An annual payment would reflect better stewardship and match the payments with the use of the asset.

Are there any good counter arguments?  

What Big Companies can Learn from Startups

Most of my earlier career was working at the executive level of big companies, but I have spent much of the past three years investing in and advising startup companies.  That has been a real education -- partly because of the challenging capital markets today and partly because of the low margin of error in startups.

As I step back from this experience and reflect on my "big company" work, I can see there are many ways for big business to learn from startups rather than the other way around.  Our economy is likely to stay flat for a while, and capital will be scarce for everyone.  Here are my five major lessons:

1. Think big but act small.  Capital is tight, unlike the 1980s and 1990s, and few investors today want to fund a big concept.  Instead, many investors want to provide success-based funding for bite-sized increments -- so long as they know those increments could be part of a big vision one day.  I have seen too many people saying "XYZ going to be a major trend, and we are part of it, so fund us."  The XYZ might be the buzz word of the day: cloud computing, mobile advertising, location-based services, whatever.  I would rather fund a first slice of a business model, which will prove out market demand and profitability, then have the entrepreneur come back for more.  Chances are the big-company CFOs would prefer to do the same.
2. It's mostly about the team.  Most investors I know focus on the quality of the CEO, the experiences of the management team, and how well the team works together.  The sense is that a great team will choose the right business model, will execute well, and will adjust the strategy as conditions inevitably change.  Some investors go so far to suggest that teams open their pitch with the bios of the team members -- but I recommend against that because it is better to establish context first.  Big companies would do well to bet on their best teams -- rather than count on the corporate cocoon to ensure success of a new product or venture.
3. You have 30 seconds to tell the story.  The elevator pitch makes all the difference -- especially in our information-overload world.  And I believe the teams that have the best elevator pitches are more likely to be able to execute more effectively, because they will have more clarity about what they plan to do.  In the pitch, make sure to mention the customer and how the money will flow, and talk about what is in it for the stakeholders -- customers and investors.  Draw a picture, but kill the Powerpoint; it takes more than the 30 seconds to boot up the machine.  These recommendations are as true for startups seeking funding as they are for new initiatives in companies.  I defy people to think of a counter-example, where a big company initiative succeeded without having a great elevator pitch.
4. Spend small, and rent where possible.  Startups are usually cash-starved, which creates a need to get things done for as little money as possible.  Great startup CEOs prefer to rent their assets, do without where possible, talk suppliers into giving free services, and find cheaper ways to get things done.  This is why we see many new business startups create prototype products and get into market for under $100,000.  Big companies, in contrast will conduct extensive market studies and competitive analyses,  set up expensive office spaces, design prototypes to cover any potential need, and so on -- on the basis that they want to avoid criticism for having missed anything, rather than seeing what they can achieve on a shoestring.  
5. Fail fast and fail forward.  Many of us have heard this term applied to startups.  Get an initial version into the market, take the knocks, learn from it, and then rapidly turn around another version to repeat the cycle.  How often do we hear about this type of approach in large companies (Google excepted)?  In fact, what usually happens to executives who fail in big companies?  Too often they are fired or demoted, instead of celebrated for having taken a risk and valued for having expanded their experience.

If you are at a big company, how many of these startup lessons are you applying to your business?  Have you adapted for the new economy?  Or do you need to inject some startup culture in your business to help it succeed?

Stages of a Startup

In my past few years of angel investing and startups, I have found a wide range of ideas and terminology about what is appropriate at each stage.  I have yet to find a definitive guide for how entrepreneurs should address each stage, so have created this graphic of Typical Business Growth Stages.

It starts with labels for each stage -- ranging from kernel of an idea to a mature business -- then shows what elements are usually in place to reach that stage, the challenge for getting to the next stage, and the "typical" sources of financing.

This is intended to be at a high level, and there are many exceptions to this pattern.  At the same time, these guidelines help an entrepreneur talk about the most important elements of the business at the right stage.  It prevents, for example, confusing a business concept or vision with a complete business plan.  It prevents, for example, trying to get to launch stage without having a clear view of how to make money (yes, Twitter is an exception).

I have shared this with some startup friends (thank you Jim, Ken, and Cathy) and got some good input, which boils down to:

• The lynch pin to the whole formula is the management team.  A great CEO or team can attract good financing earlier, and is a necessary element to attract the bigger money at later stages.  Some investors will say the management team is all that matters, because a great team will make all the right choices for the other elements and will adapt successfully as the business grows.
• Technology platform is critical for a product to work for customers and to scale well.  Some companies have been able to migrate their platform on the fly, but the right choices early on can make a real difference.
• The best type of financing is a function of the business stage, the growth potential, and the amount needed.  There are smaller, low-entry-cost businesses that can be self funded through their life.  There are big ideas that can attract VC money, at a $5M minimum investment, early on because of the growth potential, strength of the team, and the quality of the idea.  And there are some later-stage businesses that will lack the profitability or predictability to attract private equity or IPO investment.
• All these funding sources ignore another common exit strategy: sale to another business.  That can happen at just about any stage after pilot, on the basis of the financials, strategic fit, technology and intellectual property, or skills of the team.  For many startups this is the preferred exit path, but counts on a positive investment climate as well as great execution by the team.

I welcome comments about what others have seen that is important or how they characterize start-ups.

Inspiring Quotes

I have been doing most of my work with startups of late, and one of the things I have learned is that successful entrepreneurs are good at facing incredible challenges with a smile and a renewed energy burst, on practically a daily basis.  One outcome of a recent conversation with another entrepreneur was the comment "whenever I face a new challenge, I realize it is going to be that much more difficult for my competitors to keep up".

In my reading, I have come across some inspirational quotes that entrepreneurs use to keep up their spirits.  A good list is at the site Escaping the 9 to 5.  Here are a few of my favorites from that list:

• You can’t wait for inspiration. You have to go after it with a club. – Jack London
• Try and fail, but don’t fail to try. – Stephen Kaggwa
• Learning and innovation go hand in hand. The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow. – William Pollard
• It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change – Charles Darwin
• The most successful people are those who are good at Plan B. – James Yorke

I hope a few of these helped inspire your day!

Leading Due Diligence

Lately I have been working with many start up companies as part of my association with Kieretsu Forum in San Francisco.  I have enjoyed the challenge of working with these early-stage companies, and buy into the view that start-ups are an essential part of job creation, as described in the article Startups or Behemoths, Which One Are We Going to Bet On?  

As part of my work with Keiretsu Forum, I co-led an academy with fellow member Cathy Chiu titled The Art & Science of Leading Due Diligence.  We believe we have some good gems in this academy and share our thoughts in four bite-sized (average 15 minutes each) segments:

1. The Due Diligence Process
2. Resources & Tools
3. Effective DD Leadership
4. Dealing with Challenges