Entrepreneurship Through Acquisition

When the vast majority of people hear the word “entrepreneur” they think of a person that had an idea and set off to build a company from scratch. Building something from nothing is daunting to many people and the fear of failure and the unknown represent a large barrier that prevents many would be entrepreneurs from taking the leap into owning their own businesses. One option for those would be entrepreneurs that are a bit more risk adverse is to take the route of entrepreneurship through acquisition. Entrepreneurship through acquisition is, in its simplest form, just buying a business that is already operating.

Lessons from FARMCON: Kevin Van Trump’s Wisdom on Investing in Startups

Last week, I had the privilege of attending FARMCON in Kansas City, MO. Hosted by Kevin Van Trump, FARMCON brings together some of the sharpest minds in agriculture for a few days of networking, learning, and inspiration. For those unfamiliar, FARMCON isn’t your typical conference—it’s half market overview, half start-up incubator and designed to push boundaries and equip agricultural entrepreneurs with tools to thrive in an industry that’s as challenging as it is rewarding.

Kevin Van Trump, who is the man behind The Van Trump Report, is a well-known name that is synonymous with innovation and insight in the ag sector. Kevin started from the bottom of the commodities world in Chicago and built his reputation by not only understanding market trends but by helping others navigate them. Through his report, read in over 35 countries, and his consulting firm, Farm Direction, Kevin has become a trusted voice for farmers, investors, and executives alike. Kevin has an overarching passion for rural America—a passion that shines brightly at FARMCON.

While FARMCON covers a range of topics, Kevin ran a panel that offered insights on investing in startups, and his comments stood out as particularly impactful. His decades of experience investing in ag-tech startups and other ventures have taught him hard-earned lessons, many of which he shared during the conference. Here are my top five takeaways:

Lessons from the Roadside: Embracing Failure in Entrepreneurship

I identify as an entrepreneur - more accurately, a failed entrepreneur - but an entrepreneur, nonetheless. My personal experiences have taught me that failure is not a destination, it’s that strange, potentially intimidating rest stop you may be forced to visit during your entrepreneurial journey through the start-up desert, inching toward the oasis on the other side. Failure is that detour that makes you go “huh…” once its finally in your rearview mirror. In my younger years, I have had the opportunity to stop off at three of these less-than-ideal roadside attractions, each teaching me something new.

Kevin Starr, California: A History (New York: Modern Library, 2005).

Forty years ago, I had just graduated from a law school that is part of a private research university in what is now known as Silicon Valley. At the time, this was a somewhat sleepy area, tucked among the wealthy southern suburbs of San Francisco but devoid of much industry—except for Hewlett-Packard, located just southeast of campus on Page Mill Road, which made hand-held calculators for engineering students.

I now wonder at the personages among whom I lived at the time, and occasionally ponder what might have happened if I had invested my law school tuition with some of the startups occurring all around me. Frequently, after this painful exercise, I consider what it was about the area that was so conducive to entrepreneurial activity in the early 1980s. Here’s where Kevin Starr, in his California: A History, has much to contribute.

Entrepreneurial Opportunities in A Pandemic?

One of the reasons that I enjoy working with entrepreneurs so much is because so many of them have a positive outlook. Think about it, would anybody really even think seriously about starting a business if they weren’t looking beyond all the challenges they will face to see the potential opportunities?

As we all know all too well from our current view through pandemic-tinted glasses (sitting in sweatpants, socially distant from others, wondering what day it is, trying to avoid cable news networks, and hoping that our Zoom calls don’t get disrupted), businesses of all sizes are being dramatically impacted by the COVID-19 virus and related stay at home and social distancing measures put into place by governmental officials. Unfortunately, some (possibly many) businesses will not survive the crisis. 

I believe that many of the ones that survive and maybe even end up being stronger will be those run by entrepreneurs who see the glass as half full. Rather than huddle in fear, they will instead look for the opportunities available to them during and as a result of the current coronavirus crisis. While it can be easy to be sucked into all the negative news and real human toll the virus is taking, l — like my entrepreneur clients — prefer to focus on the opportunities.

Remembering Kobe, the Entrepreneur

Last month, we lost Kobe Bryant, his daughter, and seven others in a tragic helicopter crash in California.

We all know Bryant as one of the greatest basketball players of all time, and since his passing I have learned more about how he was perhaps an even greater father figure for his daughters. But here we want to recognize Bryant for the entrepreneurism that he diligently pursued with the same “mamba” mentality that earned him many achievements on the hardcourt.

First of all, I could spend paragraphs here analyzing how Bryant’s book, The Mamba Mentality: How I Play, can be turned into fuel for entrepreneurs. If you have not yet read it, do so. For now, given the limited lines I have available, I’ll present you with some of his philosophy.

Bryant explained once that the difference between basketball and entrepreneurship is that in entrepreneurship there is no competitor “directly in front of you;” instead, as an entrepreneur, the challenge is to be constantly creative in a way that impacts the market you are trying to dominate. “But even more so,” he said, “when you play basketball you’ve got to take time off, in order to avoid injury. In business and creativity there is no off switch. Your brain is constantly working.” I think every entrepreneur can attest that the brain is always ticking. (But the picture of Bryant shooting hoops in his pajamas with a cast on one hand makes me wonder whether he ever actually rested, on the court or otherwise!)

Keep Control of Your Venture

Every founder I work with is concerned about control. And rightly so, given that their new venture is their baby and the beneficiary of a lot of sweat and money out of their own pockets.

Usually the discussion gets interesting when the company begins issuing shares to employees or raising funds, but sometimes we dig into it right at formation. There are various creative methods to approach the issue.

Some traditional methods include implementation of voting agreements or the like, but for a startup looking to add and retain employees in a competitive market those methods may not be an ideal approach, plus they can be overly complex and it can become a burden making sure every employee signs an agreement that nobody other than legal counsel understands. Another method is to implement a dual-class of shares to give one or more founders the sole vote or “super” voting rights.

Instead of a Post About Musicals, How about a Piece of the Brooklyn Bridge?

I was thinking about my recent semiannual musical theatre fanatic trip to NYC and what might be interesting about it to entreVIEW readers. I usually try to find some entrepreneurial hook into the several musicals I see in the course of a brief sojourn (over this past Memorial Day weekend, six musicals in three days). You can judge for yourself whether I’ve successfully done that in my last few post-NYC theatre posts like this one about Ken Davenport, this one about "Ernest Shackleton Loves Me," or this one about "Hamilton" (which, in case you missed it, is coming to the Twin Cities late this summer as part of the Broadway Season presented by Hennepin Theatre Trust, and, in case you were wondering, no, I can’t help you get tickets). 

Anyway, I was trying to find an interesting entrepreneurial hook about Tina Fey, the author of the "Mean Girls" musical, which was one of my favorites this trip and which is up for 12 Tony Awards. Surprisingly, considering how creative and prolific Fey is, I didn’t find anything I thought was all that interesting. Nor did I find anything compelling about Robert Lopez, who wrote the score for my other top-two musical of this trip, Disney’s "Frozen." (Lopez also wrote the scores for a couple of my all-time favorites, “Avenue Q” and “The Book of Mormon.") 

What Entrepreneurs Get Wrong

Sometimes knowing what not do to do is just as, if not more, valuable than knowing what to do. I came across an interesting article recently in the Harvard Business Review related to this very topic. While this article, titled “What Entrepreneurs Get Wrong” was published a few years ago, its practical advice is as relevant now as ever.

What I like about this article is that it deviates from the notion that entrepreneurism is, for lack of a better term, all “rainbows and butterflies.” The article outlines common pitfalls that entrepreneurs face when launching their business and provides strategies for overcoming such obstacles. (Can you tell this blog post is written by an attorney?) 

The authors surveyed 120 entrepreneurs from around the world and examined the mistakes they cited most frequently, focusing primarily on the sales aspect of entrepreneurism. 

If you are an entrepreneur just launching your business, or are interested in sales strategies in general, I would highly encourage you to read this article!

The Magnolia Story

On HGTV’s Fixer Upper, Chip and Joanna Gaines “take the worst house in the best neighborhood” and “turn it into their clients’ dream home.”  A husband-and-wife team, Chip manages the demolition and construction, and Joanna designs and styles the interior.  At the end of each episode, Chip and Joanna ask, “Are you ready to see your fixer upper?” as their clients eagerly await the first look at their newly-transformed home.  Now in their fourth season, Chip and Joanna have millions of viewers captivated by their playful rapport and signature modern, rustic style. 
    
In addition to raising four kids on a working farm and starring in a top-rated TV show, they run quite a few businesses in Waco, Texas. Their empire includes a real estate company, Magnolia Realty; a construction company, Magnolia Homes; a furniture line, Magnolia Home; another furniture line, Magnolia Home Furniture; a collaboration with Loloi rugs; a quarterly lifestyle magazine, Magnolia Journal; a bed and breakfast, The Magnolia House; a real estate subdivision, Magnolia Villas; their quarterly lifestyle magazine; and the Magnolia Market, a shopping and dining destination in downtown Waco. 

Ray Kroc, Grinding It Out: The Making of McDonald’s (St. Martin’s Griffin, 2016)

It’s one of the first memories I can identify by time and place. There I am, sitting in the back seat of my father’s red 1960 Buick LeSabre, gazing up at a sign featuring a jolly Mr. Speedee, who is cheerfully informing us that he has sold over 100 million hamburgers as of this mid-winter evening in 1962. Yes, this is even before McDonald’s had the golden arches, though as I recall they followed shortly thereafter. 

It seems that this restaurant chain has always been around, morphing somewhat from time to time but always growing and grabbing ever-greater market share.  But Ray Kroc’s entrepreneurial autobiography, recently reissued in advance of the recently released movie, The Founder, with Michael Keaton in the starring role, reminds us that the leviathan that is McDonald’s has been around only for a little more than a half-century.

This is the story of a paper cup salesman who graduates to selling milkshake mixers. He stumbles on the idea of franchising a California hamburger joint as a way to increase mixer sales.  Along the way and through persistence, he builds an empire based on hamburgers, French fries and milk shakes—and a brand (and color scheme to make us hungry?) instantly recognizable around the world.

Is Your Entrepreneurial Clock Ticking? And Other Ways the Entrepreneur’s Mind Works…

I started my first business six years ago, after a decade of hobby experimentation and continually increasing requests from the local community. It’s a unique horse treat company, and we continue to sell about 400 dozen per month, with demand currently higher than supply.

I followed that with my next business, the tack shop – St. Croix Saddlery – and started offering new ancillary services, like horse blanket repair, consignment and custom saddle fitting, and now it seems I’m just hooked on this process of generating ideas and putting them into action.  

Mozart’s Brain and Unleashing Your Gray Matter’s Potential

Whatever your faith or ethnicity (or lack thereof), your special late-in-the-year holiday—whether Christmas, Hanukkah, Eid, Kwanzaa, or even Festivus—has now come and gone. A new year beckons with new opportunities!

Some say you can’t teach an old dog new tricks. However, I’ve often equated the New Year with the chance to learn something new. Let’s be clear: I am no spring chicken. But, the prospect of a new year, untarnished by frustration, disappointment or any other vicissitude to which we humans are all too prone, still holds the promise of encountering something new and interesting.

Turns out this is a very healthy trait. Dr. Richard Restak, in Mozart’s Brain and the Fighter Pilot: Unleashing Your Brain’s Potential (Harmony Books, 2001), tells us that, contrary to the lesson drawn from the old adage, a person’s capacity for new learning “remains and may increase as you grow older,” and that “the brain is not a static structure, but exhibits a remarkable plasticity over time according to the richness of a person’s experience.” The more you learn, the more you want to learn, and the easier it is to learn, regardless of age.

All of which makes me think about some serial entrepreneurs I’ve known—the ones who have started business after business, sometimes in different industries, often with repeated success. Chances are they aren’t doing it for the money (or only for the money). It’s the challenge of building something new—and the joy of new learning that is part of the building process.

Bill Aulet’s 24 Steps to Becoming an Entrepreneur

Guest author, Alice Campbell, Business Analyst at Gray Plant Mooty (and MIT Alumnus)

Last month, an outstanding group of our entrepreneurial clients, together with members and guests of the MIT Alumni Club of Minnesota, gathered at our offices for a time with Bill Aulet, Managing Director of the Martin Trust Research Center for MIT Entrepreneurship. Since 2004, Bill has taught three or four courses each year on entrepreneurship at MIT's Sloan School of Management. He is also the author of Discliplined Entrepreneurship: 24 Steps to a Successful Startup, which has been translated into 11 languages. Bill has raised over $100 million in funding for his companies and directly created hundreds of millions of dollars of market value.

Bill’s presentation provided a snapshot of how he developed the 24 steps, following which he answered questions about all kinds of entrepreneurial activities and education. The energy at the event was palpable, and the event could have easily continued late into the evening. (Sorry to any attendee who planned an evening schedule around our projected ending time, which was off by about 90 minutes!)

Some experts think that entrepreneurship can’t be taught—that it’s a skill with which some people are born. But, for over 40 years, the Massachusetts Institute of Technology has been turning out ever larger numbers of graduates who already are or will become entrepreneurs. The 25,600 companies started by the entire pool of MIT alumni have generated approximately $2 trillion in revenue and have created 3.3 million jobs. If MIT were a country, it would be the 11th largest economy in the world—just about the size of the economy of Canada (but without all the great hockey players, eh?).

If you want a few of the benefits of MIT’s classes without the >$60k per year cost, MIT is one of the founders of www.edX.org, a website at which some of the finest universities have put courses online as massive online open courses (MOOCs). MIT’s entrepreneurial courses are well-represented among the MOOCs, including:

• Entrepreneurship 101: Who is your customer? 
• Entrepreneurship 102: What can you do for your customer?

Out of the 54,856 students who took Entrepreneurship 101 online, MIT selected 47 to participate in the inaugural MITx Global Entrepreneurship Bootcamp last summer. A similar number have confirmed for this August. If you thought MIT was hard to get into for an undergraduate degree (7.9%), the competition for bootcamp was even more brutal (0.086%), or slightly more than 100 times less likely.

Why “Here Lies Love” is Worth the Risk

I spent Thanksgiving in New York City, as I have for the last 25 years. While it is nice to see my in-laws (my wife is a native of Long Island, or is it “Lawn Geiland?”), for my kids to get a chance to spend some time with Grami and other family members, to get a peek at the Macy’s parade, and to see the tree at Rockefeller Center (not to mention taking in the best donuts at Doughnut Plant), it is also a chance to feed my musical theatre addiction.

This year, among the eight shows we saw in four days, I decided to take my daughters (ages 8 and 11) to see "Here Lies Love" at the Public Theater. This is a show I saw about 18 months ago and I liked it so much and it was so different that I just couldn’t resist the temptation to take them. Of course, it helps that they aren’t your average kids when it comes to musicals—the younger one has seen over 70 musicals and the older one more than 80!

Watching “Here Lies Love” and thinking about just how unique it is got me thinking about David Byrne, a member of the Rock and Roll Hall of Fame and one of the musical’s co-authors (the other being English DJ Fatboy Slim). “Here Lies Love” is so groundbreaking and risk-taking (more on that in a moment) that it felt like something created by a serial entrepreneur. 

Not surprisingly, I learned in my quick research that Byrne is something of a serial entrepreneur. Not only was he a founder of the Talking Heads, but, in addition to founding his own independent record label (Todo Mundo), he also founded the world music record label Luaka Bop and started his own internet radio station, Radio David Byrne. I guess having had the opportunity to work with so many serial entrepreneurs in my career served me well in being able to spot one in Byrne.  

What’s risky about “Here Lies Love” is that it doesn’t follow most musical theatre conventions. A few specifics:

• It’s mostly club music (there’s no orchestra, just a DJ) and virtually through-sung.

• It is rooted in the history of Imelda Marcos (no, there aren’t a lot of shoes) and Filipino politics during the rise (and fall) of the Marcos regime.

• The entire show is staged in a Filipino night club, with the audience all being participants on the dance floor of the club.  That’s right, there are no chairs!

• There is no fixed stage at all, just a series of platforms that move (with the audience and the performers) throughout the performance.

Of course, what really makes it such a terrific show (one that I had to see a second time before it closes in January) is a score, written by an entrepreneur, that makes you want to dance. If I’ve piqued your curiosity, take a look/listen here. 

Taking these risks appears to be paying off. The show extended its original run in 2013 for several months (until the theatre wasn’t available anymore because of prior commitments). It’s been playing at the Public since April, and its entire current run at the Royal National Theatre in London is sold out. Most importantly, my girls rated it as their favorite of the eight shows we saw!

The Book: Richard Restak, M.D., Mozart’s Brain and the Fighter Pilot: Unleashing Your Brain’s Potential (Harmony Books, 2001).

Why You Should Care: Your brain never loses its capacity to learn, and the more you learn, the stronger this capacity is.

Last week, Dan Tenenbaum gave us a look at the world of musical theater from the inside. Dan, a highly skilled and accomplished lawyer in the entrepreneurial “space” (not to be confused with a parallel universe), also has been giving the right side of his brain a thorough workout for the last few years, with very impressive results.

 My office is next to Dan’s, and I have been treated to the working versions of librettos and snatches of tune now and then through the paper-thin wall that separates us (makes a nice change from the conference calls about Series A Preferred Stock and other venture financing terms). Once or twice, I was even flattered by consultations on matters of historical trivia that may or may not have triggered a thought that found its way into a rhyme or two.

 Let’s just say this process has been almost as interesting for Dan’s friends to witness as it has been for Dan to experience.

 Who knew that Dan is also doing what, according to Dr. Richard Restak, we all should be doing to maintain our mental capacity and performance as we age? As Dr. Restak observes, “[W]e describe a person possessing varied and far-ranging knowledge as a ‘Renaissance’ person. That is the model we should all strive to achieve.”

 We used to think that you can’t teach an old dog new tricks. And, indeed, it is true that, with respect to a learned skill, you either use it or lose it—“if you stop learning, your overall mental capacity and performance will decline.” Not a great message, but something all of us would intuitively endorse.

 It turns out that medical research over the past decade or so has revealed that “the brain retains its plasticity across the entire life span.” A person’s capacity for new learning “remains and may increase as you grow older.” Those of us like me with loved ones who have suffered from mental impairment as they have aged may doubt this, but studies indicate that a person who thinks of education as a lifelong project (and regularly engages in new learning over the course of a lifetime) measurably reduces his or her chances of developing such an impairment.

 I guess serial entrepreneurs, who repeatedly approach new products, services and business models as they build business after business, often in varying industries, are doing more than just scratching an entrepreneurial itch.

An Upate on Lot18: Too Much of a Good Thing?

Some of you may have read my post about Lot18 back in November, wherein I extolled its virtues and hypothesized as to why the New York startup was so phenomenally successful at raising money from venture capitalists.  Since that post, tech news outlets have reported two rounds of layoffs at the company and the closing of its short-lived UK operations.  Lot18 also stopped offering food and travel products for sale, which it had recently been doing in addition to its primary business of selling wine.

When I was reading about the company to write my previous post, Lot18 reportedly had about 500,000 members; now there are almost 1,000,000, according to online reports!  Things seemed to be going so well!  As it turns out, the wealth of cash the company was able to raise might have also made it easier to lose sight of its core business.  As founder Philip James told Betabeat, “One of the perils of having a lot of money is, it’s easy to launch a lot of things.”  We can all understand how a company flush with cash might be more apt to take risks on premature expansion than one that needs to watch every dollar just to keep the lights on.  

While the decision to wind down the company’s short-lived food and travel businesses is unfortunate for the employees who lost their jobs, it should help Lot18 refocus on building its wine business for long-term sustainability.  Luckily for Lot18, the nature of its business is such that its investment in those complementary businesses probably was “just” those people and maybe a few other ancillary services, marketing expenses, etc.  One can imagine many other types of businesses where expansion into ancillary businesses would require huge capital outlays at the beginning for things like equipment and regulatory approvals, which are not easily recouped.  This reminds us of the important life lessons we can take from Lot18 so far:

1. Drink good wine.
2. Do not expand so quickly into new businesses that doing so jeopardizes the long-term success of your core business.

A Post by Alyssa Hirschfeld, Guest Blogger

Networking Opportunities Through BizLounge

If you are an aspiring or early-stage entrepreneur, or want to expand your network to include such people, consider attending a BizLounge networking event. BizLounge is an organization that is committed to supporting entrepreneurism by inspiring, educating, and connecting people in our start-up community. Gray Plant Mooty has been a proud sponsor of BizLounge for several years.

BizLounge hosts monthly networking get-togethers throughout the year. The events are usually held on the third Monday of each month, with the next such gathering taking place on June 18th. The events are usually held at a local restaurant or bar, although they have also hosted events at interesting office locations. Last month, the meeting was held at CoCo, which is a co-working and collaborative work space. 

From September through May, the events include both time for networking and a presentation from a speaker. The speakers are usually successful entrepreneurs who can share their experiences (both successes and failures) to inspire and educate the attendees about starting and growing a business. Past speakers have included Larry Abdo (current owner of Nicollet Island Inn and My Burger, among many other ventures), Phil Roberts (founder of Parasole Restaurant Holdings, which has owned and operated several successful restaurants in the Twin Cities, including Manny’s, Salute, Figlio, and Chino Latino), and Robert Stephens (founder of Geek Squad).

Just last month, Daryoush Allaei, founder and CEO of Sheer Wind, Inc., spoke about his new company and his many past ventures. While his presentation was scheduled to last about 30-45 minutes, it went well over an hour because of questions from the audience. In addition to events involving entrepreneur-speakers, there are usually a few events during the year where subject matter experts are brought in to educate attendees on their field of expertise. For example, this past year, Mike Cohen, an intellectual property lawyer at our firm, spoke about IP-related concerns for start-up businesses.

During the summer months, BizLounge takes a little more relaxed approach. Typically the events are held at a restaurant/bar with a good outdoor meeting space, usually near water. The next meeting on June 18th will be held at Tuggs, on the riverfront just across from downtown Minneapolis. The summer events do not include a presenter, and are intended to provide an informal opportunity for entrepreneurs to network.

The events are free to newcomers, but they do ask you to become a member if you plan to continue attending. Annual membership dues are $75, or $25 if you are a student. All membership dues are used to pay for the meeting spaces, food, and drinks. The organization has no other real expenses, and the board that operates BizLounge does so on a volunteer basis.

So, if you are looking to connect with some other aspiring and early-stage entrepreneurial types in a relaxed setting, consider attending a BizLounge networking event this summer. At worst, you’ll spend an hour or two meeting and talking with others interested in entrepreneurism, all while enjoying free food and drink. And, you might even meet someone who is able to create some real value for your business, or help you to start that business that you’ve been planning to launch.

Writing the Check is the Easy Part

 

Last week I had the privilege of attending the Minnesota premiere (sponsored by among others, Gray Plant Mooty) of the documentary film, “Something Ventured: Risk, Reward, and the Original Venture Capitalists.” It was a great night of movie-watching and meeting with those interested in the role of entrepreneurship and venture capital.

Something Ventured tells the story of the creation of an industry that went on to become the single greatest engine of innovation and economic growth in the 20th century. It is told by the visionary risk-takers who dared to make it happen--leading venture capitalists Tom Perkins, Don Valentine, Arthur Rock, Dick Kramlich, and others.  The film also includes some of America's finest entrepreneurs sharing how they worked with these venture capitalists to grow world-class companies like Intel, Apple, Cisco, Atari, Genentech, Tandem, and others.

While the film mostly features talking heads, their stories add color to the incredible statistics that demonstrate the profitability and success of these early investments. Here are some of my favorite anecdotes from the film:

·    Steve Jobs and Steve Wozniak were considered smelly, ill-mannered geeks who dressed funny and could not get a bank to even listen to them.

·    Nolan Bushnell, who created Atari, held board meetings in his hot tub. Bushnell introduced Steve Jobs (then 18 years old and working as a technician at Atari) to Don Valentine.

·    Bushnell was offered a one-third stake in Apple for $50,000. He turned it down. Bushnell’s comment? “That was a big f------ mistake!”

·    Arthur Rock displays a one-page business plan filled with typos and few specifics requesting $2.5 million for the creation of Intel. Rock says, “Not a polished document, but kinda cute.”

·    Mike Markkula ($142,000), Arthur Rock ($57,000), and Don Valentine ($150,000) provided the seed money for Apple. Collectively, their investments in Apple are now worth over $300 billion.

·    Markkula recalls the early days with Jobs and Wozniak. “While the two of them did not make a good impression, Woz had designed a really wonderful computer. I came to the conclusion we could build a Fortune 500 company in less than four years.” Markkula adds: “Steve Jobs had never seen the inside of a board room. I remember one meeting when he took off his shoes and put his bare feet on the table. I said, ‘You’re excused until you act like a board member.’ He put his shoes back on and was fine.”

·    Half of the original founders of start-ups were replaced within 18 months after receiving start-up funding. Cisco System co-founder Sandy Lerner was the sole woman who appeared in the film. She tearily describes how Don Valentine abruptly fired her from the company she started.

·    Don Valentine tours the Atari factory and finds the people working there smoking something that’s not his brand. Valentine believes in the Atari concept of moving the coin operated game console featuring Pong into homes. The film includes a clip of a nostalgic commercial showing a family sitting in their living room playing Pong, which demonstrates how quickly this world has changed.

Why VCs Are Attracted To Online Wine Retailer Lot18

I was happy to receive an email this week from Lot18, my favorite online wine marketplace, announcing that the company had raised an additional $30 million in Series C venture capital financing led by Accel Partners.

For those who aren’t familiar with it, Lot18 runs “flash” short-term (sometimes lasting only a couple of hours) sales on premium wine and wine-related products, and recently added travel, food and wine experiences, and gourmet foods to its offerings. Since I’m a big fan of the site from the consumer perspective, the news of investors wanting to put their money at risk to grow this business was good news to me. Lot18.com has only been around since last November and has reportedly raised a total of nearly $50 million in investments, has 500,000 members, and did $1 million of sales in one month earlier this year.

With new flash sale sites popping up all over the place in a number of categories (clothing, accessories, food, wine, travel), this category already seems saturated with a lot of sites that will eventually be faced with an inventory scarcity or less price advantages as the economy recovers and wineries (and other sellers of products and services) no longer need to liquidate inventory at below-retail prices.

With this in mind, I looked at this most recent substantial investment as an opportunity for me to research the short history of Lot18 to examine some of the factors that might make this an attractive investment for the VCs. When I really started looking, I realized this company is getting a lot of attention from bloggers, as well as VCs, and I think these are some of the reasons why:

(1) Founders with a Track Record.

Co-founder of Lot18, Philip James, was previously the founding CEO of snooth.com, a wine-focused web site with over 805,000 members that offers extensive wine reviews, online price comparisons between wine merchants, and many other wine-related products and services. Kevin Fortuna, Lot18’s other founder, was formerly the CEO of Quigo, an advertising technology company that was sold to AOL Time Warner for $360 million in 2007. Combined, those two look to possess a very relevant set of skills and experience for this type of venture, and they are a good reminder that, when looking for investment in a yet-unproven company, proven people are very compelling. 

(2) Gradual Loosening of Regulations in a High Value Industry

Gomberg, Fredrikson & Associates, a wine industry consulting firm, reported earlier this year that the United States has just eclipsed France as the largest wine-consuming nation, and that the retail value of United States wine sales in 2010 topped $30 billion. This was a luxury industry that actually grew in the United States even during a recession, which, for a non-investing expert like me, seems like as good a place to put money to work as any.  Further brightening the future for online wine sales, states are continuing to loosen their regulations regarding interstate shipments of wine. Most recently, Maryland passed legislation allowing residents to have wine shipped directly from wineries to their homes. As these shipping regulations continue to change, investors can see an obvious path towards future growth without having to be too imaginative. As we often tell our clients who are looking for outside investment, a simpler story about the path to success is usually a better story.

(3) Differentiation from Competitors

Despite flash sales being a fairly young category of sales vehicle, there already seems to be more flash sale sites than even I can keep track of (and let’s face it, I love wine). In the wine category alone, Wines ‘Til Sold Out, wineaccess, wine.woot, and Gilt Taste are obvious competitors. I admittedly know more about Lot18 than I do about any of these competitors, but from a purely consumer perspective, I prefer Lot18 because of the excellent customer service I have received there and because it offers what appears to be a small and carefully chosen selection. Thus, the appeal of Lot18 specifically lies well beyond just discounts on the wine, which means I am likely to continue shopping there even if the discounts dwindle as the economy recovers in future years. When there are reasons a company should succeed in a bad economy as well as a good economy, any time seems like the right time to invest.

A Post by Alyssa Hirschfeld, Guest Blogger