November 14, 2012

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November 14, 2012

It’s also fair to say that many institutions—pensions and the large investors—have cut back their private equity allocation. They have looked for more liquid investments. So the total capital that’s flowing into the private equity firms has been reduced. That said, there are a lot of firms that have a lot of money that they need to invest in good businesses. So there’s still that pressure on the frontline with private equity firms, VC firms, to get money to work in good investments.

WIDLANSKY: Raising capital hasn’t been the issue for us. We raised early-stage capital four years ago. We raised venture capital twice. In that Valley of Death, we raised between $5 and $7 million twice. The last one we closed in eight weeks. We didn’t have any real difficulty at all.

For us it’s been talent. We acquired a division of a large public company, and then we had to right-size it and then find the right talent. Particularly in marketing and product roles, this valley can be challenging. There’s not a ton of second-generation entrepreneurs—folks that have done it, learned it and are ready to do it at a higher level.

To echo something William said, you can make a costly mistake by getting the wrong person in the wrong role. We just went through that, and it probably cost us eight weeks of development time just because we had one wrong person in the wrong chair. The faster you figure that out, the faster you can get back on track and accelerate your progress.

There are very specific pockets of talent that are hard to find. And I don’t know that it’s necessarily losing them to California. The population here just doesn’t have the depth that you get if you are on the West Coast, where you tend to have folks coming out of Stanford or Cal Tech. On the East Coast you have folks coming out of MIT. That makes it more challenging.

SLOVIK: There are two concepts that integrate one with the other. When the economy is really bad and people are out of a job, it’s really easy to attract them to startups because they are unemployed. So you get a lot of people with more experience.

As the economy improves and some of those guys get employed, they remember what it was like to be unemployed so they are not going anywhere. They are holding onto their job and praying to keep it. And suddenly it gets really hard to attract talent. Then when things get really on a boom, it’s easy to get them again because they are all looking at their friends making all the fortunes and they think, “Things are great, but I’m willing to leave my job and take a chance and I can always get a job again, right?” We are in that center stage where we have had some recovery and people are starting to get jobs, but now they are afraid to leave those jobs.

The second thought is the people who are starting companies are really the young kids. Really young. They always start companies based on their life experience—and their life experience is really limited. So we see a lot of deals on, “I was in line getting a haircut and, wow, we can make getting haircuts easier,” or whatever. And the fact is that the economy is still so bad that there are phenomenal opportunities to help companies improve efficiencies, or with their top line. But the 19-year-olds, they don’t understand how the payables department at a Fortune 500 works, and they are not going to have an idea on how to improve that. You don’t see the guys who can say, “For 10 years I have been running the purchasing department at a major company and there’s a way to make that better.”

That’s where the real innovation needs to happen—not just in all the consumer Pinterest, Facebook, Groupon kinds of things. There’s a lot of opportunity for improvement, and mid and larger companies are starving for some innovation to help them cut costs and increase top line. But the entrepreneurs aren’t focusing there. And that’s one of the things that is difficult for me as an investor. It’s always, “It’s going to be really cool. It’s going to be really fun.” And I’m like, “No. How about we find something with a real ROI that is going to be attractive to real companies?”

WELLS: What’s difficult in this market is finding people that are willing to do whatever it takes to take a company where it needs to go; I mean, just put your guts into it. And I’ve got to tell you, there’s too many people that use excuses, that aren’t willing to just make it happen. I don’t know if that’s strictly a Utah challenge, because I have spent all my career outside of Utah. Maybe it’s because I’m hiring younger kids because they are hungry and affordable and looking for jobs. But I want talent that really is in it. And that’s a challenge.

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