Frank,

great interview. I hope you enjoyed talking to Tom O'Malia as much as I enjoyed listening to the podcast. Its a pleasure to hear two of the most generous and helpful people I've met, together.

Thanks,

Andy

I just listened to the Tom O'Malia interview and was reminded I was overdue to thank you for making available interviews with such interesting and accomplished people. One thing though; I've long heard the mantra that it is the team that is invested in--not the idea. Just yesterday I happened to hear another interview with Tom Perkins (http://www.venturevoice.com/ show # 47), and was really surprised to hear Perkins say that KPCB invests in an idea, and then builds a team around it. It seems to me that there must be at least a very few great ideas that hold such promise for society that a way should be found to make them work.

Regards, David Hurwitz
Founder-in-progress, www.DeeperDebates.com

Frank replies: Thanks for the comment. Greg's interview with Tom Perkins continues to haunt me, too. I try to reason it away by thinking, 'if I had all the resources of an HP, then I wouldn't care about the people either'.

As a 32 year old father of 4, travelling businessman, and CEO/Founder of CabDaddyGPS (a new Dallas based LBS tech startup), I have to commend you for such a great show. Anything that I can do to learn more about this process is invaluable to me. I travel 100% and cannot fathom spending one second of my time on business when I am home with my wife and children. So I really appreciate what you are doing and do feel that it is an asset to both sides of the playing field.

I'm one of your Australian listeners and I enjoy the show.

I thought you might be interested in this:

http://www.techcrunch.com/2008/08/13/y-combinator-to-offer-standardized-angel-funding-legal-docs/

Frank: the show with the head of entrepreneurship of USC is the most useful show ever... perfect, concise story telling of what it takes in real-time.

This podcast interview Of Tom O'Malia Is Not Advice for Venture Funding as History Shows It Will Ruin a Startup.

I disagree with the post from "Lou V" that states that this "is the most useful show ever".

Other VCs such as Randy Lunn, who is also interviewed on The Frank Peters Show, say that by the time you know the right questions to ask it is too late to invest. Other interviewed VCs that talk about the importance of the idea include Jim Armstrong, Josh Wolfe, and Shahin Farschi.

So that means Tom O'Malia's advice that "ideas are not important" and saying "of all the things that count industry knowledge is number one", is utter nonsense. In fact history is full of examples of industry knowledge causing people to miss the boat and go out of business. I'll include a huge historical example below after my analysis of this interview.

O'Malia states having your game together doesn't mean you have a better idea. Whereas VC Tom Perkins specifically sates to start with a great idea, build the company around the creative genius at the heart of the company, remove the risk, and only after that recruit the great people with industry knowledge to run the business.

To illustrate his point that industry knowledge is more important than the idea, O'Malia uses examples of people who capitalized on ideas such as Thomas J. Watson who started IBM. He then says that MySpace.com came out of his feasibility class, and "an undergraduate had an IDEA way back then for a thing called salesforce.com. The both of them are national history. Salesforce.com might be the most successful IPO in the last five to ten years."

He then goes on to say that "those are not that much more important than somebody who started doing something that they love. A gal that's doing a million one in brownies in Arizona is of equal importance to us".

It is important for Angels and VCs to note that O'Malia needs to fill the seats in his classrooms and in his lectures around the world. After he tells his students they have a bad idea, he has the need to tell them that the other things he teaches are more important than ideas so that they will continue to take his classes. Remember that Confucius taught to look at how someone makes their money and you will know where they are coming from.

O'Malia also goes on to say "I believe that any success we've had is that we've taken people and shared with them how to structure and IDEA to find out if there is a concept in there that is a worthy opponent to go forward". He specifically stated that ANY success includes an IDEA.

From his own experience at his first job out of college, O'Malia states that because the company he worked for had a unique product (which is a reference to having an IDEA), they were able to buy another company to expand their business and they made a lot of money from it.

O'Malia talks about the importance of "being able to get people to understand that ideas are not important... " But then he goes on to say to START with 100 ideas. Let me write that again, he contradicts himself saying that the starting point is the idea. He says to start with 100 ideas and take them through the seven filters he teaches to get to the good ones.

Earlier in the interview he said to start with the problem. I don't see why I need to come up with 100 different solutions for it. Such an exercise is just a confidence trick and will eat up all your cash.

The most realistic thing is to let the patent search set your work parameters. The patent search which you can now do online yourself allows you to immediately discard any ideas that do not give you a competitive edge, before you waste time and money going through O'Malia's seven filters.

Now here is the historical example I promised earlier of how industry knowledge can cause you to lose your business.

Alexander Graham Bell invented the telephone shortly after Thomas Edison invented broad band. That's right, broad band predates the internet and the light bulb. It is what first made Edison famous. Nobody at the time cared about the light bulb because they did not have electricity.

Edison sold his patent to Western Union, the largest telegraph company at the time. It enabled them to now send four messages on a single wire at the same time, instead of having to have four separate wires.

So it would have been natural for Bell to think, if they like that, they are going to love this. Western Union told Bell to go jump in the lake. Saying things to the effect of "people are not going to pay money so they can talk to each other, people have better things to do".

Bell couldn't sell or license his patent to anyone. So he was forced to start his own company which later became a nationwide monopoly. Western Union saw it killing their business and started a phone company of their own infringing on Bell's patent.

The legal battle took many years, but in the end Bell prevailed. You might say Western Union's foray into the phone business caused the demise of their telegraph business to happen more quickly.

So what was the industry knowledge, which O'Malia says is more important than the idea, which caused Western Union to lose business? Houses were not wired for phone or telegraph service at the time. If you wanted to send a message you had to go the telegraph office. In order to get a message to you the telegraph company had to send a messenger to you. You could then give the messenger a reply to send back.

Industry knowledge told Western Union that people do not want to come down to the telegraph office because they are busy and have important things to do. That's why they had to send their people out to pick up messages, in order to keep their telegraph operators busy.

So the idea that people in different cities would agree to be at the phone center at a specified day and time seemed ludicrous to them. And if those cities are in different time zones they better get the time right. Western Union naturally thought; our industry knowledge already tells us people do not want to come to the telegraph center, why would they want to come to a phone center?

Historians portray Western Union as being stupid. But they actually had a logical reason. They acted exactly as Tom O'Malia teaches that everyone should act, and that is according to industry knowledge. This is proof that Tom O'Malia's advice that the idea is not important and only industry knowledge is to be followed is not advice for venture funding.

Just like some fast pitches, O'Malia's tone of voice sounds very convincing until you check the facts. There are credible people who disagree with him.

It is normal for teachers to speak with an authoritative voice because they need to maintain discipline in the classroom. Or if you are a paid speaker an authoritative voice can help keep your audiences attention.

The authoritative voice is not to be confused with being THE authority on the subject. I have learned that when listening to teachers or professional speakers, it is important to discern the difference between the disciplinarian voice and useful information if any.

My advice is very different. Do not start with the problem or the idea! In venture funded businesses that is a big mistake.
1. Start with the largest market size for a specific product you can find.

2. Look for a problem in it that you can solve.

3. Come up with patentable solutions by using the patent search to direct your efforts.

4. Add the business people to the team.

5. When sells begin do not spend more money than what the sells bring in.