Successful emergency room doctors must be highly intelligent and calm under pressure. Successful triathletes must to be goal-oriented and driven. Successful songwriters must be creative. What about entrepreneurs? Entrepreneurship is an interesting field and one that often stokes the debate over whether successful entrepreneurs are born with the prerequisite traits or if they can also be learned/developed over time. Rather than get into that debate, I thought I would share what I see as the eight most common personas of successful entrepreneurs.
When I ask entrepreneurs what their most valuable resource is, I ALWAYS get one of two responses: money (aka – funding, cash) or people. And it’s hard to argue about the relative importance of these two things. But those resources are replaceable. There’s another resource that isn’t, and it’s Time. Time is an entrepreneur’s most valuable resource and is the subject of this article. Given the various other tools and resources you have, how can you maximize time? Let’s explore further.
What do buying a new smartphone and being given a gift card have in common? In both cases you want to extract value as soon as possible. With the gift card you immediately want to go shopping and with the new smartphone you immediately want to port over your contacts and download your favorite apps so you can start using it.
The same thing happens when subscription-based companies sell their offering to a new customer. This article describes the all-important time-to-value (TTV) metric and the various ways it can be measured.
It seems like everywhere you look now there is some form of startup program advertising their method of helping entrepreneurs increase their odds of success. From incubators and accelerators to boot camps and co-working spaces, each has a different collection of benefits and associated costs. But how should you go about deciding if they are right for you and your particular venture? And if the answer is “yes”, how do you go about comparing them? Let’s explore further.
Some online marketplaces that have a local services component on one side of the marketplace carry an extra burden that “pure” online marketplaces don’t have. Such marketplaces can’t immediately gain broad geographic coverage for their offering. Examples, include transportation network companies (ie – Uber, Lyft), food delivery services (ie – GrubHub, Postmates), in-home cooking services, on demand photography services and many other types of services that aren’t easily on-boarded into the marketplace and activated without some local presence by the marketplace company itself.
This phenomenon creates an extra burden when trying to scale after initial business model validation and that, in turn, creates an extra burden when trying to convince investors to put their money into the company. If you have such a company, read on because in this article I describe some key things to consider and possible approaches to take when devising your market expansion plan.
Many (probably most) startups go through periods of extremely little cash in the bank and with visions of crashing and burning before being able to recover. Unfortunately, crashing and burning is what actually happens a high percentage of the time after getting extremely low on cash. But it’s not what always happens and even if closing the company is the only option, there is a certain way to go about it. This article highlights some golden rules to keep in mind upon hitting really tough times, having doubts about survival and deciding how to proceed.
How can something that’s free and openly available cause so much unintended harm to your business? The availability of open source software has contributed as much to lowering the cost of starting a software company as cloud hosting services. So much so that it’s not unusual to find software companies with 40% or more of their code attributable to open source software. But too many startups learn later as they’re in the middle of due diligence from a big acquirer that their practices for using open source software created significant problems – including reducing the acquisition price or, worse, killing the deal.
I previously described a specific example of this, which I was personally involved in. You can read it here: A Tale of Two Acquisitions – Part 1. Let’s dissect the issues a little further so that you can decide what the right uses and processes should be related to open source software at your company.
When you first incorporated as a C-corporation, probably only you and your co-founder were named as board members. You never really had official meetings or voted on anything, that you were aware of. Your attorney would have you sign some documents from time to time but you didn’t pay much attention to them. After some time and some success, you raised an equity round of funding from a VC and one thing they required was a board seat and quarterly board meetings. Now it’s time for the first board meeting and you’re having a mild panic attack because you don’t know what to expect or how to prepare. And you certainly don’t want to embarrass yourself in front of your new VC investor.
This article is just for you. I’ll describe typical participants, presentation topics, formalities, common courtesies and other administrative activities associated with board meetings. Let’s get started.
I know what you’re thinking. “We don’t even have 20 employees, so why do we need a management system?” You might be thinking this because you previously worked for a larger company and one of the things you hated was death-by-meetings, decision-making red tape and excessive processes/procedures. Or you might not yet know what a management system is but it sounds burdensome. But every company needs a method to their madness – a way of getting things done, deciding what to focus on and communicating to the team so everyone is pointed in the right direction. That’s a Management System. Now you just need some tips for how to right-size a management system for your stage of company evolution so that it is most effective. This article focuses on the very early stages.
It’s a necessary element of your business plan and pitch deck. It’s a question you’ll get asked all the time by investor prospects. And it’s something you’ll find yourself defending, even if much of the underlying data and assumptions didn’t come from you. As the title of this blog article suggests, I’m talking about your market size. But how do you go about estimating the size of your market and what should you do if the resulting estimate is way too big or way too small? Read further for a few hints and tricks for conducting this important exercise.
You see it all the time. A young, invincible hustler-hacker team join together as startup co-founders to pursue a dream of becoming the next Google or Facebook. The hustler takes the CEO title while the hacker becomes the CTO. All is good, right? Well, maybe not. Many first-time startup CEO’s know there will probably be a time in the future when they will need to decide if they want to be rich or be the king, which translates to a possible need to step down as CEO and bring in someone with more experience. The CEO learns this by getting asked by investors if they insist on remaining the CEO forever. What about the CTO? The dilemma is different but has similar implications. Let’s explore further.
Many startups begin with a founder that spends part-time on the idea while still having a paying job. Another common approach is to secure a small amount of funding via “friends and family” or even to self-fund with personal savings. These super-lean methods of starting can be great for focus during the early validation stage but once the idea is proven and more resources are needed, how does the startup go about hiring the first employees with zero/little cash in the bank and not enough revenue to self-fund? The answer probably lies in equity but it’s not as easy as some think. In this blog article I will explore the various nuances and give some specific examples and recommendations.
I get this question all the time from US-based startups: how should we price our Common stock? It’s a very simple question with a not-so-simple answer. The reason is that in the very early days of a startup’s evolution, the methods used to price the company’s stock involve more art than science. Let’s explore further.
Continue reading “Pricing Your Stock in the Early Days”
It’s amazing how quickly legal costs can add up. If you’re running a startup, it’s possible that your legal costs are second or third highest amongst all of your expenses. And just like medical bills, they always seem to be higher than you imagined possible. Even if you don’t like the lawyer you are using, you know you can’t do without one. So what can you do to control your legal costs? Here are 10 ideas to try.
If you already have an experienced product manager on your team, they are probably/hopefully following some well-established product management process. But what about the early days of company formation before you have such expertise on staff? There are always more ideas (features/capabilities, new products, etc) than can be implemented in the desired timeframe. How do you prioritize the ideas to figure out which to focus on first? There’s a simple method I’ve used in the past that at least maps the ideas to various aspects of your business strategy. Let’s explore further.
Throughout your startup’s evolution you’ll find that you do a lot of networking with others that can potentially help you. This includes potential business partners, employees, advisors, angel investors and VC’s. Regardless of who you’re meeting with, it’s not uncommon for them to finish the meeting by offering help. They’ll ask a simple question like “Is there anything I can do to help you?” When this happens, you must have a ready response. In fact, you should have 2-3 things to request without apology.
You’ve just completed a great investor pitch with heads nodding and good interaction. You’re about to ask “Does this opportunity interest you enough to explore an investment?” when instead you get a final question: “One final question. What is your exit strategy?”.
Oops, the last two times you got this question you were met with a sour look. The first time you wanted to show you aren’t looking for a quick-flip and so you answered something like, “We’re not even thinking about selling the company or doing anything crazy like an IPO”. The next time you decided to show the investor you want everyone to get a payday and so you answered something like, “We’ve already identified six companies that surely will want to acquire us as soon as we’ve reached $5M in revenue. They are A, B, C, D, E and F”. In this article I’ll explain why you got the sour looks and suggest a different response that aligns nicely with both company and investor interests.
Similar to the “So What” rule, every time you make a claim, prediction or forecast, imagine your audience is thinking to themselves “yeah, right!” in skeptical fashion immediately after seeing/hearing your claim. Make sure you aren’t asking them to make a huge leap of faith without supporting your claim. There are a variety of ways to do this. I’ll start with some examples and then dive a little deeper.
Once you have a product in the market with an increasing number of paying customers, your valuation will increasingly be driven based on financial and operational metrics. Don’t get me wrong, establishing a financial valuation for any early stage company is part art and part science. So it is true that things like meaningful strategic partnerships, a robust product roadmap, and other non-financial items can help drive valuation. But the more you have an established track record of revenue/profit, the more your valuation is based on financial and operational results. What about establishing and defending your suggested valuation before you have revenue traction? Let’s explore.
It’s not innovation or company culture or a desire to win. Those are important but successful big companies have at least some of those things too. It’s nimbleness (aka – agility). Startups have a “turning radius” measured in inches whereas really big companies can barely turn around in a football stadium. Tucked away in this glaring contrast is a unfair advantage for the startups. Let’s explore further.
The title of this blog article suggests you’ve already decided that you need an advisor. But spend time with your co-founders discussing this to make sure you agree it is something you want and need. In many cases, a really good startup advisor is worth their weight in gold and can demonstrably increase your odds of survival/success versus executing on your own. Let’s explore the secrets to success.
How much equity should you give an advisor? Should the shares carry any special provisions like anti-dilution or change-of-control acceleration? What about giving the advisor cash compensation? Tough questions for a startup founding team that’s doing it for the first time and faced with an advisor they desperately want to bring on board (see related article titled “Selecting an Advisor”).
The short answer is there is no universally-agreed market rate for advisors. And if you want a superstar, you’ll need to pay whatever they demand or be forced to go with one of your other options. But I realize that doesn’t give any guidance so for purposes of this article let’s take superstar advisors out of the equation and just deal with “normal” scenarios.
Startups commonly give 0.5% equity or more to attract an experienced advisor (see related article titled “Compensating an Advisor”). Sometimes after a few months they find themselves wondering if they are getting the value they expected for the amount of compensation provided. This blog article focuses on things you can do to ensure you are extracting maximum value from your advisor throughout the duration of their engagement.
First and foremost, you must realize that it’s your obligation to extract the maximum value. In other words, don’t expect your advisor to send you an email that says “Hey, we haven’t talked in a long time. Is there anything I can do for you?” Instead, you will need to be proactive about engaging your advisor. Let’s dissect this a little further into specific things you can do.
There’s a reason it’s referred to as an “elevator pitch” – it must be expressed in a couple of sentences and no more than 10 seconds. And that might even be a little generous. Psychologist Michael Formica reported that the average non-task-oriented attention span of a human being is about 8 seconds. What you must realize is the only thing your elevator pitch needs to accomplish is to cause enough interest on the part of the recipient to ask you any question that lets you expand a little further. But also be careful about abusing the permission you’ve been given to continue. Now you have 2-5 minutes to generate enough interest for a full-blown conversation, either then or separately scheduled.
I mention this because I see a lot of startups way over thinking the elevator pitch. Start with two sentences that answer the following questions:
The answer is, it depends on how you derive the number and how you communicate it. I’m wearing my angel investor hat as I write this blog article. I hear a common response when I ask a startup what milestones they are trying to reach in ___ months. Included in the response will often be a statement like “We want to get to 100 customers within that timeframe.” Or I might ask why $____ is the right amount of money to raise (see related article titled “How Much Should Your Raise?”). The response will commonly include “That amount allows us to acquire our first 100 customers.” I love the focus on outcomes rather than activities (see related article titled “Investors Write Checks for Outcomes, Not Activities“). The problem I have with these responses is they are nice round numbers that are obviously being used because they are nice round numbers. For some companies the magic number might be 1,000 or 10,000 but my reaction is the same: so what, why do I care about that nice round number? (see related article titled The “So What” Rule) In other words, why is that a meaningful milestone to an interested investor? I have a few suggestions.
I’m afraid the current “don’t waste time creating a business plan” mantra is doing unintended damage. It’s leaving the impression on first-time entrepreneurs that they don’t need a plan of any sort. What I think advisors and investors are trying to tell them is that the 30-50 page written business plans of yesteryear that include long-range financial projections, exit strategies and extensive market research aren’t going to be taken seriously, so don’t waste your time creating such a document. They are also trying to tell entrepreneurs that they barely know if they’re going to make it another 9 months, so why spend too much time thinking about 3-5 years from now? The investors are right but the entrepreneurs aren’t hearing it that way.
Here’s my opinion on the subject. In order to get funded you’re going to have to come up with your “story”, which includes all of the typical content that’s included in a pitch deck and more. The pitch deck is in presentation format but it essentially follows an abbreviated outline of the old-day business plans (see related article titled “Pitch Deck Flow“). So if you have a solid pitch deck you’re already half way there and you do need a plan.
If you’ve seen my bio or LinkedIn profile, you’ll know I’ve served three stints as a CMO and roughly half of my professional career has been spent in a marketing role. But even with my admitted biases towards the marketing trade, I still must push on this one. I find a lot of startups that only want to initially load up on developers and maybe a couple of sales reps. But I contend that a marketing professional absolutely, positively should be one of your first 10 employees. You don’t need to start with a VP but you also shouldn’t cop out with a marketing intern or junior rookie with only 2 years of experience.
I love this blog post from Upstart Business Journal with 7 common tax mistakes US-based startups make. And even though the post was from December 2012, the concepts and recommendations are so fundamental that I doubt they would change much year to year. You can find the post here. Their list includes the following:
- Choosing the wrong legal entity
- Not understanding your tax obligations
- Not asking for professional tax help
- Blending business and personal finances
- Not deducting business expenses
- Not using the right tools
- Not paying quarterly taxes
Get some good advice from a professional in the beginning. Unwinding or correcting for some financial-related or tax-related mistakes can be a serious distraction and even risk your odds of fundraising.
Wait, there’s much more!!!
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I guess the corollary to this could be “don’t use a compass when the precision of a GPS is needed”. In fact, the main point is to use the best tool for the job at the time. If you need to move fast and just want to make sure you’re directionally correct, then a compass is perfect. With plus/minus a few degrees of precision, you can quickly set off in the right general direction. In fact, I wrote a blog article on this exact topic titled “An Unfair Advantage All Startups Have Against Big Companies“. Same for things like estimating your TAM/SAM market size (does it matter if it’s $3.2B versus $3.3B?), estimating salaries for new hires over the coming year and the like.
The analogy of using a compass is ideal for times when speed and flexibility are more important than precision. In other words, make sure to use a GPS instead for things like revenue recognition and your investor capitalization table – where precision is mandatory.
I don’t have anything against a traditional SWOT analysis but recently found myself helping a couple of startups figure out how they are progressing against their business plan and vision. They were less concerned with external market forces like competition or market growth and more trying to figure out if they were on track versus off course. I asked them to create 4 lists:
Too many startups discover they’ve got an acquisition-blocking or acquisition-inhibiting issue after a price tag has already been agreed with the acquirer. It comes out during due diligence and the best outcome could be a reduced acquisition price, significantly increased escrow amount or something else not as palatable. The worst outcome could be a busted deal.
Trying to “set the stage” late in the game is usually very difficult and sometimes impossible. So why not think about it now and set some processes in place to keep things clean from an acquisition readiness standpoint? Here are a few things to consider:
I really enjoyed this blog article from Dharmesh Shah. It’s unbelievable how many startups get into trouble not because their product isn’t having success or their company can’t scale but rather because the co-founders have some “funk” between them that grows to the point that the train goes off the tracks. In a related article I discussed some of the implications of matching up with a co-founder that’s already in the bonus round (see article here titled “Is Your Potential Co-Founder Already in the Bonus Round“). You can read Dharmesh’s post here.
His list includes the following topics:
In the world of mobile apps, as an example, a startup can create a minimum viable product (Lean Startup Methodology – order book here) and put it into the open market via multiple channels for direct consumption by interested parties. In doing so, their primary burden in the beginning is on general awareness of the solution’s availability and hoping the target user will be attracted enough to try/buy the offering. If so, they start getting orders and proceed from there. But many other product ideas and associated business models have a “chicken-and-egg” challenge of requiring two constituent audiences to be convinced before business plan viability is achieved.
The situations usually can be described as having a supply side (often the service provider) and demand side (usually the consumer). Online marketplaces always meet this criteria. The supply side won’t want to commit to any costs unless there is a meaningful demand side already in existence. But the demand side might not perceive any value unless there are any supply side offerings/providers to engage with. So rather than get paralyzed with the situation, let’s explore some possible approaches.
It happens over and over and over again. A company has a successful growth spurt and is ready to ratchet up to the next level. They are sitting around a table trying to decide whether to add more offerings, enter adjacent markets, raise their prices, etc, etc, etc. Very quickly they realize it would be ideal if they had analytics and metrics on A, B and C to help make the best informed decision. But they don’t have A, B and C because they didn’t capture the data during the earlier days and now it’s too late.
This dilemma happens at all stages of company evolution. So why not instrument everything for data collection from the start? Seriously, data storage is unbelievably cheap so that’s not the inhibitor. The hardest part is deciding what information/metrics to keep. My answer is EVERYTHING. Now you just have to figure out what “everything” means. Let’s explore further.
I just sent the exact message below to the startups I’m currently invested in. I realize (and you should too) that Lean Startup principles (order book here) should be used repeatedly for refinements and extensions of your product/offering. But a key point I’m trying to make is that Lean applies to various aspects of your business model that require validation in order to be viable and then eventually successful.
I don’t know who came up with this analogy but I’d love to thank him/her because it’s a perfect way to think about your offering and its value proposition. Is it a vitamin? In other words, does it create an opportunity for some improvement? Or is it an aspirin? In other words, does it solve a problem?
Both might sound like beneficial offerings, and they are. But there’s actually a big difference when it comes to buyer behaviors. Imagine you have $2 to spend and, for some reason, you need to spend it today. Someone presents you with a vitamin and an aspirin and they each cost, you guessed it, $2. Which do you choose? Well, if you don’t have a headache or other body pain, then you’ll probably go for the vitamin because of its preventative health benefits. But if you have even a slight headache you’ll take the aspirin without even thinking about it. I know, you could substitute a cancer prevention pill for the vitamin and even someone with a headache might go for preventative medicine. But are you offering a cancer prevention pill?
For years I’ve helped friends and former business colleagues with their job search. If I find out they are thinking about working for a startup or early stage company, I usually talk to them about the various attributes of a bonus round CEO in case they come across a company that has one. What’s a bonus round CEO? It’s simply a CEO that’s already made his/her retirement money on a previous venture. And the more they made the more into the bonus round they are. Sometimes, but not always, bonus round CEOs are willing to take much more risk. After all, if the venture doesn’t work out, they’re already set for retirement.
So what about having a bonus round co-founder? It could be great given the extra been-round-the-block experience. The main thing is to understand the following things:
I use this rule all the time when advising startups and early stage companies. Actually, it has application in any sort of sales pitch, regardless of your company’s stage. I call it the “So What” rule because it’s an easy way to think about it during a conversation or presentation. It’s a fundamental element of all sorts of sales and presentation methodologies that are just called something different and with a longer explanation. Here’s the simple approach.
Remember that investors are skeptical to start with, and rightfully so. Most investments by angels and VC’s either fail completely or return less than what they invested. They count on something like 1 out of 5 investments to give some minor or decent form of return and 1 out of 25 to do really well. So many executive summaries and business plans come across their desk claiming to completely change the world that they basically get numb to superlative claims. Same for customer prospects you’re selling to.
As you’re getting started with your new company, possibly the last thing on your mind will be defining the principles you want to run your company by. You don’t even know if your product will work or if customers will pay money for it. So why waste time on company principles? The answer is because the moment you start hiring your first few employees, the culture of your company will start to get defined. Many people think a culture is something that just naturally develops from the collection of personalities and actions taken by the employees. And for sure there is a lot of truth to that. But what can you do as a founder to set a foundation upon which the culture develops? The answer lies in founding company principles. These are things you declare and are almost never willing to deviate from. They serve as the litmus test for critical decisions. And they serve as the mantras employees will voice later and the bar they will try to always reach for personal recognition.
I’ve had the privilege to work for a company and to advise another company that are pure demonstrations of this. One company had a half-dozen or so core principles that were set in the very early days and became so ingrained in the company that they were the culture. If you asked any employee what the company stood for, they could all recite at least three or four of the founding principles. These included the following mantras that were my favorites and the ones most remembered by employees: