Up and Running:

(This is number 6 in my list of top 10 startup mistakes.)

A business idea is not necessarily a real opportunity. You need to filter those business ideas, sifting through them, looking for the opportunities.

What’s the difference? An idea is just that. It has no value unless you make a business out of it. An opportunity is an idea that can be implemented, for which resources are available, that will prosper.

Opportunities are far rarer, and way more valuable than ideas.

Business planning is a great way to filter the ideas and find the opportunities. Take the idea and lay out the basics, like starting costs, realistic sales, costs of sales, expenses and such. Take a good hard look at the market, what the real needs and wants are, and whether or not people — enough people — will spend money on it. Think through the resources required. An idea becomes an opportunity when you can act on it.

Very few startups succeed or fail because of the business idea. It happens, but it’s rare. For every new-idea-based business there are tens of thousands of new businesses based on giving people more value or better value or something they like better, somewhere it’s easier to get to, or get to more often.

So business ideas are great, hooray, but not really what makes the difference. Make sure you have an opportunity, not just an idea.

Hooray for bootstrapping. My startup mistake number 7 is accepting the popular myth that has startups always requiring winning investment from some outsider. This idea is way too common in business schools, blogs and books.

Sure, a few thousand high-profile startups get investment each year, but the vast majority of startups are bootstrapped. I saw a Wells Fargo study just a few years ago showing that the average startup cost in this country is $10,000. And that, obviously, isn’t something you get from outside investors.

In addition, we gloss over the glaringly important fact that investors make money when a startup sells itself to some large company–called the exit. Just staying healthy and growing isn’t enough. Exits used to include going public with stock, so anybody could trade it; but that rarely happens anymore.

Lots of great companies don’t exit. They start, survive and grow. Their owners make money, their employees (often the same thing, owners and employees) make money, but there’s no exit. Or at least, not within the three- to five-year period that investors need.

And investors aren’t bad people (I’m an investor myself, through the Willamette Angel Conference, and I like me). But they invest to make money, and they don’t make money unless there’s an exit.

So, if your own pet startup can’t get investment, get a clue. Revise the plan. Start smaller. Focus better. Get some early sales. Or keep your day job.

There is only 100 percent ownership in a company. It’s for founders who are totally committed to it, for investors who spend money and, later, for the most important trusted key employees.

It’s not for your cousins, your in-laws, the lawyer who did the initial paperwork or the vendor who did the website. It lasts forever. Ownership belongs with those who are fully dedicated to the company.

I like this summary by Asheesh Avani, who’s a brilliant strategist and a true expert on the ins and outs of small business and startup financing. Asheesh founded Circle Lending, which was purchased by the Richard Branson group and is now Virgin Lending. This is from one of his columns, called “A Fairer Share”:

In simple terms, founder stock is issued early in the life of a startup to the founder and co-founders. It determines how the ownership is divided up and it is typically based on each founder’s contribution to the key assets of the company. Unlike stock that is acquired as the business grows, founder stock is primarily granted for sweat equity–so it’s difficult to distribute fairly if there are multiple founders with different roles and levels of commitment.

I see so many startups that throw ownership around like it’s free admission to the opening day celebration. This is so often a no-win solution. If your new company never does anything, it’s just a waste, a disillusion. And if your company takes off, those early owners are there forever, causing problems, exercising minority ownership rights and scaring away professional investors.

One of the worst ways to save startup money is to give away ownership to service vendors.

Be careful. It’s not a casual favor. A co-owner is a long-term relationship. Make your equity count.

(This is number nine in my list of top 10 startup mistakes. I started yesterday with number 10, and will going from these less significant issues all the way to number 1, the most important mistakes to avoid .)

So many of us do it. I certainly did, in my early startup days. We think entrepreneurship is supposed to mean that we do everything ourselves. Make the product, make the sales, do the books, and take out the garbage.

Doing it all works sometimes, for some people, but it’s the exception to the rule. Most of us need to build a team to build a company.

Think about likes and dislikes, and strengths and weaknesses. Some people like numbers, some like people, some like machines, some like lines of code and keyboards. There’s a lot of like in a team that has different people with different skills. The admin person and the operations person and the (golden-tongued) sales person and the creative marketing person and the programmers don’t have to all be the same people. Usually they’re different people.

And don’t forget the professionals. While it’s smart to do your homework to minimize the legal bills by understanding the standard questions and the main tradeoffs, you still need an attorney you can trust. And while it’s smart to manage your bookkeeping yourself, or with an hourly bookkeeper, most of are going to need a CPA to manage taxes.

Doing it yourself isn’t always the best way. Sometimes you need to develop a team.

This is number 10 on my list of top 10 startup mistakes. I used the list last week at the Growth 2.0 conference in Miami, so I want to share it here.

Once upon a time, I sat down for lunch with a venture capitalist friend of mine.

To the standard rhetorical how are you question, he answered,

“If I see another hockey stick forecast this week, I’m going to throw something at somebody.”

I asked what that meant, and he answered:

That means that sales are going along flat and boring, with nothing happening . . . but things are going to shoot up as soon as I get your money.

It’s not just the hockey stick forecasts, either. It’s all those unrealistically optimistic forecasts with no real basis. For example, the forecasts that assume some new venture can get a small but significant percentage of a very large market. No, you can’t get half a percent of the $50 billion widget market.

And with an unrealistic forecast, you naturally have an unrealistic expectation of capital needs, cash flow break-even, and a lot of other numbers.

And, speaking of hockey stick sales forecasts, they’re actually great when they’re real and believable. Back them up with early sales results, letters from buyers, demographics, conversion rates, and other real data. Then they work.

But anybody can type spectacular numbers into a spreadsheet. The real trick is to meet those numbers in real life.

New kinds of businesses, based on entirely new ideas, are extremely rare. The vast majority of new businesses are new attempts at existing types of business. And that’s fine. Don’t ever focus too much attention on the new idea, as if that were the only foundation for a good new business.

For a specific example, think about graphic artists, consultants, attorneys, accountants, bookkeepers, restaurants, and so on. Somebody comes up to me after a talk, saying he or she can’t be a graphic artist because there are so many of them, and I say of course you can. Do it.

These are displacement businesses. They’re looking to pick up some of a market that already exists. They churn. New restaurants appear, old restaurants go under. There is lots of opportunity.

You don’t have to be alone in any market. Nobody is the only one out there. You don’t have to be first. And just because there are a lot of other people offering similar services doesn’t mean that you can’t succeed. And if nobody else at all is doing it, maybe you should get a clue.

Do what you do well. Give value. Open up the doors on time, answer phone calls, get stuff done. And you can succeed.

In the world of entrepreneurship we talk too much, in classes, books, blogs, and so on, about the interesting new businesses. As if every new business needed a new idea. Start in an existing business, and displace the ones that aren’t doing well. Do it better.

(Image credit: istockphoto.com)

Are you teaching a class on starting a business? If you are, then I’d like you to be aware of course.bplans.com.

That’s where I’ve put up a full curriculum/syllabus including lesson plans, exercises and assignments, online videos, and more than a dozen PowerPoint slide presentations complete with slide-by-slide notes and distribution-friendly photos and graphics.

This is material I’ve worked on for years, originally just for my own use as I taught a course in starting a business for undergrads at the University of Oregon. I’m not going to be teaching that course this spring, after 11 years of it, because I’m more involved with angel investment via the Willamette Angel Conference. But I do want to make it available to others. Why not?

The whole curriculum is free to professors on that site. And, just so you understand the motivation, yes, the coursework requires Business Plan Pro, Guy Kawasaki’s The Art of the Start, and my books the Plan-As-You-Go Business Plan and 3 Weeks to Startup (co-authored with Sabrina Parsons). So my company, Palo Alto Software, does make money by selling those to your students. But we have academic pricing, so your students can get all three for less than the $130 average cost of an entrepreneurship textbook. I’d like to think everybody wins.

That’s at course.bplans.com. You’ll find instructions there to get your free registration as a teacher. This was done especially for SBDCs, members of the National Association for Community College Entrepreneurship, community colleges and undergrad business education classes. We’ve been a sponsor of the ASBDC network for 15 years now and of NACCE for two years; so we like to think we understand those needs.

I’m watching with great enjoyment the Apple iPad announcement and especially all the analysis of the iPad vs. Kindle implications.  That seems like the big issue. Google “iPad vs Kindle” some time. As I write this, two mornings after the announcement, I get 4.3 million hits on that. For example, PC Magazine calls the iPad a Kindle Killer, and Huffington Post asks Will Apple’s New Product Make eReaders Obsolete?

However, unless Apple blocks the Kindle app on the iPad–which would be crazy–then the real issue is the extra $5 for ebook features like color and better formatting. The iPad owner will get to choose between the $14.99 slick iPad version of the book or the $9.99 Kindle version.

I’m already running the Kindle app on my iPhone, and it works very well. The Amazon.com background synchronization gets me automatically to the last page read on any device. While I can read books on the physical Kindle, I can also keep them on my phone and have a novel ready any time I get 10 minutes waiting idly somewhere.

When I get the iPad (which I will, as soon as it starts shipping), that gives me a nicer and more comfortable place to read the same books I’ve already bought on my Kindle account. And transfer them to my iPhone for portability.

And, to make the choice more interesting, how much do you want to bet that the iPad reader app will be transferable to the iPhone and iPod Touch, so you can have that kind of flexibility with the Apple reader options, too? I think it’s obvious. Kindle buyers get more functionality. Apple-only buyers get a slick new ebook option. Everybody wins.

This is good for consumers, giving us more choices and better technology. And it’s also good for the Kindle accounts. Let the buyer choose.

(Image: taken from amazon.com)

I had a really enjoyable time in Miami earlier this week as a guest speaker for the Entrepreneur Magazine/UPS Growth 2.0 Conference. You may have seen my 10 Practical Tips for Starting Fast here Tuesday, taken from my talk there.

There was one question I didn’t answer well because it would have taken too long and would not have applied to a lot of the audience. Time was limited.

An audience member asked me how to establish the right percentages when asking for investment. He said he’s done his business plan, he’s been to talk with the local SBDC and SCORE organizations, but he still doesn’t know how to calculate the right percentage. How much of his company does he have to give away? He said he didn’t know if it was 1 percent, 10 percent or 50 percent.

Of course that’s impossible to answer well without going into the details of the specific case, but generally you have to understand that investors’ best weapon, as they look at a deal, is the simple word “no.” As in “No, I don’t want to do this deal.” And I also asked him to consider the needs of the investor, which are more about getting cash out in a reasonable time than just about having a share in a healthy company.

So, thinking about this on the plane back to Oregon, here are some general thoughts (in no particular order). Warning: these are all general rules; there are exceptions to every one:

• While it is true that you can occasionally get naive people with money, often friends and family, to write big checks for small pieces of ownership (say 1 percent to 5 percent), those are often bad deals. They’re bad for the investors because the return is likely to be very low or nothing at all. They’re bad deals for the company because you end up with unsophisticated investors who get in the way of real growth prospects later, if there are any, by interfering with professional investors.
• Do you want to start your company with naive investors? Consider this previous post of mine, about the wisdom of looking for stupid investors.
• Investment by outsiders is for scalable, defensible, high-profile startups with proven management teams. Unscalable services don’t attract professional investors. And there has to be a real commitment to a credible exit strategy in three to five years. If you don’t like these criteria, rewrite your business plan to need less investment.
• Investors want to have enough clout to make sure you don’t decide later that you don’t want to sell the company. That doesn’t mean that every investor is going to want more than 50 percent, but he or she will almost always want to see that the outside investors, when their holdings are combined, hold more than 50 percent. They don’t make money when you do. They only make money when you sell.
• Don’t give equity to anybody you don’t want permanently involved in your business. Those 1 percent-5 percent-10 percent pieces that startup entrepreneurs give to professional advisers, relatives the kid that did the website? Those are going to drive you crazy later. If you grow and prosper, you’ll need those shares for employees. If you fail to grow, those people will be bugging you over the long term, pressuring you to give them money where there is none.
• Remember the math of equity and valuation: You calculate how much money investors give for how much ownership by managing valuation, meaning how much you say your company is worth. So if you want to give 10 percent equity for $250,000, you’re saying your company is worth $2.5 million. Is it? Can you argue that with investors? Will they agree?

(Image credit: Mircea RUBA/Shutterstock)

I’m at the Entrepreneur Magazine/UPS Growth 2.0 conference in Miami today, speaking on starting a business.

I”m pushing getting going today, with the idea of quickly starting a new business. Some highlights:

1. Don’t wait until all the lights are green before you pull out of the driveway.
2. The right business for you is one that matches who you are, what you like to do–but always with the eye on what people need, want and will pay money for.
3. Do focus from the beginning on giving value, offering something people want to buy.
4. Don’t get lost in the details in the beginning; think about directions, which way to go, without having to have every step set in stone.
5. Major error: not having all the people involved in the start fully understand who does what and who owns what. Get this agreed upon and written down in detail. Never underestimate the value of having a written document, in normal business non-legalese terms, that sets these basic agreements down so everybody can see them.
6. Avoid trying to offer the lowest price. Offer value first, and price accordingly. Low-cost, high-unit strategies require a lot of capital.
7. Find a good business lawyer you can trust.You should still research your legal options yourself and cut down legal costs by knowing the basics before you start, so you can ask questions and understand the options; but you want a relationship with a lawyer.
8. The most important concept in marketing is focusing on a well-defined target market. This is especially true at the beginning.
9. Match your strengths and weaknesses. Do what you do best.
10. The second most important concept in marketing is who isn’t your target market, and why not.

(Note: this is a guest post by Megan Berry (my daughter), first posted at her blog Part-time Perfectionist. It’s so closely related to my normal startup topics that I decided to re-post it here.)

Early last year I was knee-deep in a job search and also a perhaps predictable crisis trying to “find” myself and figure out just what I wanted to do with the rest of my life.

Luckily, I soon came to the much more manageable conclusion that while figuring out the rest of my life was dauntingly impossible, I could find what I wanted to do in the next few years (or attempt it anyway).

And indeed, I did finally find the right job for me. I started work for Mobclix, a mobile ad exchange, last July. As July approached I was both excited and a bit terrified of joining this “real world” I’d heard so much about.Was it really quite as devoid of fun as adults made it seem? Luckily, I’ve discovered the answer is no.

In fact, at times it seems just like college:

1. I’m surrounded by smart people, and they are all pretty close to my own age.
2. I always have too much work to do and not enough time.
3. I’m learning every day (many days, I’m learning much more than I did in college)–about social media, giving real-life presentations (definitely different from school presentations), talking to developers (our target market) and how to best work together with colleagues.
4. There’s always junk food around (and this definitely isn’t always bad . . . )

Oh, and in case you’re curious, here are the ways the real world (or my real world, to be more accurate) is definitely different from college:

1. Having a real job brings new meaning to the “I don’t have enough time in the day” problem. I thought I was busy in college. Now I know what busy is (and I’m sure my older sisters with kids will tell me I still don’t know what busy is, but luckily I don’t have to worry about that yet).
2. Evaluation isn’t so simple. You don’t just get a grade.
3. The gender balance is little bit different. At least in my case, where I work with basically all guys since I’m in a tech startup. See my recent blog post on Huffington Post for my take on that.
4. There’s less room for perfection. I found in college I could study long enough to get everything done–definitely at the cost of my own free time, but it was possible. Now, I simply cannot get everything done, and I have to try to get as much stuff done well as I can. Getting something done “perfectly” is a waste of time.
5. It’s easy to lose sight of the big picture. In college people are always asking you “what do you want do after you graduate?” “Where do you see yourself in 5 to 10 years?” and generally debating the meaning of life. Work leaves less time for that. Occasionally, I have to take a step back and decide I’m still heading in the right direction. For now, the answer is definitely yes.

I had an excellent encounter last night with a group of Duke students. It was hosted by Howie Rhee, who directs the Duke entrepreneurial program, and several others involved in this year’s Duke Startup Challenge, a startup contest that begins now and finishes this spring. There’s a $25,000 first prize.

I really like how they’re specifying the business plan for the contest. This may not be the final version, so check with Howie or the Duke Startup Challenge website; but here’s the rough idea we talked about last night :

• No more than 10 pages of text.
• The main financial tables (startup costs, pro-forma income, pro-forma cash flow, and pro-forma balance sheet) should be included but don’t count against the 10 pages.
• Business charts, bar charts, line graphics, pie charts and so on don’t count against the 10-page limit.

As a frequent reader of business plans, and a frequent judge of business plan contests, I like this. Yes, the length of plans should be limited for the contests, but way too often the limit means that we lose the important financials. And I love having the financials made visual with some good bar charts.

Not that the 10 pages of text couldn’t be 15 or maybe even 20 (although I’d rather have 15 than 20, and 10 is fine). But without special treatment for the tables and charts, they are the first thing that the plans leave out; and the worst thing to leave out.

I am very impressed, by the way, with the Duke Entrepreneurship Program, and the startup challenge, and a really intriguing social entrepreneurship class I visited, taught by Christopher Gergen. The questions, the interest, the students themselves, all very impressive. Lucky Duke students.