Up and Running:

There’s a comment on my post about invention grants from last week, asking for more information about grants. The source site for that was the NCIIA, National Collegiate Inventors and Innovators Alliance, which has some grants for companies and for teachers, too.

I may have to rethink grants. I’ve been pretty negative about grants on this blog and in real life. The idea bugs me, I suppose, because there’s so much more talk about grants than there are actual companies around that benefited from grants. In theory, they give you money to help you start your business, but they don’t take ownership interest in return, and you don’t have to pay it back. Sounds great, but it doesn’t happen much.

So I’ve said, and so I’ve written. But then, lately, I’m thinking that maybe I’ve been too negative. I turn around and realize I’ve run into several startups funded by grants lately.

I recently met John Miller, CEO of a company here in the Eugene local area, Dune Sciences, that has received several hundred thousand dollars in grants from two agencies, one federal and one state. It’s a nanotech company that has won grants because of innovation. And last week I was on a panel with Ian Hill, co-founder of SeQuential BioFuels, which has won cash awards for pioneering environmentally friendly auto fuels. Then I ran across Trillium FiberFuels of nearby Corvallis, which won a $100,000 grant from the U.S. Department of Energy for testing a new method for making cellulosic ethanol from fibrous plant material. The press release said Trillium was one of 360 companies receiving a total of $36 million nationwide. Next I read this story, on a Department of Energy Press Release:

WASHINGTON, DC–Secretary of Energy Spencer Abraham announced today that 234 small businesses in 34 states will receive Department of Energy (DOE) grants totaling $102 million to conduct innovative research. The department chose 351 projects from among 1,450 proposals submitted under DOE’s Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. The department’s Office of Science administers both programs.

So maybe times are changing. Maybe there are more grants now. And maybe I was just wrong before.

Either way, I’d recommend that if you are looking to start a business with a socially recognized angle to it, maybe you should look into grants.

What’s a “socially recognized angle?” You already know. Science and innovation are big these days, particularly when there’s an environmental angle. Other angles include locations in government-sponsored development zones or green industries, and minority-owned businesses. Give yourself some time to think about this, and maybe you’ll be able to present something in a new light.

Think about how your startup addresses some community goals, social goals or worldwide goals. That might be breaks for minorities, developing depressed economic areas or new innovations. Grants aren’t there just because you apply: They have to do with causes.

Do a good search. There’s the obvious Internet search you need to do, but don’t stop there. Check your local Chambers of Commerce, Small Business Development Center (click here for a list of them), local business schools and local governments. Every time you talk to somebody, whether he or she has a good lead or not, ask whom else you should talk to.

If you do have an interesting opportunity, pay a lot of attention to the grant application. Get examples of previous applications that have been accepted. Pay attention to the grant writing itself; a well-prepared application is essential. Do your homework. Get as much information as you can about what the donor organization wants, what it has awarded in the past and why. Usually this information is relatively easy to find, but people just don’t do the work well.

Good article on Facebook in the Wall Street Journal Online: “Some Facebook Applications Thrive, Others Flop,” with thanks to David Miller of Campus Entrepreneurship.

For some of those developers, the applications have become viable businesses. Companies drawing large numbers of users to the Facebook web pages associated with their applications are able to sell advertising or even goods or services there. For others, the applications are helping to raise their profile and user ranks of existing operations.

But many more have tried and failed, unable to gain or keep a following. Creating catchy applications is becoming more challenging as the number of applications vying for users’ attention grows and their sophistication increases. Meanwhile, some early tactics used to gain wide reach are being eliminated by Facebook because their intrusiveness drew complaints.

“Entrepreneurs need to ask themselves, ‘What is the problem I’m trying to solve? What is the need I’m trying to address?’ ” says Ben Ling, director of platform marketing at Facebook. “The Facebook platform is not a magic platform and you can plug in anything and it will be successful. It doesn’t make something that’s not useful, useful.”

The top 1 percent of applications accounted for two-thirds of all application activity in the nine months since Facebook introduced the platform, according to a study of Facebook applications published in March by O’Reilly Media Inc., a technology-focused publishing company in Sebastopol, California. And only 200 applications hosted more than 10,000 users a day. About 60 percent of applications failed to attract even 100 daily users.

Worth reading.

A long time ago when I first quit a good job to start out on my own, a very good friend of mine was shocked.

“You have a family and a mortgage,” he said. That was true. He was amazed at the idea of quitting a job to start out on one’s own. “How can you deal with the risk?”

“It’s not that different,” I answered. “Even in your job, with your salary, you are only as safe as the numbers you bring in.” We were both vice presidents in a market research and planning consulting company. We both ran our groups. “If your numbers turn sour, so does your job.”

The owners couldn’t help that, really, even though it was a small company. You can’t make payroll if you don’t have the revenue.

Things worked out for me, but it’s still a serious question. And to make that more interesting, there’s a new website that measures your job security in that existing day job. Interesting idea, no?

Here’s the link: Job Security Score. Predicts consumer’s income and credit risk

Here’s a cure for that “Oh, a business plan is too big and too tall and I don’t want to do it” syndrome:

1. Do a sales forecast. Do just that. For the next 12 months, break your sales into major categories, and think about units, price per unit, sales, cost per unit and costs. Here’s an example:

2. Commit to reviewing results every month. Set up a schedule, timing, attendance–and maybe even the lunch menu for that meeting next month.

Not so hard, right? Nothing which takes that much time. But, with any luck, just starting the process of projecting your sales and then tracking the difference–and there will be a difference, of course–gets you started with planning.

The next thing you know, you’ll be thinking about why the difference, what’s working, what isn’t, how to improve things … next steps and all that.

Want more on how to do a sales forecast? I’ve got more:

• Forecast your sales … step by step, with examples.

The National Dialogue on Entrepreneurship’s latest newsletter has an interesting call to inventors (and educators):

If you’ve got a good idea for a new product or technology, you might want to check out some interesting grant programs sponsored by the National Collegiate Inventors and Innovators Alliance (NCIIA). Funded by the Lemelson Foundation, NCIIA now operates three separate grant programs that provide up to $50,000 to support efforts that move innovative products or technologies from the idea stage to prototype. They can also provide grants for innovative education programs focused on the same goal of moving ideas to commercialization. This is a great opportunity for colleges, universities, research institutions and their students. A new round of funds has just been announced, with deadlines in the fall and winter of 2008.

Looks interesting. You can find out more about this at the NCIIA grants page.

Don’t choose an industry based on trends, statistics or some list of hot startups. Look in the mirror, focus on your strengths and weaknesses, your experience, whom you want to be and what you like to do–and start a business that reflects who you are and who you want to be.

I hate to disagree with Scott Shane because I like him, I like his books, and I like the way he thinks. But I do disagree with at least some of the underlying implications of his two-post reflection on failure rates by industry. Particularly the matrix he produces as a conclusion:

To bring you up to speed, this starts with Shane’s May 28 post on Small Business Trends, about how small business survival rates vary.

The data show that the four-year survival rate in the information sector is only 38 percent, but is 55 percent in the education and health services sector. That is, the average startup in [the] education and health sector is 50 percent more likely than the average startup in the information sector to live four years. That’s a huge difference.

Moreover, most of the sector trajectories don’t cross; the sectors that have lower initial survival rates generally tend to continue with these lower survival rates every year.

Then he followed up with an even more interesting post late last week, prompted by the obvious follow-up question, which is in one of the comments:

“Good point about selecting an industry with high survival rates for a startup . . . but does not an entrepreneur have to stick to the industry he or she knows? Perhaps the information is valuable for angel investors but I think entrepreneurs cannot change their spots, stick with your strengths.”

Exactly. I’ve posted several times on this blog my general orientation toward starting your business in the area that you know. For example, my previous posts: “Where to Start, What to Start” and “Mirror, Mirror, on the Wall, What Startup?” My general position is that you don’t choose an industry; you stay with the givens, meaning your interest, your experience and, in most cases, your location.

Shane has a pretty good answer to this question:

Entrepreneurs won’t be successful if they try to start businesses in industries they don’t know. We have a lot of data that show that various dimensions of startup performance–survival, sales growth, employment growth and profitability–all increase with the number of years of experience that an entrepreneur has in the industry in which he or she is starting a business.

But Joe and many other people are missing an important part of the success story, operating in a favorable industry. I can tell from the comments on my posts about picking a good industry that people are frustrated by this point because it creates a problem for many people. The dilemma is that if your experience lies in an industry–like autos or steel or retail–that isn’t favorable to startups, you’re disadvantaged relative to your friends in computer software. Their 15 years of experience in software positions them well to start a business; your 15 years of experience in autos or steel or retail does not. The frustrating part is that you can’t change your history.

But this dilemma doesn’t change the facts. Success as an entrepreneur is enhanced by being experienced in a favorable industry; being inexperienced or operating in an unfavorable industry puts you at a disadvantage. Even if you want to fight the odds, it’s an uphill battle because investors, customers and suppliers understand the situation.

. . . which brings Shane to the matrix above.

And my problem with Shane’s conclusion is that I don’t agree with the premise that your odds in a business you don’t know are ever better than your odds in a business you do know.

Statistics are dangerous. Generalities don’t work well. You aren’t just in autos or steel or retail, for example; you’re in your specific auto-related business or your specific retail business. The real odds are about the match between you, your business offering, your target market and your strategic focus. That’s my opinion, though; I might be wrong.

Entrepreneur, trust me on this: Do what I say and not what I did. If you’re working for your own company, your startup, for less than what your market salary rate would be, document it. Please.

Like so many entrepreneurs, I worked without payment a lot in the early days of my company. I also had a stint of almost a year without salary when we needed an extra push during a hard year in 2001, which wasn’t the early days. We already had more than 30 employees and several million dollars in annual sales. But we were also hurting that year and, although we made the rest of the payroll, we didn’t cover me. I didn’t document the sweat equity of the early years well at all, which hurt. With that more recent bout of sweat equity, our very professional controller, who managed the bookkeeping perfectly, recorded everything correctly and avoided the problems.

The problem you face with undocumented sweat equity is what happens if the company grows and prospers. Then assets, expenses and ownership become important elements of tax liabilities and negotiations with new investors and banks. If you have nothing that quantifies those months or years that you worked to build the business without pay it becomes very messy. Of course, if you don’t make it, it doesn’t matter much.

Unpaid wages are hard to put on your books correctly. Although I’m not an accountant and this blog isn’t about accounting or bookkeeping, the problem is that the unpaid wages have to show up as a portion owed to the owner and a portion that will be owed to the government–as employer taxes–when they are finally paid.

If you simply record your unpaid wages as payroll expense and offset those wages as a loan from founders, then the IRS wants to know where the payroll tax money went. Check with your accountant, but I’m pretty sure you can’t deduct unpaid payroll owed to the owners as a deduction that reduces your income for tax purposes.

I was a panelist last night at a new startup organization, Smart-ups, in my hometown of Eugene, Oregon. Somebody asked me about mistakes I’ve made, and I described this one. In this, if you’re making that mistake, you’re not alone. So many of us end up working for our own company without real compensation at one point or another. But please, be aware of the pitfalls. And don’t forget to document.

Here’s a question I was asked this morning:

My company operates in a highly competitive environment in a
specialized category. To gain more power in this category, we are
looking to raise more money. If you could create a list of Top 10
Things that represent value for investors, what would those be?

I’d like to answer with a top 10 list, but hey, when you think of it, there are two things that represent value for investors:

1. Money now.
2. Much, much more money later.

Investors write a check now because they believe that money invested will multiply. They want as much return as they think they can get, on as little investment as they think they can get away with. And don’t blame them for it; that’s their job. That’s what investment means.

Those people who write checks for startups and entrepreneurs have options. They can buy houses, cars, jets, stocks, bonds or gold bars.

You’d think that’s obvious. But I deal with this all the time, and I’m amazed at how many people confuse having a good, healthy business with making money for investors. Lots of good, healthy businesses never make money for investors. One of the worst things that can happen to investors’ money is getting trapped into a holding in a healthy, happy company that’s never going to generate any liquidity for investors.

But of course you want me to stop pontificating and list some things that will make investors believe they’re going to make much, much more money later. So here’s the rest of the top 10 list, which, by the way, ends up with nine items in total, because I’m not going to slavishly think up a tenth:

3. Credible exit strategy.
4. Sales growth. Proven, actual growth in the very recent past. Actual realized 50 percent per year growth for the past two years is 10 or 20 or 200 times more interesting than a sales forecast showing growth to come in the future.
5. Potential sales growth. Future sales growth. Like they say, “It could happen.” Why future if not present and recent past? Investors will ask. Sometimes you can come up with a reason, something you’ve done, a new product, new technology, a relationship just won.
6. Believable potential appreciation. Things that will make your company’s valuation grow. Of course that’s almost redundant, because sales growth drives valuation. But if you have a lot of Internet traffic, a special position, new technology or some other angle, that’s useful. Why will your company be worth more later? Is there a secret sauce? Is it defensible?
7. Profitability. Funny how profitability isn’t as important as growth, but it isn’t. Growth builds valuation.
8. Management team. People with a track record and, in the best of cases, people who have some traction with other investors, who can build your business’ valuation.
9. Battle scars. The “the sadder but wiser ” factor. Last week I heard David Johnson, a venture capital fund formation expert, say: “Past failure is not a problem. It’s good to know what that feels like.”

I’m getting email now from several new “list-your-startup-for investment” sites on the Web. If you’re not familiar with these, there are several. Generally you pay to have your new business listed there as an investment opportunity. You’re hoping an investor will find you there, contact you, and eventually invest.

One of these listing sites asked me to put a link up on this blog, and offered a 50% commission for anybody who follows that link and signs up.

Sorry, no deal. True, there are ads on this blog, but they are controlled by the people who pay the bills.

I’ve met some honest and well-meaning people offering listing services, and charging money for them; but frankly, I just can’t believe that works. In my mind, people who have money to invest, and people who are paid money to manage other people’s money by investing it, don’t browse websites looking for places to put their money. Instead, people who have companies needing investment seek out the investors. There’s that whole matter of contacts, introductions, who do you know, and all that. In short, the deals chase the money, not vice-versa.

Maybe I’m wrong on this. Some venture capitalists run great blogs, and if you ask them, they say that one of their purposes is “deal flow.” So that contradicts my basic assumption. I did learn once of a venture that was funded through one of these listing services; that was five years ago, that service no longer exists.

But I am not putting any listing service on this blog, that’s for sure.

Great title. I wish I’d thought of it. It’s from Venture Hacks this morning in a post about Mike Speiser’s new blog: Laserlike. Laserlike’s theme is, “Free ideas. Just add execution.” In his second post, Mike writes:

The theme of Laserlike is that ideas are overvalued. Entrepreneurs spend too much time worrying about protecting their ideas and not enough time launching them!

I had trouble finding the original post, but not the PDF of the slides in a related presentation. And the Venture Hacks summary is also very good.

So what are the hot markets? Where are the hot markets?

I’m sitting as I write this listening to a panel of experts answering that question. The is at the Princeton Entrepreneurship Network (PEN) Conference on Entrepreneurship. Several experts are answering very well. One of them lives in Geneva, another in San Paulo in Brazil, most are based on Wall Street, which is about 90 minutes from the Princeton Campus.

I’m hearing some very interesting answers. The interesting markets are all global. Between the lines, what I’m hearing is that the question goes off in the wrong direction. It’s not as if the audience has a menu to choose from, select what to start and where to start.

Where you are is usually a given. Right? Sure, there are stories of people migrating to the Silicon Valley to start companies, but that’s rare. Most of us start businesses where we are.

And what business you start is also a given. It’s what you know, what you like to do, where you have experience, interest, and background.

Some other notable moments from this conference:

Mac Lewis, founder of and partner in Sherpa Partners, pointed out that “you don’t do it by following the stories of the companies that everybody is talking about right now. Those stories are already told. You have to invent new ones.”

David Johnson, managing partner of DMJ Advisors, said that having a failure in the past doesn’t rule a person out for getting investors in a new venture. “Failure is not a problem. It’s a good thing to know what that feels like.”