Up and Running:

People used to say you couldn’t be too thin or too rich, and I think we know now that both points are sometimes wrong. Too thin isn’t my problem, so let that one go; but too rich is a problem for some startups. Not when too rich refers to your own money, perhaps, but with startups it’s almost always investor money that creates a problem–meaning: not your money, but their money.

Taking their investment is your promise to deliver. And the more investment you take in, the more return you’re promising to deliver. So if you got more money in than you can spend productively, you’re in trouble.

I once heard a person suggest that he wanted more investment than his plan said he needed for “peace of mind.” Bad idea. You won’t get peace of mind by having somebody else’s money in your bank account gathering the implied promise of delivering something.

What you get sometimes is people wasting money on bad marketing spends because they can’t find good spends, and they have to spend the money before they face the investors. This explains a lot of very unproductive Super Bowl ads during the dot-com madness.

I picked up on that over the weekend reading Roger Ehrenberg’s “Monitor 110: a Post Mortem” on his Information Arbitrage blog.

We rarely get a chance to look backward as well or as openly as Ehrenberg does in this post. Calling his involvement with Monitor 110 “one of the most interesting and informative experiences of my life,” he offers us a view into the heart of it, well organized into a simple list of seven points:

1. The lack of a single, “the buck stops here” leader until too late in the game
2. No separation between the technology organization and the product organization
3. Too much PR, too early
4. Too much money
5. Not close enough to the customer
6. Slow to adapt to market reality
7. Disagreement on strategy both within the company and with the board

Those are good points, and the post expands on them well. It was “too much money” that caught my eye first because I’ve seen that problem in the past, but I think it’s not one a lot of people think of. Roger adds:

Too much money is like too much time; work expands to fill the time allotted, and ways to spend money multiply when abundant financial resources are available. By being simply too good at raising money, it enabled us to perpetuate poor organizational structure and suboptimal strategic decisions.

I also liked the reference to too much PR too early. I see that happening, too, and he puts it into a very understandable, concrete context:

[some] bad behaviors were reinforced by an unplanned event that sharply impacted our psyche: being on the front page of the Financial Times. It is hard to call it a mistake since we didn’t seek to get such exposure, but I put it down as Mistake #3. To be honest, this single fact was a very meaningful factor in our failure. It raised the level of expectations so high that it made us reluctant to release anything that wasn’t earth-shattering.

Both of these points are reminders that the hunt for financing is not just a simple quest for money. It’s about finding good partners, the right partners, and building long-term relationships and healthy businesses.

Information Arbitrage: Monitor110: A Post Mortem

Two out of three isn’t that bad. 37 Signals is a success, too. So I was curious when I saw “Advice for entrepreneurs: Throw out that five-year plan, build something now, and don’t take any money” on the 37 Signals blog.

It links to “Follow Your Dream” in Best Life magazine, with some good advice about starting your new business. It quotes experts including Scott Shane (author of Illusions of Entrepreneurship) and Greg Gianforte (author of Bootstrapping Your Business). I particularly like (and agree with) the emphasis on getting real, bootstrapping, as implied in the 37 signals blog post title.

Gianforte says:

The secret is to stop sweating your five-year plan and start moving the product from Day One. If your business idea requires more money than you have at hand, then shrink the idea.

That’s great advice. Frankly, I don’t like the plan bashing–that’s why I said two out of three in my first paragraph–but it’s still great advice. Ironically, I don’t like the plan bashing, but it’s not too different from what I’ve been saying about planning in my plan-as-you-go work: Get started, get going, use your planning from the first day. The plan bashing here is about the plan as an excuse for doing nothing. Some people use the plan like politicians use committees, as excuses to do more study.

The article itself has a sidebar on how to go and when to go, which includes four steps to take, called “Look Before You Leap.” The steps are 1) SCORE free advice 2) Find the unmet need 3) Make a plan and 4) Know when to go. For Make a Plan, it says:

Make a plan. Research shows that writing a formal business plan significantly enhances your chance of success. The folks at SCORE can help you do it right. Just remember that most investors won’t think much of your fancy hypothetical numbers until they see some real-life revenue.

For Know When to Go, more good advice, maybe:

Know when to go. Are your wife, kids and boss all crying out for attention while your sideline project morphs into a grasping mistress? You can try to juggle a job, a family and a thriving new business, but you will eventually drop a ball. So if your new venture has built up a solid client base, it may be time to take the plunge and make it your day job.

I say “maybe” because that’s good advice only if the new business succeeds. If it fails, it’s very bad advice. And we don’t get to know that until later.

Which is why I go back to fundamentals: Make a plan. Reduce your uncertainty. Don’t make a five-year plan that’s just an excuse to do nothing: Make a real plan, and do some real planning.

I’ve talked about this topic on my other blog, Planning Startups Stories. I don’t like the idea of retiring. I love what I do. And I’m 60 years old. But then, I recently changed what I do to focus on blogging, speaking, writing and teaching. And that gave me a new job.

Which made me take a personal interest in Brent Bowers’ New York Times piece about Early Retirees In New Ventures, Mostly for Fun. This is really cool, a great reminder that business–your own business, your startup–is supposed to be more than “just” business; it’s supposed to be new, exciting, challenging and fun.

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.

Nice treatment of an important question in Bootstrapping or Fundraising, That Is The Question by Alyssa Royce on the Seattle Post-Intelligencer reader blog, Start Her Up: for Women Entrepreneurs.

I’ve dealt with the same issue this blog addresses: The startup culture emphasizes raising money. But bootstrapping has some real advantages. Royce quotes several people and several points of view.

So, imagine my surprise when I sat down for a friendly cup of coffee (NOT a pitch) with a VC and she looked at me and earnestly asked me why I was raising money.

Um, because I HAVE to?

But I didn’t answer her, I just thought about it, and my answer changed to, “because I thought I had to.” I really thought about it, thought long and hard. What do I need money for, and how much will it take? Huh, that’s a good question.

I’ve come out before on the bootstrapping side of this question, both on this blog and my Planning Startups Stories. Part of that leaning is for reasons that Royce points out . . .

Raising money is a full-time job. Running your company is a full-time job. It’s very hard to do two full-time jobs well. (And exhausting!)

. . . and part of that leaning is also a long–some time in the future–post on the desirability of owning it all yourself, doing it all yourself, not sharing the decision process, independence and control.

But then there is that whole other side of this question. Can you do it by yourself, without additional money? Does that require too much compromise? Can you narrow the focus–can you start up a part of it on a smaller scale? And for that matter, is funding a real option? Do you have the track record you’d need to get investment? Does your business plan hold up to scrutiny?

These are all really important questions. More later . . .

So here’s a question I got in e-mail the other day:

I am an engineer and I’ve designed a machine and got it patented. I am struggling between selling my patent or starting my own business. I am trying to balance out all the pros and cons of a product-based business. I had really great offers for my patent, but I think more money can be made if I manufacture the machine and sell it myself. What do you think? What are the pros and cons of a product-based business?

And here’s my answer:

By the way, have you actually tried to sell rights to that patent? Make an informed decision. Something like a patent is worth what a buyer will pay for it. Most patents, the vast majority of patents, have no buyers.

And then there’s the problem of the buyer who offers a royalty for a license, then does nothing with the patent. You make no money.

And, on the other hand, there’s also the chance that you try to build a business and fail. Lose your shirt. Lose your house.

Which do you prefer, a bird in the hand or a successful business that you build yourself in the bush?

It started late last week with Jason Calacanis’ post “How to save money running a startup (17 really good tips).” He’s the founder of the search engine Mahalo and a Silicon Valley veteran. Read it. Think about it. The “really good” description in his headline is Calacanis’, not mine. Just so you know, “Fire everybody who isn’t a workaholic,” tip No. 11, doesn’t strike me as a really good tip.

That post set off fireworks. Michael Arrington summarized on TechCrunch. Follow his links for good reading.

Boy was he attacked. Bloggers lined up to take their shots at him. Examples are here, here, here and, especially, here.

He goes on, however, to agree with Calacanis. You should read his post, but read the others, also, and read the comments. Read Duncan Riley’s post on the same TechCrunch blog (interesting that Arrington, founder, owner and head knocker, handles that disagreement disarmingly well, by the way). Read the comments to that one, too.

Read also the related 37 Signals commentary, titled “Fire the Workaholics.”

My own experience argues against what Calacanis, Arrington and others say. I would hate to have a company full of workaholics. I don’t think that works. People burn out. Furthermore, I think that the founders making the big money forget–so easily, and so quickly–that the rest of the company has a few odd shares in options and won’t be making tens of millions of dollars if the company makes it. I think that the best company environments are built with people who have lives that they value, by companies that value their employees as people and respect the rest of their lives.

But that’s just me. You get to decide for yourself. Read about it, think about it, and make it work the way you believe it will work best.

Here’s an e-mail:

I saw that you run a few websites and they look impressive. I also saw that you said you had 130K users of Amiglia. I don’t want to be too forward, but I was wondering if the users drop out when they get to the end of the year-long free trial–I mean how many are really paying? The site looks like a good idea.

I’m thinking of starting a website, but I don’t know if users will pay. Even still, I would hope to have members, but I’m impressed with how many users you have. Again, if you don’t mind me asking–how did you get that many people? What marketing tactics were successful for you or would you recommend? Also, I don’t code so I need all the help I can get.

My reaction:

1. I congratulate this person for sending an e-mail to founders of Amiglia.com and asking these questions.

   It doesn’t hurt to ask. The world of startups is full of people guessing what’s going to happen. Ideally, you get into a team with somebody who has experience to get you through this. You want educated guesses, not just guesses. And if you want to know, one way to find out–if you’re lucky–is to just ask.

   Another good idea, when you’re asking, is to ask who else might know. Ask them to point you to some resource on web membership revenue. Ask them to point you to resources on web marketing. It doesn’t hurt to ask.

2. Teams. You don’t have to know everything to get a team together, combining people with different skills and experience. It does take organizational skills, sharing and working with other people…but it’s hard to start at zero and find out everything you need to know. People learn business from experience, and that’s a matter of teams.
3. Getting money from websites can be mysterious business. There are a lot of beta sites like Amiglia.com that don’t actually charge money. And there’s the website tradition of not charging money, too. Facebook is free, LinkedIn is free, MySpace is free and Google Apps are free.
4. How did Amiglia.com get that many people? The line from Field of Dreams comes to mind: If you build it, they will come. Amiglia built a site offering family-friendly photo sharing and waited for reviews, awards and recommendations.

   And what works for one site doesn’t necessarily work for any other. There is a lot of experimentation going on in this business. The good news is that sites like Amiglia.com get up and running with relatively little startup capital, and sometimes they work. Do a good web search on what it cost Guy Kawasaki to start Truemors.com and Alltop.com.

5. Will people pay to be members, and how much? Really good question. In Amiglia’s case, they haven’t pushed it past beta. People can still get it free. The New York Times went from membership to free a few months ago, and The Wall Street Journal is supposedly thinking about the same thing. Flickr.com and Picasa Web are free. How they make money is a good question. Everybody has a different answer.
6. Oh, dear. “I don’t code so I need all the help I can get.” You can be a marketing guru like Guy Kawasaki and find coding help, or a coder and find marketing help, but it’s hard to be neither. Unless you have a lot of money to spend.

I like to think of this situation as similar to what it was back in the 1980s when I got my first toll-free telephone number for Palo Alto Software. It was pretty obvious that the toll-free number alone wasn’t going to do anything for me; I had to get the word out for people to call.

Things are so much easier nowadays because of Google AdWords and related opportunities. But it’s still pretty hard to guess right, and ahead of time, on any of this.

A final thought: Figure out your burn rate. How much money per month will it cost you to buy both internet marketing and website coding skills? Do you have that kind of money? If not, don’t give up, but keep looking for answers. Get some of the right books, read the blogs, immerse yourself in it, and things will be better, after a while.

The San Francisco Chronicle’s Sunday front page ran a feature on Women’s Initiative for Self Employment, with the headline Female entrepreneurs needed the Initiative. The gist:

A microenterprise training and microlending organization, Women’s Initiative has helped low-income women start or expand more than 1,600 businesses in Northern California.

The nonprofit is based in the Bay Area and is celebrating its 20th anniversary. Women, many of them Hispanic, pay $100 for a 20-week course in getting a business growing. It’s a fascinating story, with lots of examples. Here’s just the beginning of one of them:

A 37-year-old immigrant from Chile, Chef Guisell H. Osorio runs Sabores Del Sur, a food and catering company that specializes in South American cuisine.

“I’m surprised people say I can sell because I didn’t think I could,” Osorio said one morning at her weekly stand in San Francisco’s Alemany Farmers’ Market.

Osorio and thousands of other women have learned to do more than just sell. Through a 20-session business management course at Women’s Initiative, they’ve figured out how to come up with business plans, target their markets, analyze the competition, price their product or service, handle cash-flow projections, and do all the other things that entrepreneurs must.

When they graduate, some receive microloans from Women’s Initiative to start their enterprises. And all of them can benefit from the network of successful women who will be with them from graduation to the grave.

Reporter Patricia Yollin has a nice flair for details that make these examples come alive.

In San Francisco last year, eight graduates received first-time leaseholder grants of $9,000 apiece, with the assistance of the Mayor’s Office of Community Development, to help overcome a frequent problem: prohibitively high commercial rents.

“I looked for a year for a space to rent,” said Carmen Rios, 38, who grew up in Mexico City and received one of the grants.

She opened Rose Nails in August on Valencia Street in San Francisco’s Mission District. Her clients get manicures, pedicures, waxes and facials. The specialty is Latin American art nails, or encapsuladas, which can contain ribbons, flowers, snake skin, leaves or whatever.

Rios graduated from the business management course at Women’s Initiative in 1996. She worked at a travel agency and sold clothes before opening her salon.

“It took me 10 years,” Rios said. “It is very difficult. It is hard for Spanish women to find someone to believe in you.”

She said Women’s Initiative gave her confidence–and advice that continues to this day. “When you come to the United States, you are alone,” Rios said. “This was the first organization I can come to where they talk my language. I felt like I’m alive and I can survive.”

Her 17-year-old daughter helps out in the salon, where candles create an amber glow and the scent of rosewater is pervasive. Statues of San Martin Caballero and Our Lady of Guadalupe keep company with foot repair cream and dozens of bottles of nail polish.

Rios works more than 60 hours a week and has one employee. The salon operates nine hours a day, and has just started opening Sundays as well.

The headline seems wrong, vaguely critical of female entrepreneurs. But after reading the whole story, I’m sure that’s not intentional. For the record, when I started with newspapers long ago, reporters didn’t do headlines. Copy editors did. I’m guessing that’s still true today. So, needing initiative might sound too tough, but clearly these are women who can really use the help:

The agency has served more than 16,000 women in two decades. The average client is 41 years old, and 78 percent are women of color. Twenty-nine percent are single mothers, 15 percent have a disability, and 46 percent speak Spanish as their first or only language–which is why Women’s Initiative offers programs in Spanish. All of the women are struggling, with an average household income of only $13,000 a year, and some are illiterate.

I think this is a great story. We have some excellent organizations doing something like this already–especially the national network of Small Business Development Centers–but obviously there is room for more. And the focus on Hispanic and economically challenged means there is more to gain.

This is the right kind of success story; a combination of focus, consistent value and making things work. Mary Ann Beauchamp was born in Japan and had a lifelong interest in healthy eating. Mark Beauchamp bought into the idea. Together they started a food business, found something people liked and focused on giving customers what they wanted.

Not that it was easy; but it is a good story of working hard to make an idea into a business and then building that business. ‘Chelle Parmele posted Success Story: Cafe Yumm! today at the Bplans Blog.

And now the Beauchamps’ Cafe Yumm! is growing, expanding into new areas, exploring how to take a successful local business with a distinctive difference and move that same idea into other locations.

Wow. It’s scary to me. There’s some really bad advice available on blogs. I just saw one about bootstrapping suggesting that bootstrappers starting new businesses are better off without the business professionals, meaning lawyers, accountants, and consultants. That’s the kind of advice that people throw around all too easily. It might be valid for some very small startups, and really dumb for others, small or not. A lot depends on how many people are involved, how much money, and how much work. Furthermore, with professional services, timing is also important. People are much more likely to need attorneys than accountants at the beginning, and much more likely to need accountants at tax time as they move forward. Consultants are special cases, to be used according to specific needs.

Furthermore, it’s all lumped together wrong, as if all these professionals are the same thing. They aren’t. You have different needs for different businesses, and at different times, but here is a simple set of five mistakes to avoid.

1. Don’t underestimate the value of legal advice. As soon as you have two or more people involved in a startup, talking to an attorney is a good idea. Ownership is not trivial. You need to figure out how many shares each of you get, and why. There are no blanket rules for whether you want a corporation or LLC, and partnerships are appropriate in some cases, and simple fictitious business names are sometimes all that’s needed. You need to think through tax implications, future growth implications, what happens if you break up, and you need to do it early, before there’s real money at stake. Two or three hours of a good attorney’s time, especially at the very early startup phase, can save you lots of headache later.

   I do know you can get this done via software packages and company generators who cost a lot less than an hour of attorney time. Some of these can save you money if you do some of the work yourself, but be smart, have an attorney guide you through it first. Know what the tradeoffs are.

2. Don’t do your own taxes. You don’t need a CPA to start your business, but you do need to keep very good records of all money transactions (as I suggested in my post about accounting software earlier this week) and you need to get professional tax help at tax time. Taxes are complicated and tax mistakes are way more expensive than tax advice from a good accountant. Work with a CPA at least once a year.

3. Don’t give professionals (lawyers, accountants, consultants) ownership in your business. If you can’t pay for their services, then revise your startup expenses, review where you’re getting financing, if anywhere, and find a budget for consulting or do without.

4. Don’t confuse consultants with coaches.Good coaches help you get things done, they share advice and experience and know-how but they don’t do it for you. Consultants do the work and deliver you the results. Few startups and even fewer bootstrapped startups can afford to spend money on consultants.

5. Never hire a professional without first talking to two or three of his or her current or past clients. You need to have professionals you can trust and work with on occasion for a long time. Definitely check references. Just being a member of the bar or having the CPA certification doesn’t mean these are the people you want to trust with your business. With consultants and coaches, it’s even more important, because there isn’t a professional certification you can work with.

I’m in this morning’s Wall Street Journal in an article titled Tips on Relinquishing Control from an Executive Who Did So.