Up and Running:

Fascinating startup: Add posterous.com to the mix of Twitter, Tumblr, new media and cool new websites. It’s like an instant blog platform, free and extremely easy to use. You just e-mail into it and, with your first e-mail, it sets up your site, automatically; then you can edit and tune it. I just heard about it in an instant message (see below) saying…

… posterous is going to find VC money in 5 seconds flat

For example, posterous lets you automatically post pictures into an instantly obvious and usable blog-like interface. and it has the quickest and easiest setup I’ve ever seen and, amazingly, it works.

Microblogging. This new instant small media, something that feels to me like instant messaging with a posting platform, seems all the rage. I’ve been on Twitter for a few weeks now, unable to decide whether it’s a gigantic waste of time or the next big thing. Twitter lets you post 140-character snippets. I’m finding some of my favorite people there, and they’re doing interesting things. There’s been a business plan contest and a poetry contest, I think, both limited to 140 characters. Think of the trade-offs.

Of course there’s the problem of attention span, as the instant messages interrupt my Twittering while I’m talking on my office phone, and then my cellphone rings, in between posting–drafting this post–and posting elsewhere at the same time.

Is it a good way to make money? I’m not really sure how or whether social media makes money, and I just finished posting (elsewhere) on an in-depth analysis of that in MIT Technology that is very much worth reading if you’re curious about that.

With respect to instant media and instant posting and a million interruptions, here’s the text of the instant message exchange about posterous.com this morning . . . my tip of the hat to the good side of instant interruptions.

Paul: http://www.posterous.com/
Paul: very interesting
Tim: OK I just tried it, with an e-mail. Interesting idea . . . I’ll see what happens . . .
Paul: yeah
Paul: it’s pretty impressive
Paul: great interesting and real startups
Paul: tumblr.com, posterous.com, twitter.com
Paul: http://www.newsweek.com/id/145216
Tim: hmm . . . btw, you know I’m on twitter?
Paul: yeah twitter is all the rage
Paul: it’s good to be them
Paul: posterous is going to find vc money in like 5 seconds flat
Tim: I don’t get it . . . why doesn’t posterous want me to register timberry.posterous.com?
Paul: oh it lets you bypass that
Tim: How do they know when I e-mail to them what site name I want to be?
Paul: but you can. you’ll see as soon as they e-mail you back. then it becomes clear.
Paul: The e-mail you got back should make it easy to switch that up to a domain you actually want.
Paul: it’s not so much your next blog–but the next trend in the path to microblogging
Tim: OK getting it now … timstuff.posterous.com
Paul: yeah, it’s clever
Tim: It is cool. You’re right.
Paul: check out what a nice slideshow it made for this post http://paul_8f3xz.posterous.com
Paul: just attaching 5 photos to e-mail and boom
Tim: wow
Paul: yeah that’s slick

So there you have it. Instant blogging, instant gratification, immediate interruptions and maybe VC money as well. I like this 21st century. Or at least I do this instant, until the next interruption changes my mind.

(Note: I posted this earlier on Huffington Post. Repeated here for my readers’ convenience on this blog.)

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.

If you’re serious about startups, browse daily through Startups at Alltop (startups.alltop.com). It’s a slick, easy, smooth way to get an instant idea of what’s up at the main startup-0riented blogs. Move your mouse over a blog, read the first paragraph. I start there every day.

And another good view, also at alltop, is venturecapital.alltop.com (yes, about venture capital) … and there is also smallbusiness.alltop.com.

I got an email overnight from Mike Anderson at PartnerUp.com. I’ve guest-posted there on occasion. The site seems like a good idea, a social network site to put entrepreneurs (founders) together with other entrepreneurs, build teams, and the like.

They’ve posted a very useful list of Q1/2008 Web companies acquired by larger companies. This information is hard to come by.

Specifically, the information is used in developing realistic exits, and realistic exit strategies, for companies developing business plans involving investment. Investors need a way out, and that’s what this is about.

You could hardly say that optimism is everywhere, so it’s nice to see today’s New York Times story announcing that Despite Downturn, Financing Exists for Small Companies:

With all the grim earnings news from corporations and banks lately, not to mention the continuing credit squeeze and widespread talk of recession, it would seem that most small companies, too, would be having a hard time finding financing.

But that was not the case at a recent conference in Southern California, where 1,000 investment professionals came from all parts of the United States to hear and talk to 330 aspiring companies–50 of them from China. Many of the companies sought by investors were developing environmental, clean energy, cell phone, water treatment and biomedical technologies.

The economic gloom actually encouraged the crowd, said Byron Roth, chairman of Roth Capital Partners, the Newport Beach, California, investment bank that was the host of the conference. These days, Mr. Roth said, “established large companies may not offer earnings growth but we can show investment managers fast-growing small companies that few people in broader markets know about.”

The story, by James Flanigan, goes on to quote a number of professional investors and cites several recent conferences.

Technorati Tags:
small business, venture capital

I had an excellent Friday and Saturday last week at the Rice University 2008 Business Plan Competition, a reminder for me that some scientists and some ideas make great new businesses. I have to say that because I so often state that the idea is an overvalued component of a new business (compared to the implementation), and that wasn’t the case with some of these. More on that some other time.

As part of that competition, in a judges’ meeting before it started, Rice Alliance for Technology and Entrepreneurship managing director Brad Burke shared the following list of questions to ask about a new venture:

1. Is there a real need? What problem is being solved?
2. Is the market big? Will customers pay for this?
3. Is there sustainable, significant differentiation?
4. Is there IP (patents)? Exclusive license?
5. Are members of the team committed to launch this business?
6. Strong management team? Are gaps understood?
7. Are the timelines, milestones, capital needs and financials realistic? Is there an exit in five to seven years?

The context Friday morning was judges looking at business plans, but I asked Burke for permission to share this because it’s a good list for anybody to use.

And while I seem to be on the theme of business plan competitions–I posted about one here Friday; there are a lot of them in April, and I’ll be judging at the University of Oregon this week and the University of Texas at the end of the month. I posted about the Forbes $100,000 business plan contest for existing companies over at Business in General. Forbes is accepting applications now through the end of May.

The office space problem. If you’re not in a home office, starting a company within a company, in your car or in a cart on the street (no, I’m not making light of homelessness, I’m talking about coffee carts and dessert carts and hot dog carts), then one of the steps in starting a business is getting the office space.

Which brings up An Office Space of One’s Own for Entrepreneurs in yesterday’s New York Times. In Good Company Workplaces is a group of women building a membership organization solving the office space problem for women entrepreneurs.

“They are onto something here,” said Nell Merlino, founder of Count Me In, a nonprofit group that makes small loans to female entrepreneurs. Ms. Merlino, who had never heard of In Good Company, said that the idea made sense in light of the research she had conducted. “Seventy-three percent of women business owners work by themselves, so community is very important.”

Like many interesting new startups, this one started with a need that had to be filled.

Within a few months of starting In Good Company Consulting, a business to advise female entrepreneurs, Amy Abrams and Adelaide Fives discovered that they shared something with many of their clients. They, too, needed office space that was well-located and professional with a place for private meetings. And they wanted to be near like-minded entrepreneurs.

They tried subletting space from another firm. They rented space at the corporate office suites HQ (now the Regus Group) and BevMax Office Centers and visited virtually every flexible and temporary office space in Manhattan. But they were disappointed with what they regarded as the often cold and impersonal qualities of those places, not to mention the shared restrooms that never seemed to be clean enough. “And nothing had the energy and buzz we were looking for,” Ms. Fives said.

So they designed it. And last September, In Good Company Workplaces opened in the Flatiron district of Manhattan with its first 39 members. Their company website speaks of “the three essential elements every successful business needs: productive workspace, powerful connections and effective ideas.” By many accounts it is an unusual hybrid: equal parts business incubator, co-working and learning space and members-only networking group.

So far, so good. Things are looking up. What started as a consulting practice is now aiming for a lot more volume than what just consulting would have allowed.

They said they also wanted to build something that would offer a model of a certain type of entrepreneurial behavior to their target market. “Our plan,” Ms. Abrams said, “is to be much bigger than one space, and to build a bigger business for many years to come.”

Interesting idea. I’ve seen incubators work and not work. This one seems to have a distinctive difference that makes it much easier to understand. And sell.

He was about 45 or maybe 50 when I met him. He was spreading, graying and somber. You don’t know him. You probably never even heard of him.

He’d spent the last 15 years of his life starting, building and growing a sailboat manufacturing company. It sounds glamorous, doesn’t it? He sailed as a hobby, taking small boats out to the San Francisco Bay. So he “realized his dream,” as they say, and started the company.

He told me a long series of sad stories about unpleasant surprises, dealing with employees, unexpected expenses and disappointments.

“So why are you still doing it?” I asked.

“I can’t get out,” he answered. “I could never face the friends and family members who backed me. I just can’t tell them they’ve lost their money.”

Keep that in mind if you head for friends and family financing. And I’m not saying you won’t; sometimes you have to. But keep that story in mind.

Over the holiday I ended up talking to some smart people about getting equity, as in shares or options, in a high-end startup. One of these people has a very high post in a venture-financed Web company with high traffic. Two others have been involved in venture-financed Web startups and had to sue later on matters related to initial share options.

Confusion over ownership comes with the territory. People naturally have different values for the idea, the work and the money. People are often awkward about putting these general ideas into specifics. Ownership of a company, however, is not vague at all; it is very specific. Legally it gets defined in numbers, not concepts. Whether it’s stocks, partnership shares or percentages, it’s specific. And then, to make matters worse, ownership changes as a company brings in investment in return for a portion of the ownership.

There is also a hidden problem: Company founders, the entrepreneurs, necessarily end up having to conform to investors’ rules when they bring in investors. The hidden problem is quite common. What happens next is that vague and general agreements made before the investors entered the picture are impossible to honor after the investors take their place.

So here are my three vital rules for dealing with early-stage equity ownership:

Rule #1: Get it in writing.

If ever there was a road paved with good intentions, this is it. Everybody intends to be fair, and they talk about fairness, but it’s just impossible to make it work until you get down to the actual details.

Rule #2: Get it in writing.

I know, it’s awkward. The other person says “trust me,” and you ask him or her to put that in writing. There you are in the excitement of startup, everybody pitching together, and it just feels bad to be the one who brings up the problem. It’s deflating. But it’s also really important. Swallow hard, breath deeply and explain that these things are supposed to be put down in writing. Things change quickly. One person’s idea of fairness is different from another’s, and those ideas change over time.

Tip: Set this up right, before you start talking, that it should be in writing because that’s the right way to do it. “Hey, Mabel, do you mind, but I think before we even broach this topic we should understand that it needs to be written. This is because it’s so easy to misunderstand, situations change so quickly, and sometimes you don’t have the options or control later that we both assume now.”

Rule #3: Get it in writing.

What is especially tough about all this is that so often promises, given honestly, become impossible to keep later on, because situations have changed. Investors are involved, and they have control clauses, and they can say no.

Having something in writing is a very powerful defense against this changing or cascading legal situation. Investors are 10 times more likely to have to honor–and I mean legally have to honor–a written document than a promise.

Here’s an interesting question: What do you do when your plan includes financing, and you can’t get the financing?

Normally there are options: investment financing or spending less.

Katie Conrad at Faux Pas is dealing with that problem–the loan is apparently not coming–as she builds her new business, and writing about it as it develops. ‘Chelle Parmele tipped me off to Conrad’s blog, and now I’m interested, rooting for her and waiting to see what happens.

In her latest, titled “Bootstrapping,” she’s contemplating never getting the loan and apparently deciding that she’s going to go for spending less, not investment:

If my loan application is denied, and I’m faced with the dilemma of opening my store with minimal money or not opening it at all, I’ll be bootstrapping–doing what I can when I have the money.

Not knowing her situation in detail, I can’t explain why she doesn’t consider partnering with investors, although maybe that’s what she means when she writes:

I know that I have a couple options–I don’t particularly want to use these options as they come with stricter guidelines and much higher interest rates–and I’ll use them if I have to.

I say “maybe,” because guidelines and interest rates sound like other borrowing options, not investment.

Obviously, there are always tradeoffs with these decisions. Not everybody has the option of investors–it depends on who you are, what you’re doing, what you’ve done and so forth–and some who could get investment don’t want to. I certainly relate to the downside of getting investors.

As with marriage, in which the wrong partners can ruin your life, so too with investors. The wrong partner can ruin your business. That can also ruin your life.

So I don’t know what the problem is, but there are a lot of possible problems, so I let that go for now. If you are in Conrad’s position, you should at least ask yourself whether you can get investors and also, just as important, whether you want to.

Conrad seems to be heading toward the second option, which she calls bootstrapping. To me it’s bootstrapping as well if you get a loan, but that’s semantics. Conrad says:

Bootstrapping brings out the creativity–because what else can you do with little money? You just have to be smart with it! The most important things to me are forming my company and securing the location I’ve already picked out and grown to love. So, those will be first on my list. I have found some used and refurbished equipment on the Internet, and I know I can get started with just a few new things.

It seems like a valid option. If you find yourself in this position, at least take the time to ask yourself whether there is a way to get by with less. Some businesses do in fact really require what the plan says for initial capital because you can’t cut corners. A lot of product businesses, for example, will fail if they don’t get the full capital requirement.

If you only have half as much as you need, make sure you aren’t going to end up losing all that you have because it was only half what you needed. That can happen. That’s why we take the trouble to think it through with a plan.

So, do you just push on ahead, demonstrating your resolve and proving your passion? And if so, does that mean pushing on ahead while seeking financing, resolutely, or does it mean starting the business without the financing? Or do you revise your plan and make do, without the financing?

That’s a question you have to answer for yourself, for your specific case. There’s no one right answer for everybody.

Brad Feld offers a very useful answer to an important question Tuesday in Ask the VC, a discussion that also belongs here in this blog. First, the question:

Q: … as an early-stage company looking to raise a seed round of under $500k ASAP to help us grow, what are your thoughts about outsourcing fundraising to a place like Vfinance so I can focus on running the business? Are there any drawbacks?

And then the answer:

A: (Brad) This is a bad idea. You should not do it. Even though fundraising–especially for an early-stage company–can turn into a full-time job, it’s an important one for the founders to do.

You need to treat fundraising as a priority. Presumably the reason you are raising $500k is to be able to hire a few people to help you leverage your time better as you are trying to get your business up and running. If you don’t put enough energy into this, you fall into a classic chicken and egg problem where you don’t have the money to build out your team, but you don’t have enough time to go raise the money because you are busy doing everything because you don’t have the team.

Take a deep breath and realize that fundraising has to become the most important thing you are doing at this stage. Find an early investor or advisor that knows you, likes you and has credibility and hopefully a network of other investors and advisors. Ask this person to help you with introductions to other angel investors. Manage these introductions like a sales process–once you have a pipeline of potential investors, spend the most time with the ones that appear to be most interested. At the earliest stage they are investing as much in you as they are in the business and idea, so make sure you are on the front line of this effort.

Start every day off with this. Fundraising should be the first thing you spend time on each day until you get it done. Once you take 100 percent responsibility for it and make it your priority, it’ll get easier.

Thanks Brad, that’s a very useful post.

I really don’t like the word “valuation”; it sounds too much like an MBA buzzword. But I like even less the general confusion about the concept. We talk about starting businesses, we talk about running businesses, getting investment, getting financed, and we should take discussion of valuation for granted. Valuation is at the same time frequently necessary, obvious and extremely arcane. It is nothing more than what a company is worth. It becomes necessary more often than you’d realize, with buy-sell agreements and tax implications after death and divorce, plus financing and investment. It’s obvious because a business is worth what a buyer will pay for it. And then it breaks down into complex formulas and negotiations.

So here are 10 (I hope simple) rules for valuation.

1. Valuation is what a company is worth. It’s like what a house or a car is worth–less than the seller says, more than the buyer says.
2. A company’s ownership is almost always divided into shares. Let’s say your company has 100 shares, 51 yours and 49 your co-owner’s.
3. Valuation equals shares outstanding times the price of one share. If the company is worth $500,000 and there are 100 shares, then each share is worth $5,000. (OK, there are exceptions, preferred shares and such, but leave the fine tuning for later.)
4. Tax authorities say the price of a share is whatever it was at the last transaction. (There, too, there are exceptions, but let’s keep this simple.)
5. When startups offer shares–equity–to investors, then that, too, is simple math. If you sell 20 percent of the company for $100,000, that means the company is worth $500,000.
6. Investment deals frequently revolve around valuation. When investors question your valuation, they’re saying they want more ownership for their money, or want to invest less money for their ownership.
7. Analysts often apply formulas. The most common formula is called “times profits” because it multiplies profits times some number. Another common formula is “times sales.” Companies might be worth two times sales or 10 times profits. There’s also book value, which is assets less liabilities. And there’s the estimated sale value of assets.
8. Privately held companies are worth less than publicly traded companies. They get discounted for the disadvantage of not being able to convert ownership to cash easily.
9. Growing companies are worth more than stable or declining companies.
10. As with real estate, comparable sales matter. Analysts look for recent transactions involving similar businesses.