Up and Running:

There was a good reminder placed on The Funded yesterday. It’s a note from an entrepreneur entitled The Gift of Not Getting Funded (Early). I really like this quote:

What our lack of funding made us do is go back to basics. We know we had the seed of a good idea but struggled to come up with a sustainable model. Along with lots of hard work we talked with potential customers and came up with a solid way to generate revenue. Our potential customers are now signing letters of support saying they like our product and find it beneficial for their business and are willing to be contacted by investors. We have never had this in previous attempts to raise money and now feel confident in our plan.

The author, who has a screen name but not any additional details, makes this excellent conclusion:

Don’t despair if you haven’t gotten funded yet. It could be a gift in disguise.

Good point. And good example.

Which reminds me: If you’re an entrepreneur looking to get funded, go to thefunded.com and angelsoft.net. Both of those are excellent sites, very valuable for entrepreneurs, free and very useful. Oh, and by the way, if you’re an Oregon entrepreneur and looking to get funded, go to Willamette Angel Conference. Please.

(Photo credit: William Attard McCarthy/Shutterstock)

I found this list in a very good post from Charlie O’Donnell on his blog This is going to be BIG. I don’t know him, and I didn’t know his site, but on digging I discover he has done time with Union Square Ventures, teaches entrepreneurship and practices what he preaches with a couple of startups that he runs.

But what really matters is that this is a very good list. It matches my dealings with startups and investors, on both sides of the table.

1) Strong sense of the key milestones–Entrepreneurs often ask what metrics they need to get to in order to get an investment. I often turn that question around and get them to tell me what the important milestones are.

In a nutshell: Metrics. Trackability. He adds: “Milestones are a waterfall–and having them as goals should inform product, marketing, financing, etc.” Agreed.

2) Implementation of a product strategy–More so than any other aspect of the business, the thing I see early entrepreneurs tend to drop the ball on most–myself included–is product strategy.  I’m not saying you have to know all the answers, but you should at least know what your landing pages are trying to accomplish, where they’re going wrong and what steps you’re taking to identify the solution. I like to know that, even if you haven’t figured everything out, you have a process around product–so this way I can bet that you have the tools to figure it out.

The product road map included, and this gets even more powerful when you add on the milestones in the first point. In the post he adds the practical question, “How do I know you’re not going to spend the whole financing moving the search box around when it turned out that being on mobile was more critical to your success?”

3)  A theory on customer acquisition–You may not even have your product out yet, but having a reasonable sense on how people are going to discover it–past the buzz around your launch–is necessary. Just tell me how the first 10,000 users who aren’t your friends find it–and if it’s viral, tell me why people pass it on other than “because there’s an invite friends link.”

And, within that, this very real note about what doesn’t work:

If your strategy is to reach out to all the bloggers in your industry and get them to write about you, that’s pretty much what every other startup is going to do–and anyone who has done it will tell you the results will likely be underwhelming.

So make it real, and also realistic. Don’t just do what everybody else has done.

4) A financing strategy that gets you *somewhere*–When I say *somewhere,* I really mean one of three outcomes: getting critical mass (whatever that is for you) or at a product milestone that makes your venture fundable, starting to get revenues or cash-flow positive. When someone asks you, “What does this money get you?” they really want to know that it gets you to some amount of users, coverage of certain platforms, first enterprise customers, whatever it is. Just something more mission critical than “18 months.”

Notice that it’s not necessarily all the way to the exit strategy. I find this very refreshing, looking at some real next step, and going back to the foundation of metrics and milestones, trackability.

5) Specific value creation –The easiest way to show value creation is to say that each customer is worth X dollars in revenue. Pair that with the cost of customer acquisition and net worth; there’s your business. I don’t care if these are wild-ass guesses–at least make some attempt at showing that at customer N, your business is worth X.

That’s a very nice summary of “value creation.” Units times price.

What I like about this post is that it gets away from the standards I find myself listing too often: exit strategy, differentiation, growth potential, defensibility, management team and so on. This different way of looking at it seems very useful to me.

Once upon a time the so-called “home office” market was a pot of gold hidden at the end of a rainbow. Maybe it will be someday. And, maybe more important than that, home office businesses are at the very least real, employing people, getting things done and growing.

I first noticed the so-called home office market back in the middle 1980s, when I did my business from a home office (so perhaps my attention wasn’t entirely by coincidence). I was consulting for a living in those days, doing planning and related research mostly for high-tech companies. I was also writing a monthly column in Business Software magazine. And one of the markets most of my clients wanted to reach was what they called the home office.

The problem, however, was that the people who ran their home office businesses didn’t really make a market. They were out there diffused in the world, without an identity, without much in common with each other and without product identity.

What did a home office need that was different from what small businesses needed? What did a home office buy, different from a general small business? It was hard to tell. In comparison, the mobile travelers needed some predictable items and read predictable magazines. So did the students, the engineers and so on. But not home office businesses. Or so it seemed back then.

Earlier this week Steve King of Emergent Research tipped me off to new research about home-based businesses that adds a new angle on the lure of the pot of gold. In his post “The Rise of the Homepreneur,” he offers real numbers from a new report based on data from the Network Solutions Small Business Success Index. The report is available here. And some of the key findings are:

• Home businesses employ more than 13 million people.
• Nearly 6.6 million home businesses generate at least 50 percent of the owner’s household income
• 35 percent of home businesses generate $125,000-plus in revenue and 8 percent more than $500,000.

So with new data from a new angle, it’s not that home office businesses are necessarily a market; it’s that they are a lot of people doing business, making money and doing (I hope) what suits them. And a reminder, as well, that “home office business” doesn’t mean inconsequential; the millions of businesses in this study are supporting people, employing people and generating real money.

And if you dig into the study, they are being taken seriously by customers and clients. And they offer lower-cost startup alternatives, too.

Now where was that rainbow?

Anita Campbell published “51 Tips for Saving Money on Technology” on her Small Business Trends blog last week. Four of the 51 came from me:

Eliminate Paper and Filing with Screen Shots
“I’m finding I can eliminate a lot of paper and filing expenses–not to mention filing and recovery of documents–by taking quick screen shots of web orders and travel documents and such. I save them on my CPU unless they’re travel documents, in which case I save them as JPGs and put them onto my iPhone.”

Use the Amazon Cloud
“We’re saving several thousand dollars a month now by having moved our servers from a server farm somewhere else to the Amazon cloud. We get much better up-time and response time, but for significantly less money.  We’re also using the Amazon cloud for storing files and backup.”

Insist on Price Reviews from Existing Vendors
“When the recession was at its worst we pushed our vendors that provided phones and the office internet bandwidth to redo their pricing. We found that vendors we’d been with a long time were giving new customers much better deals than existing customers, and we insisted on a review.”

Hold Meetings Online Instead of Traveling
“We’re using the web conference for webinars and to host meetings, often one-on-one meetings, to reduce our travel costs. We’ve had success with both WebEx and GoToMeeting. We’re finding the simple meeting online as quick and easy, and a lot more effective, than getting on the plane.”

I’ve included these here because they were mine, which makes them automatically my favorites. But they aren’t the best of the bunch. The entire post is good reading.

Save Money on Technology | Small Business Trends

I’ve seen this happen so many times: the entrepreneur gets the company going and wants financing to push it to the next level, and the investors want the company but not the founder.

It’s not at all unusual, and it’s not as bad as it sounds either. The underlying problem is that growing a company often takes different skills and talents than starting a company.

BusinessWeek.com has a good story on that this week: An Entrepreneur Prepares to Pass the Torch, by Nick Leiber. It’s about Michelle White of Michelle’s Miracle:

It’s a classic dilemma. A first-time entrepreneur creates a thriving company from scratch with the potential to be The Next Big Thing, but her investors thinks she needs an experienced CEO and management team to take it there. They also bet future investors will want to see seasoned leaders in place.

It happens to a lot of people. My favorite example these days is Steve Jobs, who was kicked out of his post at Apple Computer in the 1980s to make way for John Sculley, who ran the company from the late 1980s to the early 90s. Then when Jobs came back to run the company again in the late 1990s, he brought it back from near death to prominence. 

(Photo credit: that photo appears in the businessweek.com story online. You can click it to go to the original.)

I had a slightly disturbing talk with an entrepreneur at a smartups.org meeting last Thursday night. Smart-ups is a local group getting entrepreneurs together in the Eugene-Corvallis area in Oregon.

This man will probably make it. There was nothing dumb or naive about him, and he was old enough to know better. But the underlying assumption he seemed to be making is worth posting about.

He asked me how he would get money to start a new venture related to worms and compost. He seemed surprised, and maybe even discouraged, by my realistic answer.

I said relatively few startups get investment; that most startups make it on their own, from grit, work and getting something they can sell to customers early on.

I told him investment is really only for companies that can grow quickly and sell out soon enough (three to five years) to make it worth the investors’ money. For the investors.

And I told him that investment is particularly hard to find these days. And that he should look at how to get his company up and running on a smaller scale, and start selling.

I was surprised and disappointed that he seemed surprised and disappointed.

And yes, we call that bootstrapping.

(Photo credit: by Chika on Flickr)

Here’s a case for discussion. You be the judge.

Mary comes up with a great idea for an iPhone application. She works on it for three months in her spare time. She develops sketches and designs, trying to figure out how it would work. She looks at other iPhone applications doing related things.

About three months into it, her enthusiasm has waned a bit, but she’s still thinking about it. She’s spent maybe 10 to 20 hours on it so far. Her best friend suggests she talk to Ralph about it. She doesn’t know Ralph, but her friend does. They meet for coffee. Ralph is a programmer. He works for a company in town doing web programming. He’s also an enthusiastic iPhone user and has been thinking about taking an online course on programming the iPhone. Ralph is excited, and his excitement rekindles Mary’s excitement. They agree to be partners in a new business based on this initial iPhone application.

Four months go by. Ralph takes Mary’s initial idea and starts developing. It turns out, as he gets into the code, that what Mary imagined isn’t quite possible on an iPhone. Ralph revises the idea radically, makes it practical and develops a prototype. Mary meets with him three times, they talk, she accepts his changes begrudgingly. At this point Mary’s total hours have gone to 15 to 25, but Ralph has worked a lot, probably 120 hours, on the programming.

At Ralph’s suggestion, he and Mary take the prototype to Terry. Both of them know Terry, but neither knows him well. Terry has been through a failed startup, has a business education and is looking for a startup to do again, this time the way it should be done. Terry’s skill is mostly marketing, but he knows how to develop a plan and seek investment. Terry does a business plan and networks with local business development groups to find angel investors. They win an opportunity to present to an angel investment group.

Another three months have gone by. Mary has now put in more like 40 hours, Ralph 250 hours, and Terry 120 hours.

The three of them meet to plan their approach with angel investors. Ralph wants to quit his job and work full-time on the new thing but needs to get paid. Mary doesn’t want to quit her job but wants to stay involved; she’s not quite sure how. Terry wants to lead the new company as soon as he can get financing.

The business plan indicates it’s going to take $250,000 to develop the business for the first year, after which it will probably need another $750,000 to become cash-flow self-sufficient.

During this meeting, Mary and Ralph and Terry come to an extremely awkward realization: They’ve never really talked about who should own how much of this company, much less how much they are willing to offer to investors in exchange for $250,000.

So what do you think? This is a typical case.

1. How would you suggest that Mary, Ralph and Terry divide up the 100 percent ownership of the company now, before they go to the angel investors. Who owns how much?
2. What do you think of the management team here? Ralph and Terry both want to work full-time on the business when there’s money to pay them. What titles should they take? How much salary?
3. How much of the company should these three offer to the seed investor for $250,000?

Today I want to answer another question from email, on another subject that comes up a lot. Here’s the question, as I received it:

I’ve read many times how investors would rather invest in a quality “A” team with a “B” level product than with a “B” team and an “A” product.  According to most, I have what would be coined as an “A” product and business model. However I only have me. I am looking to apply for formal Angel investment and the team part is an integral part. I am listing that I do in fact want to find a CEO who can run the company. I am listing CEDO (Commission for Economic Development) as a team of advisors. I am listing legal as on retainer. Please share with me what I should do at this point to make the team viable in the eyes of the angel investors.

My answer:

Fill in the team first.

Find that CEO, and let him or her help you find somebody to run either the marketing or the product development, whichever of those two functions you’re not going to do. Look for somebody who’s been down the road, done a startup, made it successful, and sold it. And while you’re looking, keep an eye out for a finance/admin person as well.

What you’re looking for most is experience. Credentials are nice too, but in a pinch, experience trumps credentials, and if you possible can, get both.

Compatibility is a big deal too. You’re going to want people you can work with, who share the same values, who believe in what your company is going to do. Compatibility doesn’t mean sameness, either; same values maybe, but diversity broadens a company. Look for people who have skills and experience that you don’t. Fill gaps.

I assume what you’re thinking is that the investors can help you fill in the team, and that having people they know and trust on the team might seem to be an advantage. But the problem with that idea is that the team is so much of what they’re investing in that it’s like trying to sell a car without tires or an engine.

Investors don’t want to do it themselves. They want you to do it. That’s where the value comes.

Core problem: valuation. Divide how much money you want by how much of your company you’re offering, and that’s valuation. So for example if you want $500K for 33 percent of your company, you’re valuing your company at $1.5 million. Not having a management team really kills your valuation.

(Illustration: istockphoto.com. The point? an individual playing a team game.)

A friend asked me: What about seed capital? Good thing or bad?

For the uninitiated, here’s how I defined “seed capital” for the bplans.com glossary:

Seed capital is investment contributed at a very early stage of a new venture, usually in relatively small amounts. It comes even before what they call “first round” venture capital. How much is that “relatively small amount?” We’ve heard some high-end high-tech ventures in the heart of Silicon Valley call an investment of $500K seed capital, and we’ve known of other ventures that called $35K investment seed capital, and the following $300K investment the first round. It depends on the point of view.

My answer:

1. It’s not easy to generalize. Notice even in the definition how much the terminology depends on the point of view.
2. I like the reminder, in the name of seed capital, that it’s supposed to be like seeds, something that makes something grow. If it’s just a small amount of money but isn’t supposed to lead to more investment later, then it’s just a small investment amount, not seed capital.
3. If by seed money you mean just a small amount, but you’re not sure that will be followed by a larger amount later, then I’d always recommend that you at least consider bootstrapping instead. I’ve posted before my reminders that owning it all by yourself, if that’s an option, is good, and working with investors as partners involves a lot of compromises. For example, here last month, and here on my main blog.
4. Seed capital from good partners, professionals who add value, is almost always good. Subsequent investors from later rounds expect that and will like their participation.
5. Seed capital from bad partners, incompatible partners or unsophisticated partners who get in the way of future rounds, is bad.

So it’s easy to summarize with a reminder that startup funding isn’t as simple as just finding investment–which, as I think of it, is not that simple anyhow–it’s getting the right kind of investment, from the right investors, to match your long-term goals, strategy and practical reality.

Sad but true: Compare these two scenarios, holding everything else–the company, its history, its credit rating, its founders’ credit rating and its balance sheet–constant:

• Scenario 1: Company goes to the bank in April with business plan output showing they’re going to need a bridge loan to finance an expansion over the summer.
• Scenario 2: Company goes to the bank on Tuesday needing a bridge loan to meet payroll on Friday.

I’m guessing that you’re guessing right. The company in scenario 1 gets the loan, the other one doesn’t. That’s about 10 times out of 10.

What brings this to mind is the New Intuit Future of Small Business Report-Credit Outlook, released last week, titled Where Small Is Going.

The report, the research, sponsored by Intuit and conducted by Emergent Research, comes up with some important (although not surprising) key points:

• Community banks and credit unions can be an excellent and accessible source of credit for small businesses that meet their lending criteria. They want the business and are ready to lend.
• Businesses that can demonstrate the ability to manage assets and cash flow will find credit is still available, although not unlimited.
• Credit availability will remain tight. Even though community banks and credit unions are looking to expand small business lending, they simply don’t have the asset base to replace the large lenders.
• The reality is that the smallest of small businesses–those with five employees or less–often will not qualify on paper for business credit. They’ll need to rely more heavily on relationships with their bankers.

While the new report seems to reflect the continuing recession, the major economic problems we’re all aware of, I think we should also recognize that this is pretty much the long-term condition of banking and small business. Banks aren’t supposed to be lending money to small companies without assets, whether or not they have intriguing business plans. Banks are supposed to be safe. It’s the law.

So one of the things you want to build, as you build your business, is your relationship with one or more local banks. Start with a checking account, if that’s all you can get, but try to get a small loan first and get some history with the bank.

And plan ahead as much as you can. You never want to wait until you need the money badly. Talk to the bank early, and it will be much more likely to help. That’s good business for all.

And yes, I know that’s obvious. But we forget. Reminders are good. We’re all pretty busy these days.

A friend asked me last week if I know an investor interested in the T-shirt business. I don’t know him well, I don’t know his business, but I’d like to help. So it occurs to me that there’s a predictable series of questions to ask to point a plan in the right direction.

1. Is your business plan investor-friendly?

To interest arms-length investors (meaning not friends and family but people who don’t know you and don’t believe in you already), a business plan has to have an experienced management team, a product and market focus that offers real growth potential (like at least 10X, but preferably 50X or 100X growth in three to five years), and a believable exit strategy. These days the only credible exit strategies are about being acquired by a larger company.

2. If no, you have two realistic choices.

If your business plan doesn’t have all of these qualities, stop here. None of the rest of this applies to you, so don’t waste your time. You have two options:

• Focus on people who know you and believe in you to get friends and family investment
• Scale down so you can bootstrap.

3. If yes, do your homework; find friendly investors

Never, ever use the shotgun approach–mass mailing, e-mails or postings–to find investors. That’s about as bad as taking out “spouse wanted” ads. Instead, use the internet. Look for the right kind of investors, preferably local, preferably interested in and knowledgeable about your type of business.

Never think of investors as money; they are partners. It’s a relationship like a marriage. An incompatible investor, like an incompatible spouse, is a shortcut to hell. One of the biggest fallacies in startups is the myth that getting the money is the goal–not if you have bad partners.

Refinement: Does your plan have VC potential?

Do you have a strong team, strong product, strong market, clear exit, defensible business and a good use for several million dollars? Do you have a good shot at generating a huge return on several million dollars in three to five years? Like 20 or 30 times the initial investment?

• If and only if you can answer “yes” to every one of these questions are you looking for professional venture capital.
• If not, then you’re looking for angel investment.

And either way, whether VC or angels, turn to the web to find investors who are either local, know and like your industry or, better yet, both.

The professional VC firms are relatively easy to find. Do an internet search. You can refine it to add geography (for example, search for “VC Atlanta” or “VC Texas“). You can also find free venture capital directories with searchable entries for geography, industry, deal size or stage preference, starting with the National Venture Capital Association at nvca.org, which has a good directory of other resources.

Another great site for a VC search is thefunded.com, a database of entrepreneur reviews of dealings with venture capitalists and angel investors. Membership is free for entrepreneurs.

(Hint: you probably don’t want to buy lists of venture capitalists, because most of this information is available free. Sometimes a hundred or so bucks can save you time, which might make it worth the expense; but unfortunately there are a lot of sharks in the listings-for-sale market. Be careful.)

Angel investors are harder to find but still findable. Do a web search for local angel groups, talk to your chamber of commerce, ask the nearest Small Business Development Center, ask at local business schools at nearby colleges and universities.

It’s still easier to get an investor’s attention if you first get an introduction from somebody he or she knows, no doubt; but even without that, if you do the research first and find investors with local or industry interest, the odds of getting a hearing increase dramatically.

And for angel investors, there’s also the Harold Lacy strategy of asking everybody you can think of who they know who might be interested. It takes the edge off asking directly for an investment and, if you know enough people, it can actually work.

(Note: reposted from Planning Startups Stories)

Every startup has its own natural level of startup costs. It’s built into the circumstances, like strategy, location and resources. Call it the natural startup level or maybe “the sweet spot.”

1. The Plan

For example, Mabel’s Thai restaurant in San Francisco is going to need about $950,000, while Ralph’s new catering business needs only about $50,000. The level is determined by factors such as strategy, scope, founders’ objectives, location and so forth. Let’s call it its natural level. That natural startup level is built into the nature of the business, something like DNA.

Startup cost estimates have three parts: a list of expenses, a list of assets needed and an initial cash number calculated to cover the company through the early months when most startups are still too young to generate sufficient revenue to cover their monthly costs.

It’s not just a matter of industry type or best practices; strategy, resources and location make huge differences. The fact that it’s a Vietnamese restaurant or a graphic arts business or a retail shoe store doesn’t, by itself, determine the natural startup level. A lot depends on where, by whom, with what strategy and using what resources.

While we don’t ever know for sure–because even after we count the actual costs, we can always second-guess our actual spending–I do believe we can understand something like natural levels, somehow related to the nature of the specific startup.

Marketing strategy, just as an example, might make a huge difference. The company planning to buy web traffic will naturally spend much more in its early months than the company planning to depend on viral word of mouth. It’s in the plan.

So too with location, product development strategy, management team and compensation–lots of different factors. They’re all in the plan. They result in our natural startup level.

2. Funding or Not Funding

There’s an obvious relationship between the amount of money needed and whether there’s funding, and where and how you seek that funding. It’s not random; it’s related to the plan itself. Here again is the idea of a natural level, of a fit between the nature of the business startup and its funding strategy.

It seems that you start with your own resources and, if that’s enough, you stop there, too. You look at what you can borrow. And you deal with realities of friends and family (limited for most people), angel investment (for more money, but also limited by realities of investor needs, payoffs, etc.) and venture capital (available for only a few very high-end plans, with good teams, defensible markets, scalability, etc.).

3. Launch or Revise

Somewhere in this process is a sense of scale and reality. If the natural startup cost is $2 million, but you don’t have a proven team and a strong plan, then you don’t just raise less money, and you don’t just make do with less. No–and this is important–at that point, you have to revise your plan. You don’t just go on blindly spending money (and probably dumping it down the drain) if the money raised, or the money that can be raised, doesn’t match the amount the plan requires.

Revise the plan. Lower your sites. Narrow your market. Slow your projected growth rate.

Bring in a stronger team. New partners? More experienced people? Maybe a different ownership structure will help.

What’s really important is that you have to jump out of a flawed assumption set and revise the plan. I’ve seen this too often: You do the plan, set the amounts, fail the funding and then just keep going, but without the needed funding.

And that’s just not likely to work. And, more important, it is likely to cause you to fail–and lose money while you’re doing it.

Repetition for emphasis: You revise the plan to give it a different natural need level. You don’t just make do with less. You also do less.