Tuesday, May 29, 2007

Lesson #24 - Build a Reputation

"You can't build a reputation on what you are going to do."

- Henry Ford

An Entrepreneur is only as good as his or her reputation. In the business of startups, maintaining a solid reputation is difficult. A reputation is built on consistency - and living in an ever-changing environment of a startup makes it very hard to demonstrate consistent behavior, action and attitude.

The first thing I learned about building a reputation is that is has nothing to do with success and failure. Entrepreneurs fail. Entrepreneurs succeed. The reputation is built on how the entrepreneur handles success and failure.

Here are some keys to building a reputation:

1. Action not words. I have learned a reputation lives and breathes on action. Nothing is more empowering to a reputation than telling someone you will do something, and then actually doing it. There is always doubt in the minds of people when you promise action, and unless you prove to them you act on your word - the doubt will be confirmed.

2. Accept responsibility. With actions comes responsibility. When you take action, you are making a decision to own the result. Whether the result is good or bad, you must take responsibility. Failure is not a weakness - it defines your character. The words "I take full responsibility" are the words of a leader, not of a loser.

3. Do what is right. As an entrepreneur, you are faced with a lot of difficult decisions. You are constantly torn between what is best for the company and what is best for the founders, investors or even employees. Many times "conflict of interest" is in the forefront of major decisions and there is no way to avoid or remove it. Obviously it is important to have full disclosure, and to maintain an open and honest dialogue - but above all else - you must do what is right.

4. Be Blunt. In order to build a reputation with someone you first need to earn their respect. As you have conversations with co-workers, investors or partners - it is important to be honest even though the truth is damaging to your agenda. When someone asks a "Yes/No" question, answer with Yes or No. Be honest, and be blunt with your answer. A colleague of mine who worked in sales and business development for many years told me "Any answer other then the word 'yes' is 'no'". If someone asks you if you have experience raising capital - and you begin a long diatribe about how you have experience in investment banking, and worked for a VC funded company once....etc...etc - the answer they will hear is "No"... so just say "No". Don't be embarrassed or ashamed to answer "No". Its good answer.

5. Be Yourself. Sometimes in life in order to be accepted or "fit in" you need to behave differently and downplay your personality. Sometimes you need to sacrifice your values, beliefs and potentially your morals just to avoid feeling alienated. Big mistake. Building a reputation is only possible is you consistently be yourself and convey your own values, beliefs and morals to others.

6. Be Humble. Success speaks for itself. One of the values of having a good reputation, is that you don't have to "sell your credibility" to everyone you meet. Letting your actions speak for your character is the best way to communicate who you are. Be humble, and let other people speak highly of your achievements.

7. Build your Brand. Reputations are powerful, but typically limited to your local business community and your extended network. If you are like most entrepreneurs, you want to grow your network and reputation beyond where you live. One of the most effective ways to build a "personal brand" is to have a strong online presence. There are many tools that allow you to grow your network including social networking, forums and blogs. There is a fine line between self-promotion and stroking your ego - but the exercise of online networking and publishing can be a very effective way to meet new people, express your ideas and create an 'online' reputation.

8. Keep in touch. If you are like most people - keeping in touch with colleagues, friends and even family can be very tough - especially when you are focused on a new venture. Make it a point to prioritize your network and gather information about your business connections that make it habit to connect frequently. Even if your current daily activities don't ever cross, it is important to reach out to past relationships and to maintain the friendships.

9. Get Social Proof. One of the most powerful ways to build credibility and a relationship is to have social proof. Social proof is when credible 3rd parties validate you. A good example would be if you served on the board of a local charity, or if you were a speaker at a convention. The idea is that you were "approved" by known parties that have an existing reputation. In order to get social proof, you need to donate your time to good causes and organizations.

10. Create Passion. You can do everything right that I outline above, and build a large network of people who know your accomplishments and think highly of your reputation - but if you lack passion - no one will care. Passion is contagious. In order for a reputation to flourish, it needs to spread beyond your close network of friends. Just like a bad reputation can spread due to a few passionate people, a good reputation will spread faster if you create passion. Have passion for your work, your life and your family and friends - and your reputation will blossom.

Saturday, May 26, 2007

Lesson #23 - Wear a Harness

Entrepreneurship is absolute risk. It is the financial equivalent of bungee jumping. Investing everything you have (time and money) in one single venture is like jumping off a bridge with no harness. One lesson I learned (after hitting the ground a few times) is that diversity is necessary to be a successful entrepreneur.

Diversity has always been a buzz word when talking about investing - put some money in real estate, some money in bonds, and some in the market. That part is easy. The difficulty comes when you attempt to diversify your time. How does a dedicated entrepreneur (and probably CEO) spend time on projects outside of his or her company? After all, isn't the founder and leader supposed to invest 110% of their time in their venture? The answer is no.

Some entrepreneurs feel diversifying your time is a sign of doubt or betrayal? The obvious question is asked - "Why are you spending time on that, when we have so much work to do?" Its a logical question, and by no means am I saying abandon your duties to your venture, but what I am encouraging is that you find ways to diversify your time to meet the best interests of you and your venture.

Diversity will vary depending on your situation and your ventures situation. If you venture is profitable, and well capitalized and everything is going right - then diversity could simply mean looking at spin-off opportunities, investments in other ventures or sitting on the board or active as an advisor to other ventures in exchange for stock. The time spent on these types of activities can be managed and controlled easily. If your venture is a startup, and profitability and stability are off in the distance - then you need to look at other opportunities that could yield income. If you have a million dollars in the bank from your last venture, then you probably have enough security to not worry about personal diversity. If you depend on cash flow to maintain your life style, then you need to have a plan on how to diversify income.

Here are some ideas on how you can invest time in your venture, but also diversify your income and risk as an entrepreneur:

1. Keep your Day Job - Many times first time entrepreneurs just jump ship from their day job to start their new venture. It takes a unique individual that jumps without a harness -and I think a lot of people who could be great entrepreneurs fail for this very reason. They simply can't survive without a paycheck. I realize being an entrepreneur and having a day job can interrupt your tee times and favorite TV shows - but its better you get used to making sacrifices early - because entrepreneurship is built off sacrifice. If you work at an innovative company, you may be able to allocate time during the work day to work on your new venture, otherwise you need to spend nights and weekends. Companies like Microsoft, Google and Dell were started in college dorms in between classes - so drop the excuses.

2. Be a Consultant - If you have expertise and knowledge that you can offer to companies as a consultant - then you may have the recipe for success. Consulting is the ultimate balance between entrepreneurship and a day job. As a consultant, you don't have strict hours, a boss or any restrictions related to starting your company. Consultants can also have more control over their hours and their work load. It may be worth finding a few customers willing to pay you a retained of 2-3k per month for 10 hours a week - to ensure you have income while you venture is starting up.

3. Lower your Bills - Depending on where you are in life -single, married, with or without children - this is your best option in preparation for becoming an entrepreneur. When I launched by second venture, I sold everything I had, left my house on the beach and moved into a one-bedroom apartment. I was single, so I didn't mind living like a bum - and I knew it was necessary if I wanted to dedicate my time to my new venture.

4. Leverage your (non-critical) Assets - If you happen to have equity in real estate (other than your home) or own any depreciating asset that can be sold, you may consider building up a 3-6 months of capital in the bank before making the jump. DO NOT risk your home or sell off a bunch of stock you own. This would be completely against my point of diversification. Look for assets that you don't need that could have value. For example. do you have an old jet ski or perhaps an old computer you don't need anymore? Sell it on eBay.

The key to diversifying your time is to understand you don't need to dedicate all your time to your new venture. Every startup has a certain pace - and it usually is slow in the beginning -and doesn't require as much time as you would think. In fact, a startup usually doesn't completely dominate your life until it starts to gain traction and succeed. In the first year, you will be waiting on certain factors in the critical path that are out of your control. For example, you will wait on vendors to finish the product. You will wait on the first customer to make their decision to buy.

After starting multiple ventures over the past ten years, I started to see that the pace of a new venture is not dependant on how hard you work or how much you work - but only in how smart you work. The key is to have patience and too let the venture gain momentum on its own. If its a good idea, good market and good people are involved - it will happen.

Wednesday, May 23, 2007

Lesson #22 - Learn a little about everything

'Wisdom is not a product of schooling but of the lifelong attempt to acquire it.'

- Albert Einstein

One aspect of entrepreneurship that I always felt was critical in my success, and I think is something that is important in life despite your occupation is the commitment to learning. You cannot rely on what you know to be successful, you need to invest time in learning new skills and continuing education as you build your company.

Every new skill I learned when running a venture became a critical stepping stone to future ventures. Understanding all aspects of operating a business including technology, marketing, sales and financials empowers you to be able to manage a business, but also take control when necessary in order to succeed.

I will be the first one to agree with statement - "There is no substitute for experience", but the precursor to this statement is that there is "No experience without education". In order to truly experience all aspects of being an entrepreneur you need to learn the basics, understand the concepts and then enhance your knowledge with experience.

Here are some tips and suggestions on how to continue education while being an entrepreneur:

1. Talk to the Experts - If you want to get a snapshot of an industry, technology or any subject that pertains to your business - find an expert and spend some time asking questions. You would be surprise how much you can learn in an hour of Q&A with someone who has spent a life time studying a subject. Experts come in many forms - Academic (Professors), Experienced (Successful Professionals) and Evangelists (Innovators). Find a few experts, have questions in hand and prepare to learn.

2. Webinars - Another great way to hear experts is through conferences and seminars. If you have the time and money, it may be worth it to attend these types of events. Its been my experience that it can be hit or miss, so the investment of travel and time may amount to zero value. Over the past years, I have spent more time attending webinars. Webinars are typically free (or very cheap) and you can attend over the web, and not have to leave the office to get 1-2 hours of education. Also, because it is a webinar, the presenter is usually an expert sitting at their office as well. Most webinars also give attendees the ability to ask questions - which is sometimes impossible at conferences and seminars.

3. Shadow - If you don't have much experience as an entrepreneur (just left your day job, or just graduated from school) - a great way to learn is to shadow experts during their day. This can be accomplished multiple ways - including becoming an apprentice or assistant. Many of the successful entrepreneurs I have met throughout my years I have spent numerous days shadowing them as a way to see how they interact with other people, make decisions and ask questions about their experiences.

4. Podcasts - If you are like me, you probably spend a good time in front of a computer and listen to music in the background while working. Although I do a lot of reading, I have found listening to podcasts while working can be just as informative. There are a lot of experts that publish podcasts about different subjects, and if you are interested in learning about something it can be integrated easily into your day. While you are sitting in front of the computer working on some mundane task, play a podcast in the background.

5. Online Forums - Most people think Forums are just a place for people who are lonely or nerds who want to share a new hack. Not true. Forums can be a great place to ask questions and get smart answers. Yes, most forums do tend to be technical in nature - but there are more and more business related forums which encourage entrepreneurs to contribute experiences, recommendations and help answer common questions. Obviously, you want to always qualify your source before you take a post as gospel, but if you are looking to just share ideas, get feedback or ask for opinions - forums can be a great resource for learning. A few that I have used at LinkedIn Answers and Yahoo Answers.

As you can see, learning can be accomplished in a variety of ways, and can easily be integrated into your busy schedule. You don't have to block out 4 hours to take a class, or spend 20-30 hours reading books. Learning can become part of your daily routine while sitting at your desk or networking with other entrepreneurs.

Tuesday, May 22, 2007

Lesson #21 - Create a Culture

Of all the startups I have been a part of as a founder or investor - I always found the ones that succeeded had an X Factor that was not something that could not be manufactured - it just happens. For lack of a better name - I call it "culture".

Here is a definition of Culture that I think describes exactly what I see in successful startups

"The system of shared beliefs, values, customs and artifacts that the members of society use to cope with their world and with one another"

When a culture doesn't develop in a company - there is something wrong. I realize this is a very general statement, and I am sure their are exceptions - but from what I have seen culture thrives when people are engaged, happy and motivated to do whatever it takes to succeed.

Lets take a minute and break down the definition above, so I can add some color to the definition of startup culture.

1. Shared beliefs - A startup is 95% trust. Everyone knows a startup is risky, and when you cut through all the hype of any early-stage company - there is a high likelihood you may not see a paycheck next month. The only thing that keeps people from going insane is the shared beliefs. The job of a CEO is to show a path to success and have everyone believe it is achievable. If one person doesn't believe - its like a virus of doubt that will spread throughout an organization - and ultimately kill a company's culture. Everyone needs to believe.

2. Shared values - Everyone in a startup must share the same values. In a dynamic and hectic environment where everyone is pushing the rock up a hill, you can't afford to have someone pushing in the opposite direction (or not pushing at all). Core values like honesty, hard work and team work are always critical - but more importantly values like self-sacrifice are what makes good companies great.

3. Shared Customs - Every time I see a custom develop in a startup (no matter how ridiculous or immature) I see culture personified. Whether its someone ringing a bell when they close a deal, or everyone watching a movie together on Friday nights - a custom is the voice of culture. It ties everyone together in a simple act. There is no culture without customs.

4. Shared Artifacts - Every culture marks history through artifacts. Artifacts are the physical representation that capture a moment in time and allows people to savior the memory of how they felt that day. A common artifact of every startup is the first purchase order or first dollar of revenue. Highlight your successful milestones by creating artifacts. There is nothing more motivating than remembering history and appreciating the investment of hard work and time you have made and reminding you of the work that needs to be done.

And finally, the last part of the definition which I think is highly relevant - "use to cope with their world and with one another". What a realistic statement. The word cope is a great combination of acceptance and patience. Culture is not easy. Some people may feel that the "shared customs" are sophomoric or feel that the developers don't share the same value system as the sales team. Friction is a part of culture and needs to be acknowledged and accepted. Sometimes the differences in each person are what brings us together and enable each person to contribute and make the culture personal and unique.

Friday, May 18, 2007

Lesson #20 - Don't let Good Money follow Bad

Let's face it - being an entrepreneur and starting a new venture is not too dissimilar to being a gambler. There are so many elements in gambling that make for great analogies, but none more relevant than the old saying "don't let good money follow bad".

One of the most challenging decisions of an entrepreneur (and a gambler) is to walk away from the table and accept their losses. You never know if your losses where due to bad planning, bad execution or just bad luck - but there comes a point where you lose faith in your ability to turn your luck around, and you just need to stop.

I have been involved in multiple ventures (including ones I was the CEO) that raised millions of dollars around solid business plans, great management and a clear idea on the market opportunity - but never seemed to turn the corner and reach cash flow positive. So they continued to raise capital, round after round, hoping their luck would change. They always insist that success is just a matter of time and money. They rarely are able to accept that maybe the business plan wasn't flawless after all, and maybe they need to change their game plan ... or maybe, just maybe .. they need to fold and walk away from the table.

Here are some of the warning signs that in hindsight were obvious but difficult to accept nonetheless.

1. Sales Cycle - To me this is probably the most accurate way to determine if there are problems ahead. There are many factors that determine a sales cycle including the sales person, the product, the price and the buyer. But when you boil it down, the biggest factor that determines a sales cycle is market demand. If there is no real market demand for the product, the company will have a long road to reach success. I have seen a lot of startups close sales where there was no real market demand - but the sales cycle was brutal, they had to jump through hoops, and ultimately the sale wasn't profitable. I know what you are thinking - "what about million dollar deals... they always have a long sales cycle". Yes, big deals can take longer - but remember we are talking about startup companies, not established companies with a track record. If you are a startup, and think you are going to close big six digit deals - then you definitely need to rethink your business model.

2. Proactive Operations versus Reactive Operations - Here is another great litmus test to see if your venture is gaining real momentum, or you are operating in denial. Proactive operations is where the CEO has to actively push operations - referring back to the business plan almost like it is an unfulfilled prophecy. Reactive Operation is where the market is pushing the company - the phones are ringing, opportunity is knocking and customers are demanding product. The difference is obvious when you are looking outside-in, but sometimes is difficult to see when operating in a vacuum. Every company when it first opens its doors will operate in proactive operations for a little while, but if you are still proactive in Year 2 - there is a problem.

3. Gross Income per Employee - Here is a great way to measure the health of a company. So many of these early warning signs are subjective, but this is a clear cut number. Before you use this test - you need to wait until the sixth month of sales (which could mean you're 12-18 months into operations). At six months of sales, total up gross income for the past 3 months (total sales minus total cost of goods for the last quarter) and divide it by one month payroll.

Here is the equation:
X = (Gross Income for last quarter) / (Monthly Payroll)

So for example, let's say I did $120,000 in sales in the last three months. And my cost of goods was $20,000. My gross income for three months would be $100,000. If my monthly payroll is $33,000 then my number is 3.

Here is the scale to determine the health of the company (and whether you need to make changes)

Less than 1 - If you number is less than one then you need to make changes NOW. You are upside down, and your cash burn is way to high. The first suggestion is to cut payroll immediately. Your company could be doing well, but your staff is too big to support.

Between 1 and 3 - This is the danger zone. Most startups are in this zone during the first year or two of operations because they are in growth mode and in early stages of sales. However, you can't survive in this zone for a very long time. If you have capital in the bank to help with cash flow and sustaining operations for 12 months, then you are reasonably healthy, but if you don't have the cash to fund 12 months of operations - then you need to consider reducing overhead or really hustling on sales.

Between 4 and 7 - This is a healthy state. You may still have cash flow issues due to accounts receivable and investing in growth - but overall you have turned the corner in validating there is customer demand, now you just need to focus on scaling the business.

Over 7 - You are a rock star - prepare for an exciting journey - you clearly have the lion by its tail.

Hopefully, you can look objectively at your business and ask the hard questions to really determine if you are heading the right direction. One of the greatest strengths (and greatest weaknesses) of an entrepreneur is their blind-faith in their idea - and the willingness to fight until the bitter end.

Just remember that success usually follow failure, but only if you have the courage to make the necessary changes.

Lesson #19 - Don't be Lost in Translation

A big part of being an entrepreneur is raising capital. I have had the fortune of being on both sides of the table - an entrepreneur pitching my business plan and as an angel investor and fund manager. As an entrepreneur I have learned a lot about the process of raising capital and what fatal mistakes you can make when presenting an investment to an investor. As an investor, I have seen a wide range of business pitches (ranging from bad to okay), which led me to understand why venture capitalists are skeptical and occasionally synical.

Before I give you my tips and techniques on how to have a conversation with an Investor, lets get into the mind of a typical investor, so you can appreciate what you are up against.

1. Investors are pessimists, not optimists. Investors are looking for weakness the minute you walk into the room. They are making a list in their head of reasons NOT to invest.

2. Investors have seen it all. All businesses are 80% the same, and the remaining 20% is what makes it unique. A novel technology and business model will spike their interest, but there is a high likelihood they have heard a variation of your pitch before.

3. Investors do not want to be alone. Investors feed on validation. The best way to validate an investment opportunity is to create demand. Investors want to invest with other investors. There are very few venture capitalists that will lead an investment, and even fewer will go in alone.

4. Investors are patient. Investors are in no hurry to write checks. They will wait until the last possible second before committing to an investment. And usually the only event that gets them to pull the trigger is if the investment round is closing due to other investors interest.

5. Investors don't like surprises. Investors want to know more about the business than you. If you withhold information, or forget to tell them you won't hit your numbers, or you just lost a key employee - they will be livid. Investors will accept bad news only if they knew it was coming.

Now that you have an idea of the investor's mindset - I can give you some tips on how to interpret what an investor says, and how they interpret what you say.

Here are some common questions and statements you will here in a typical "pitch" to an investor.

1. Investor Question - "What is the history of the Company?"

Interpretation - "I am interested in knowing if you have any proof whatsoever that this is a good idea? Any customers? revenue? Anything that can be classified as "operational proof" that this is actually a "company" and not just a business plan."

2. Investor Question - "How much have you invested in the Company?"

Interpretation - "Please don't tell me your only investment is "sweat equity". Please tell me that you invested real money, showing me that you are willing to put a large portion of your own money into this idea. If you aren't willing to invest... how can I really believe you are 100% committed?"

3. Investor Question - "How much capital are you raising in this round?"

Interpretation - "I already know how much you need to raise based on my experience, I just want to see how realistic you are about what type of funding it will take to grow a company. Also, I want to see if you dodge the question - or really have confidence in your financials."

4. Investor Question - "What is the valuation of the company?"

Interpretation - "I already know what I think its worth, but I want to see if you are in the ball park, or completely off the chart. I also want to see how desperate you are for money, and if you are ready to give up half your company"

5. Investor Question - "What is your exit plan?"

Interpretation - "Please give me a list of names of companies that you feel would benefit from acquiring your technology and business.... don't just say IPO or Acquisition."

6. Investor Question - "Who is your competition?"

Interpretation - "Please give me a list of names, details on size, market share, etc... don't say 'I don't have competition'"

7. Investor Question - "Who is your Market?"

Interpretation - "Do you have experience selling this to someone? Give me specifics? Who wants to buy your product and why? Describe the perfect customer - don't rattle off a list of industries or basic demographics."

8. Investor Question - "Who else are you talking to about investing?"

Interpretation - "Is another VC interested? Do they see something I don't? I am interested, but I need validation before I spend more time looking at this?"

9. Investor Question - "What is your current funding status? How much capital do you have?"

Interpretation - "How desperate are you? Are you not going to make payroll next week... or do you have plenty of funds and really don't need me?"

10. Investor Question - "What is your background?"

Interpretation - "Are you a seasoned entrepreneur? former VP of a Fortune 500 company or a Ph.D. Scientist?? If not... there is the door"

Ofcourse these are only a few of the questions you will be asked, but I think you get the idea. Just because an Investor asks a question, doesn't mean they don't know the answer. They are more interested in how you answer, then what the answer is.

One of the most difficult aspects of being an entrepreneur is learning how to bridle your excitement and your optimism for your idea. Think of it like fire. Fire in a controlled environment can be a very powerful tool, but if it gets out of control you can destroy everything.

Thursday, May 17, 2007

Lesson #18 - Control your Destiny

“It's choice--not chance--that determines your destiny.”

Every entrepreneur is faced with decisions that relate to power and control. If you decide to raise capital and bring in investors, you are giving up some level of control and power. Even when you hire a management team you can relinquish too much power and control if you are not careful.

Anytime you make a decision to include another party in the management or ownership of your venture, you need to make sure that you still control the destiny of the company.

How do you maintain control?

1. Make sure any action to change the operating agreement or bylaws of the corporation require your approval.

2. Make sure any issuance of stock or sales of assets in the company require your approval.

3. Make sure your employment by the company can not be terminated by anyone or by the Board of Directors without your consent.

So many entrepreneurs make the fatal mistake of trusting a partner or investor in the early stages of a venture, and not putting the proper controls in place to ensure their interest is protected.

It is absolutely critical in the early stages of your venture that you have clear documentation on who are the stakeholders and what powers they hold. Here are some classic examples of ways a founder can be hijacked if they are not cautious:

1. 51% Force Out - In most corporations the majority of shareholders rule the company. If you have partners or investors that total up to over 50% ownership - then you are vulnerable to being forced out. You can be the CEO, on the Board and feel like you are the most valuable employee - but at the end of the day - one vote by the shareholders can put you on the streets. They may not be able to take away your stock, but I have seen companies maliciously dilute a large shareholder to literally nothing over time.

2. The Power Drain - Most entrepreneurs raise capital to grow their company. Many times the company is desperate for capital to survive, so investors balance their risk by making the terms of the investment very onerous. Typically, investors not only want to take a big chunk of the company and limit their downside - they also want to drain the power of any major shareholders (especially the founders) in order to protect their interest. One example. is having the founder (who is typically the CEO) sign an employment agreement that gives the company (or Board) ability to terminate their employment based on subjective reasons. One of my favorites is when Investors create a new class of stock and require all corporate decisions to have majority approval of all classes of stock (which essentially gives equal power to the investors and founders, even though the investors may only own 10% of the company).

3. Outsider Board - I have had a lot of experience with Board of Directors. I have sat of many Boards and I have answered to many Boards. Every time I have raised capital, the investors demand a seat on the board, and then once they do get a seat, they demand to have an "outsider" on the board. Although they tell you its because they want an industry expert with experience, they are really trying to stack the Board to their favor. Here is my short advice on Board of Directors. Only major investors (of time or money) deserve a seat on the Board of a startup company. If you want "industry expertise" than just ask the person to be an advisor, and when you need advice pick up the phone and call them. They don't need to be on the Board. Keep your Board small (ideally 3 people) in the early days. Don't put too much energy in thinking Board's are critical. A Board can be a powerful sounding board if you choose the right people, but if its constructed simply as a way for investors to keep tabs on their investment - it most likely will be impotent.

4. The Dilution - If you have ever raised capital, you know the word Dilution well. Essentially, anytime you sell stock in a company - all existing shareholders are diluted (which typically means their investment is losing value or they are losing power). When a company is underperforming and continues to raise capital to fund operations dilution becomes a major problem. You can start out owning 100% of a company, and after a few rounds of capital have less than 20% of a company - and not much to show for it. Unfortunately, this is something you cannot avoid if you need the capital to survive but it is something you can minimize by being smart with your capital, and making sure you can reach cash flow positive in your first round.

In summary, make sure you understand who has the power in the company - and realize their are inherant risks associated with distribution of power. There is also a sense of security for investors when there is a balance of power - and many entrepreneurs are forced to relinquish power when they bring on new partners, but just make sure you are not giving too much away. Think about all potential outcomes - from worse case to best case - and make sure you have the ability to control your destiny.

Tuesday, May 15, 2007

Lesson #17 - Tell the World about your Business

The famous saying "If you build it, they will come" only applies to gambling and graveyards. If you are in a different business, then you need to tell the world about your business.... every single day.

I can't overstress enough how important marketing is for a new business. It doesn't matter whether you are opening a sandwich shop or an enterprise software company - if you don't market your business consistently - you will fail.

I know what you are thinking "I wish I could spend money on marketing every day, but I have a limited budget, and can't afford expensive advertising, printing costs, design, etc".

I understand, so I will focus this blog on how to execute a reasonably aggressive marketing strategy for a minimum budget.

Here is my TOP TEN ways to market your business for under $100.

1. Website - You absolutely need to have a solid website, that gives people a great first impression of your business. To save money on high-end design, I suggest you purchase a template from a website like http://www.hypertemplates.com. Templates range from $30-$50. Once you buy a template, you can plug in your content, or pay them a nominal consulting fee to insert the content into the template. The goal is to have a simple, powerfully designed website that gives a great impression of the company.

2. Email Newsletter - Start building an email database of all people connected to your business - including customers, employees, partners, etc. Email is an inexpensive way to keep everyone up to date on the latest happenings, and can be deliver very professionally through services like Constant Contact - http://www.constantcontact.com. For less than $30 per month, you can send email newsletters to your 2,500 contacts. They manage the entire list, unsubsribes and give you a tool to design the email so it looks professional.

3. Blog - Start a Blog. In fact, start multiple Blogs if you want. You can never Blog enough. Blogs allow you to get personal with your readers (unlike a corporate website). Blogging can be a great way to keep people informed on your products, the company itself, or simply be a place to talk to your community in an informal matter. Services like Blogger - http://www.blogger.com are free to use.

4. Press Releases - Make news. The best marketing any company can hope for - is for a magazine or newspaper to pick up a release and print it in their issue or incorporate your company into a future story. You don't need to spend a lot of money on a PR Firm or Press Distribution service like BusinessWire - what you need to do is spread the word on the web. Here is a list of Press Distribution services that you should use to post and distribute your press.

Fast Pitch Press http://www.fastpitchpress.com (offers Free Post with optional upgrades)
PRWeb http://www.prweb.com (starts at $80)
PRLeap http://www.prleap.com
PR.com http://www.pr.com
PRFree.com http://www.prfree.com

We suggest one or two press releases a month, and posting those press releases on one or more of the sites above. The more exposure your press gets through syndication, submission to Google and Yahoo, and through the community will drive traffic to your business.

5. Search Engine Optimization - Getting top ranking in search engines is key to building long term traffic to your website. Instead of spending hundreds or thousands of dollars with an SEO firm, here are some things you can do to help boost your rankings:

a. Join Social Networks - Websites like Fast Pitch (http://www.fastpitchnetworking.com) and LinkedIn (http://www.linkedin.com) provide basic SEO services for people who create profiles. Although its driving traffic to your profile (not direct to your website) - it still drives traffic to you.

b. Create Links to your Site - Make sure you create content on the web, and link it back to your website. The number of links to your site (from relevant sites) matters. This is something that is tough to do - but start by leveraging websites that let you create pages or links (a great place to start is social bookmarking sites like delicious, Technorati, Furl, Digg and others.

c. Use tools on the web (like SEOMoz http://www.seomoz.org/) to find out how search engines view your website. Make sure you have all the right elements, keywords, etc on your site. There are great sites that walk you through basic SEO steps.

d. Participate on websites - join forums, groups (Google Groups, Yahoo Groups, Answers, etc) and contribute content. The more content you create - the bigger net you are casting to find customers and drive traffic.

6. Write Articles / Papers - Become the expert in your field, and write intelligent articles about your field. You would be surprised on how quality content is duplicated throughout the web. A great place to start is eZine Articles http://ezinearticles.com/ for posting your papers. Just like Press - there are a lot of websites that allow you to post your article for free or a nominal fee (just search Google for "Submit Articles")

7. Formalize a Referral Program - Some businesses can't support a referral program, but most do - and it is a powerful way to grow your business without spending precious marketing dollars. Depending on your business, you can intice partners/customers/anyone to refer business to you in exchange for discounts/cash/product. In order to really promote it, and make it part of your culture, you need to formalize the program. Write it down, and promote it to people you think can open new doors. Make it easy to - print out referral cards, coupons, or setup a website to capture leads. Put the tools in place to really drive people to act.

8. Build Relationships with Local Press - The only way to "get ink" is through networking and building relationships. Newspaper and Magazine writers want good stories - and if you have an interesting business, or something news worthy - you need to find a way to pitch it to a local reporter. Even small stories (like hiring a new manager) - tell the press - and they will mention it in their JOBS section, or if you feel like you have something "ground breaking" - then call up the editor and give them the "scoop". Local Press can quickly turn into Regional Press, which can turn into National Press.

9. Create Buzz - This is one of those marketing techniques that is more an art than a science, but if you do it right - you can be the "topic of the day" for literally zero investment. The trick is finding a way to create buzz. Its impossible for me to give any ideas without knowing the product, market or company's brand - but here is an example of what I am talking about. Let's say your company sells Computer Services for businesses. Call up all the local radio stations, and offer to take care of their computers at no charge for a small plug on the morning radio show. Or another example would be a local pizza restaurant running a "Pizza Eating Contest" every month, and the winner gets free Pizza for one year.

10. Hit the Streets - At the end of the day, if you want to spread the word - you need to put on the suit and press flesh. A new business needs to be out in the public all the time. Attend local events (check Chamber events, local networking events, or local clubs/organizations). Get involved on boards, or on comittees where you have the potential to meet more people on a frequent basis. Most networking events cost less than $50.00, and if you are active you can meet 10-20 people.

I hope this helps get you thinking about how you can really spend 50% of your time marketing your business, without having to spend a tons of money. At the end of the day, you need to invest time in marketing, and you need to be consistent and constant in your message. After a while, it takes on a life of its own, and that is when your company becomes a brand, and word-of-mouth takes over.

Thursday, May 10, 2007

Lesson #16 - The Answer is "Networking"

When I am asked by anyone - "How do I _________"? I always seem to answer with "Networking".

The old saying "Judge people by the company they keep" - holds a lot of truth when you are an entrepreneur. There is nothing more important (other then perhaps their reputation) to an entrepreneur then their network. If you do not have a network, then you will have a tough time being an entrepreneur.

Let me elaborate with a FAQ breakdown:

1. How do I raise capital? - Networking. There is no magic to raising capital. Sure, you need to have a good idea, plan and a nice suit - but the main ingredient is connecting to the investor through your network. If you don't know the investor, then find someone in your network that does. If you don't know someone who knows the investor, then you need to work on your network (see my tips below on how to start building your network).

2. How do I close this deal? - Networking. Sales is about having a need and a product, but its also about knowing your customer, building a relationship and creating trust. Anyone who has sold "big ticket" items knows sales cycles can be brutal, and getting to the decision maker can be impossible at times. People don't buy from strangers, and in order to close a deal - you need to know the people who are buying.

3. How do I find a good VP of Sales? - Networking. It doesn't matter who you are hiring - the first place you look is in your network. The entire process of hiring key employees was flipped somewhere down the line - the idea you look at resumes, then interview, then check references - makes no sense. The hiring process should be - check references (e.g. Network), then interview, and then look at resume. What is more powerful? A trusted colleague tells you he worked for a guy who was a rainmaker at IBM and was a great person - or reading a line on a resume that says "Sales Executive at IBM 2001-2003".

4. How do I know if I am making the right decision? - Networking. Everybody makes mistakes. Everybody makes bad decisions. However, not everybody asks for advice (which in my mind is an unforgivable mistake). Any time an entrepreneur feels like a decision can really effect their company or them personally - it is important to reach out and get advice. Unfortunately, rarely do friends or family have the experience - so it is important to have a network of colleagues, fellow entrepreneurs who can give you some feedback when you are faced with a tough decision.

As you can see - Networking is the answer - to a lot of big questions that face an entrepreneur. In the life of an entrepreneur (especially when you are starting a company) you meet a lot of people for the first time, and it becomes very difficult to build trust and credibility each time you meet a new potential customer, investor, employee, etc. The best and most valuable way to build immediate trust is to share a relationship. There is nothing more powerful in a conversation then these words "Oh, you know ____ , too?".

Tips on Building a Network

As promised, I will give you some great tips on how to get started building (or enhancing) your network. I probably should dedicated an entire blog to this - but I will kick it off with my top 3.

1. Network Online - Get started by building your personal brand online. Social Networking has become the de facto way to meet people on the Internet, and here are some great services you need to join ASAP.

- Fast Pitch
- LinkedIn
- XING or eCademy (if you are in Europe)

Start building your network online, and use these tools to meet new people in your community and industry. If you are looking for capital, start connecting to local business leaders, successful entrepreneurs and financial planners/accountants/lawyers.

Remember - this is about building relationships - not about blasting your business plan, or product data sheets to hundreds of people on the first email. Networking is building relationships - NOT - building a contact list.

2. Get a Life :) - I say this with a smile, because when I started as an entrepreneur, I worked 100+ hours a week, never saw the light of day - and it wasn't until after I sold my first company, and started to have a life outside of the office - I started meeting interesting people - and thus -my network started to blossom. In order to build a network - you need to like meeting people, and they need to like meeting you. You can meet very powerful people just through daily activities like going to the gym, going to kid's birthdays, or even at church.

3. Give back. Even if you don't believe in Karma - it is important to give back to your community. Whether it is volunteering at the local YMCA, or sitting on the board of a local charity - investing time in good deeds will not just grow your network, but will also feel good.

I remember once, an entrepreneur approached me after I spoke on a panel about Angel Investing, and he asked "Where are all the angel investors in this town? I spend time at the boat club, talking to guys at the golf course ... but I haven't really met any high-net worth investors?" - and my answer to his question - "If you want to know where all the successful entrepreneurs / angel investors are - they are giving it all back".

Friday, May 04, 2007

Lesson #15 - Know what to In-Source and know what to Out-Source

In a startup (or really any small business) it is critical to manage spending, and keeping overhead at a minimum. Companies that start to experience growth, or have a chunk of new capital hit the bank, have a tendency to over-spend and try to "buy progress" - which is a dangerous game to play. This article is going to focus on what I consider one of the biggest mistakes startups make when it comes to controlling costs - deciding on what to insource (or hire) and what to outsource.

What is the difference? Two key factors - quality and cost. Every time you make a decision that you need to hire someone - first ask yourself - can this be outsourced?

Outsourcing can provide better quality of work for much lower cost and risk. Here is a classic example. Some companies hire a CFO and pay them 7k-10k per month, even though they don't have a large AP/AR staff, and may not even have 1M in revenue - but they feel they need a manager for the financial side of their business. They are probably not wrong - every company should have a financial resource - but to commit 100-120k per year in fixed overhead is ridiculous. A company can hire a Top 5 accounting firm for 20 hours a month and spend less than 40k per year (and you will get not only someone with better qualifications, but an entire company behind that person that can bring expertise and experience to the table).

Here is my breakdown of what I think should be heavily considered as outsourced positions versus hiring:

1. CFO/Controller - Any company that has less then 2-3M in revenue should consider outsourcing their CFO and/or Controller. There are a lot of great firms that offer these services, with people that would normally go for 250k-350k per year in salary - that you can put on retainer or pay as consultants hourly.

2. Legal - I have never seen a startup have on staff Counsel, but you never know. I will state the obvious - there is no reason to have a full-time lawyer on staff.

3. Secretary / Assistant - I have mixed feelings about having an assistant. Depending on how "scatter-brained" the CEO and management are on daily tasks. an assistant can bring order to chaos. However, for a startup with limited capital - I would recommend looking into a Virtual Assistant service to handle incoming phone calls, messages and some basic services.

4. Marketing / PR - For a company that is bringing a new product to market, and trying to orchestrate a marketing campaign for an emerging market - the marketing and PR resource needs to be experienced, smart and very in tune with the market. My personal opinion is that it is close to impossible to hire a top-notch marketing person into a startup. I know what you are thinking - "but our marketing guy is great - he updates the website, and helps with trade shows" - stop right there - that is not a marketing guy. Take my advice - find a consultant, or even a firm that can really help you define and execute your marketing plan. You may have to use a few different firms - one PR firm, one Ad Agency and one Marketing consultant - and it may cost you more than what you are paying on a month-to-month - but once they develop all the marketing assets, plan and give it to you to execute their cost/retainer can be reduced.

5. Technology (Developers) - This is another tough one -especially for software/internet companies who's primary asset is the technology/software that their engineers build. However, I think its always worth considering outsourcing - if the cost/quality equation makes sense.

Lets start with the CTO/VP of Engineering. Most likely the founder of the company fills this role - if not, then you need to hire this person (if you are a technology company). If you are not a tech company this would be the equivalent of your Product Manager or key Consultant, etc. This is the guy who has the vision for the product or service. This is not a job you can outsource.

The next level - Developers and Engineers. Here are my thoughts on balancing insourcing and outsourcing in engineering - if the job is working with the "secret sauce" of the company where innovation and competitive features are being built then it should be in the hands of an internal resource. If the job is working with more mundane tasks or part of the process that is not clearly part of the IP portfolio or expertise - then outsource. An obvious example, is a consumer product company hiring their product developers but outsourcing the manufacturing. For a software company - the internal staff is writing the code of the product, but they may outsource quality assessment and testing of the product before it goes to market.

So , I think that gives you some ideas on how you can outsource tasks to great talented people for certain jobs and actually save money and keep your overhead low.

The success of any company is based on the quality and capability of the people, and the type of people you want to be part of your venture you won't find on the job boards - because they don't have a problem finding a job.

Wednesday, May 02, 2007

Lesson #14 - Know your Market Inside-and-Out

I am surprised on how many entrepreneurs I talk to (especially ones who are pitching a new business idea) do not know their market. I can't express enough how important it is know everything about your market - size, profile of ideal customer, number of potential customers, competitors, current market share of each competitor, etc. Over 90% of the business plans I read - essentially sum up their market research in this way - "Gartner reports that our market will be 2 Billion by 2010". This is absolutely useless to the investor, and to the entrepreneur.

Here is a diagram, that I see all the time - and personally, I hate it.

Why is knowing your market important? For starters, I think 50% of the startups out there wouldn't even exist if the entrepreneur did research on the market. They would find out quickly that their product ... 1) already exists 2) has no demand or 3) is or will be obsolete before it gets to market.

I encourage everyone really spend time (from the day you start your business, until the day you sell your business) on market research.

Here are some tactics I have learned that can help you kick off your market research, and put together information that can actually help you build your business.

1. Survey 100 people. Find 100 people that you "think" would buy your product and have them fill out a survey. Depending on your product, you can do this online (using a tool like http://www.surveymonkey.com/) or in person through interviews. If you don't know anyone, you can purchase email lists by industry, company size, etc. You will need to send the survey to about 10,000 people, and need to offer something (like an entry to win something). I suggest 15-20 questions that ask direct questions ranging from "would they buy", "what price", "is this a must-have or nice-to-have", etc. Getting feedback from your future customer before you launch the company or product is priceless. It will not only validate your idea, but will give you ideas on how to improve or refine your product.

2. Infiltrate your Competition. You need to know everything about your competition. Size of company, features of their product, revenue, key customers, etc. In fact, don't settle for reading press releases off their website, and "google'ing" the CEO - you need to talk to them. Call them up, and ask them questions about their company. You would be surprised how much a secretary would tell you. It wouldn't hurt talking to the CEO either. Try to understand where they are in their cycle, what they are focusing on. How are they making sales? Where do they get leads? What have they learned in the past year? I know what you are thinking "Why would the competition tell me this?" - Simple, be aggressive. One method I found works a lot is calling up the competition as an independent writer and tell them you are writing a comparison article about the industry on your Blog.

3. Go to a Conference. Conferences and Seminars are a great way to achieve two things - learn about your competition, and get to see the latest and greatest products. You can also have open and insightful conversations with people at the booths. In a few days, you can learn everything about a specific market if you go to the right conference.

4. Hit the Blogosphere. Reading the right blog, can feel like reading the future. So many thought-leaders and innovators post their works, insights and visions on their blog. Another powerful thing about blogs, is you can comment on articles, and open a dialog with the author and other readers. Its a powerful medium to test some theory, expand your ideas and get "industry-expert" validation without paying thousands of dollars to Gartner.

5. Call Customers - Not your customers, your competitors' customers. Call up their customers and ask for the key contact (if its a technology product ask for the IT manager). Tell them you are calling to get a reference, and then have a conversation with the guy who implemented the solution. Ask him what he liked? disliked? Why did they buy it?

These tactics should give you a head start. As you can see, this research will help you in many aspects of your business - product development, sales tactics, marketing programs, etc.
Most importantly - you will validate the need for what you want to build.

Tuesday, May 01, 2007

Lesson #13 - Running a Startup is a Marathon, not a 100-yard Dash

I think everyone has read or heard the tale of the Tortoise and the Hare. The famous conclusion Aesop makes...

"Slow and steady wins the race”

Despite the fast-paced, every-changing world of a startup company - this fable holds true. For some reason startups (especially technology startups) are expected to have explosive growth, and almost overnight become a multi-million dollar business skyrocketing to an IPO in less than five years. Sometimes I wonder who is writing the rules for building new companies - the entrepreneurs or the capitalists?

Either way - its wrong to have a mind-set of quick and speedy growth. For one, it is not healthy for a company to grow quickly, and two the faster you grow, the more mistakes you make, and the quicker (and more likely) you fall. Remember, slow and steady.

I know what you are thinking - "My company/market is different, I need to go 100 mph to keep up with competition". Wrong. You don't need to keep up with competition - you need to keep up with the customer - and last time I checked customers are never on the bleeding edge (only blood is).

The further you distance yourself ahead of the market, the more mistakes you will make. And mistakes cost money and time - and ultimately can cost you the business. The key to winning the marathon is holding a constant, steady pace - and plot your course wisely. There will be plenty of time to sprint to the finish line when you get to the last 1/4 mile.

Here are some common mistakes made by the "Hare" and avoided by the "Tortoise".

1. Over extending R&D - So many startups continue to innovate beyond the customers needs, and beyond any real market demand - just to be "ahead". There is no reason to invest significant time and money into future products that won't be sold in 2-3 years. Don't get me wrong - you need to continue to innovate - but don't out-innovate your customer. (Plus, I bet marketing would really like some of that budget, so we can increase sales)

2. Don't grow Fast - A lot of companies (especially ones that get VC funding) think they need to grow the company in order to grow revenue. As soon as they have capital in the bank, they start hiring 2-3 sales people (even though their current sales guy still has capacity) - and they start hiring full-time operations guys - just because they need to manage all the new employees they are hiring. Just because you have a million bucks in the bank from a new investor, or just collected on a big purchase order- doesn't mean you need to turn around and spend it.

Keep your capital for survival down the road, and if you are going to invest in growth - make each dollar count. Don't add to fixed overhead unless you are bursting at the seams. If you want to boost revenue - try investing in variable overhead - like advertising, or attending a trade show or even hiring a part-time telesales guy to bring in leads. There is a certain pace to growth, and the idea of "spending more money, will increase growth" is not entirely true. It can have an inverse effect as well.

3. Work smart, not hard - As an entrepreneur have had my share of 100 hour work weeks, spending the holidays on my laptop. Sometimes, work calls and you have to answer - but make sure you are working smart. Just because you spend 100 hours a week working - doesn't mean you will achieve your goals twice as fast. Time (like money) is not a catalyst - unless it is spent wisely.

The key question - is who sets the pace? If you are running a 100-yard dash, then you know you need to beat 10 seconds if you want to place. However, if its a marathon, you know you have a longer road ahead, and need to be patient, pace yourself, and conserve energy for the right time. A startup is no different. Pace yourself, make smart decisions and don't run in every direction - just run straight ahead.

4. Take breaks, and take them often - If you are like I was when I was running my first few companies - I never took a vacations. If I did, I was online 90% of the time. Big mistake. Not because I wasn't able to relax - it was because I was not able to think. When you get so focused on your work, you start to build blinders - and become disconnected to opportunities that could be critical to your success.

This is why it is important to take breaks - (30 minute breaks in the day to brain storm, 3 hour breaks during the weekend, and 3 day breaks every month, and finally 3 weeks of breaks per year). What is a break? It is taking your mind off work, and focusing it on something completely different. It doesn't have to be completely unrelated, but it needs to be outside the box. For example, if I was running a software company - I might take a 30 minute break one day to read some blogs by well-know software innovators. You may spend some time on a hobby, or with your kids - the important thing if you are fueling creativity and innovation more by stepping out of the office - then you would be knee-deep in the conference room.

All of the points I make above is not just about avoiding "burn out" or minimizing dumb mistakes - it is about winning the race. Building a great company is not just about management, product and market. It is about timing, pace and management of time and money.

Here are some common "Myths" I hear from entrepreneurs all the time (some of which - I believed when I was building my first company)

1. "My window is 6-12 months to build the product and beat the competition" - First of all, anyone who says their is a finite window of opportunity - is not building something that is innovative, and certainly is not addressing a dynamic market. Any market over 50M in size takes years to mature, and 500M size markets take decades. Nothing real, and sustainable has tight dead lines.

2. "We can grow the company from 1-2M in revenue next year to 20M in year 3" - Sure, this is what VC's want to hear - but give me a break - this is ridiculous growth. Even if a company achieves this type of growth, it doesn't not set a healthy pace for the company. If the CEO has committed to building a 20M run-rate in 3 years, then he will over-invest sales and marketing an an immature market, and potentially waste 50% of his budget just trying to reach his goals.

3. "I need a staff of 10 sales people around the US to meet my first year projections" - Sure, we would all like to have a large, untrained staff walking the earth - but its not a realistic plan. It takes time to train sales people. Once they are trained you need to feed them leads, so they can close and make a living. Hiring a bunch of people as a prerequisite for growth is not a good plan.

In summary, just remember to keep a slow and steady pace toward your objective, and try not to get distracted by what the market says or the competition is doing - focus on what you need to do to get customers and keep customers.