Startups and angels: Along the way to success

More About Testing

Here are Greg Gianforte's answers - and comments - to his test for bootstrap ability:

1-B; 2-D; 3-B; 4-B; 5-B or C; 6-B; 7-B; 8-A; 9-D (involved includes spouse, accountant, printer, lawyer, insurance agent and yourself) 10-C (and enjoy it!)

Score yourself:

0 - Bureaucrat.  Run for public office.

1-3  Junior bureaucrat.  Go to work for a government entity.

4-6  Find a big company and call it home.

7-9 You can work in a startup.

10 - Bootstrapper.

Test Your Bootstrap Ability

This quiz was written by Greg Gianforte, founder of RightNow Technologies.  It's a great way to think about your innate startup skills. 

1.  What should you do first?

    a.  Write a business plan and then try to raise money
    b.  Call lots of people to understand the issues in your market;
    c.  Develop a prototype of your product idea;
    d.  Hire a marketing consultant

2.  You have an idea.  What next?

    a.  Implement the business plan;
    b.  Rent office space and buy used furniture;
    c.  File for a patent;
    d.  Fax or email your idea to 300 people and then call them.

3.  You have a good product.  Next?

    a.  Find a good lawyer to protect your idea.
    b.  Build a prototype and you personally start selling.
    c.  Try to raise money.
    d.  Hire a salesperson to sell your product.

4.  You find a prospect.  Next?

    a.  Explain that you would like to have them join your beta test program.
    b.  Try to get them to place an order;
    c.  Tell them you don't have the product available yet;
    d.  Tell them about all of the features you are going to add to the product.

5.  Your product does not do everything a prospect wants.  You should?

    a.  Tell them it won't do those things;
    b.  Get them to pay for the enhancements;
    c. Take the order and tell them it will ship in four weeks;
    d.  Explain why those things are difficult to do and convince them to buy the     current product.

6.  A major publication calls, saying they are writing a big article about your product and they want you to buy an ad in the same issue of their magazine.  You have enough money for the ad, but not much more.  You should:

    a.  Buy the ad;
    b.  Tell them your advertising budget is already committed;
    c.  Tell them you don't have enough money;
    d.  Tell them to get lost.

7.  You are still getting started and Dun & Bradstreet is asking for company info and detailed financial data.  You should:

    a.  Give them the information;
    b.  Politely decline;
    c.  Refer them to your accountant;
    d.  Don't return their call.

8.  A major prospect says they want to fly out and visit you, but you are still working out of your house.  You should:

    a.  Tell them you are just getting started and don't have an office that will         accommodate a visit;
    b.  Rent office space prior to the visit and get your family and friends to             occupy all the desks;
    c.  Tell them you will be traveling the same week they want to visit;
    d.  Borrow your accountant's office and hang your shingle over theirs the day     of the visit.

9  You are the only person working fulltime in the business and you are asked how many employees you have.  Tell them:

    a.  50
    b.  20
    c.  just me
    d.  We have five people involved in the business.

10.  You have just made your first sale and generated your first monthly profit.  You should:

    a.  Give yourself a raise;
    b.  Get a bigger office;
    c.  Throw a party;
    d.  Hire a consultant.

The challenge of these kinds of things is to really try and work out answers - so I will wait until later in the week to post Greg's.

Finding "Models That Attract Investment"

Every now and then, a lively discussion coalesces from a group of people with interesting experiences.  I think you'll find this report   by Geoff Bastow fits that description.  (It would be great to find a podcast of the panel; alas, we only have print.) 

While not every example is a pathway, nonetheless these experiences, especially from the vantage point of the Midwest investor, really underline the state of the startup experience in middle America.

Our View of Deal Flow

...on video from the series on "due diligence" by the Kauffman foundation.  Deal Flow Video.

The Essential Entrepreneurial Elements

I recently heard Manny Villafana talk to the annual Wisconsin Entrepreneur's Conference (The Early Stage Symposium)  about the essential characteristics of entrepreneurs. 

(Manny is the founder of both Guidant and St. Jude Medical and now Kips Bay Partners, a new venture fund in Minneapolis.)

When asked what was essential in a successful entrepreneur and his venture plan, he said:

1.  Honesty
2.  Technical Knowledge
3.  A cash flow plan
4. A marketing plan
5.  Key personnel in place

This is a succinct summation of the plan elements everyone talks about.  It seems simple but there is a lot of subtlety here. Honesty gets assessed by the impression the entrepreneur gives and his ability to answer difficult questions factually and quantitatively.  It's bad to have to admit to not knowing something you ought to know; it's worse to try and sell a bullshit answer and get caught.  It's especially bad if the catching takes time and the investor remembers you - unhappily.

It's interesting that Manny thinks the entrepreneur ought to have technical knowledge, rather than have it on his team.   I suppose this doesn't mean that unless the entrepreneur is willing to be the CEO, the investor shouldn't be interested.  And if the leader of the business isn't passionate in an informed and meaningfully high-content way, that probably is a red flag.

A cash flow plan addresses the key issues of "how much" for "how long" and reveals all of the assumptions made not only in the plan but also in the business.   It provides a firm basis on which to have a lot of discussions around the essentials of starting.

But a marketing plan?  Well, yes.  Who will the customer be?  Is it compelling?  What will their acquisition cost be?  How long before they will, on average, send you a check?  A great series of questions!  I saw a plan the other day that was not invest-able.  The company wanted $1.5MM and planned to invest it all in a "marketing and advertising agency" and some salaries for employees.  I wonder why we sweat blood and tears over the product and then think we can hand over the final "red zone" work to outsiders?

Key personnel in place.  Yes. and No.  I think this is risky.  It asks the entrepreneur to correctly identify leaders for a startup who will take it to the next level -- even though the entrepreneur is probably ill equipped to do this and lacks experience in this critical area.  When in doubt, identify the holes, and wait.  Don't hire some consultant who has never run anything and wants his "shot" just because he seems to speak fluent finance. 

It's a Marathon...

...not a sprint.    Sometimes, because entrepreneurs and investors talk about exit strategies, one side or the other gets the impression that this whole process is more sprint than long distance run.

Well, it isn't.   

Entrepreneurs have to have a sustaining passion for the business that goes well beyond financial results and exit achievements.  We get pushed up against exit timing by investment documents and, if we aren't careful, we can make less than optimal decisions.

While it is true that the longer it takes to achieve a five or ten times-your-money return, the lower the value it is, nonetheless, the path and the timing to that event will almost always take longer and cost more than either the entrepreneur or the investor may think.

Comparability is probably a very important element here.  If others are exiting, that provides one set of comparables.  But it may also provide an opportunity to be a consolidator rather than a seller. 

Some businesses will take longer to mature - based on strength of ties to customers, the nature of the business itself, average order size, acquisition cost - the list goes on.  All of these things are interdependent. 

We have one portfolio company that is beating its plan on a timing basis.  This gives the owners a wider range of choices than they would otherwise have.

Be as certain as you can - whether you are an investor or an entrepreneur - that you both have talked about what happens when things take longer and cost more.  It can avoid a lot of unhappiness later. 

Understanding Public Markets

The Kauffman Foundation's eVenturing website has put up an interesting series of articles on raising money in public markets.  If you have heard about the London AIM, PIPEs or other alternative public markets, this is a very good series of articles on these topics.

Dealing with Attorneys and Legal Advice

In the process of starting and growing ventures, everyone deals with attorneys across a wide spectrum of issues.  Depending the business, these range from incorporations to investment documents, operating agreements, intellectual property issues, and many others. 

The whole concept of the rule of law goes back at least to the Roman Republic.  In many ways it is the foundation of civil society, and much older than relatively new ideas like organized business entities. 

I point this out only to underline the fact that the idea of legal advice and structuring is centrally important to what we do as entrepreneurs.

The lawyer's job is to protect his client first and foremost.  It is not to enhance the business prospects, unless this happens as a byproduct of protecting the client's interest.  This is an excellent point of view for your attorney to have. 

What's critical, though, is for the entrepreneur to understand the process and to manage and direct it as the person in charge.  In lots of ways this is not a doctor-patient relationship in which the patient is in a subordinate position.  If you feel that way about your legal advisers, it is time to have a candid conversation with them.

Attorneys are only as good as the people that employ them.  Here are a couple of thoughts:

1.  Be certain to drill down on advice that seems to be the conclusion of a train of thought, but where you have not heard or understood "how we got from here to there."  I've sen an IP case recently where the advice to the client was largely to miss substantial market opportunities while waiting for a patent process.  When the entrepreneur drilled down, he found there were alternatives that accomplished much the same protection without losing the opportunity.  Yes, the alternatives carried some risk - but not much - and missing the market is an unattractive idea.

2.  When structuring, be certain you - the entrepreneur - understand the tax implications and future limitations you place on yourself in the choices around how you set up your company.  If you start a venture with five parts, and later plan to divide them into separate companies, for instance, make sure you have a clear view of the future hurdles you'll face.

3.  Ask about size.  Some structures fit companies until they grow to a certain size and then have less value.  Others are the opposite.  Understand which is which and where you might fit.

4.  Get the facts and weigh the alternatives yourself.  I saw a deal the other day that I, frankly, didn't think was fundable.  The solo entrepreneur told me, however, that he had received a termsheet from an angel I knew but that his lawyer had advised him to walk away because the lawyer thought "they could get a lot better terms" elsewhere.  I urged him to understand what that meant, (He didn't know) and sit down and talk to the angel directly about what might be negotiable.  It isn't the lawyer's place to be making those kinds of recommendations, unless the lawyer is going to invest himself.

5.  NEVER let lawyers negotiate on your behalf with potential partners or the other side's lawyers.  Do all of that yourself with your business advisers, draft the terms in plain English, and ask the lawyers to prepare the documents.  There's nothing wrong with asking lawyers for their advice to you as you negotiate a deal, but don't let them do it.  Their role is only to protect you, not to reach an agreement.

6.  Make your lawyer walk you through a draft before you give it to someone else.  Again, you have to make sure that a new term, concept, or subtlety has not been inserted that you didn't expect, understand, or agree to. 

The whole idea here is that your lawyers will be happier with you if you always seek to understand the underlying thoughts, ideas and principles.  In addition, if you creatively explore alternatives and "what if" scenarios from your unique entrepreneurial perspective, you will add a lot of value to their work.

You'll be well protected - and successful.  A nice combination.