Startups and angels: Along the way to success

It's Always The People

I've been talking to a friend who leads a now midlife growing venture that was a startup.  She has the market down cold; knows the competition down to the product line; who is selling which parts of what solution to whom.  The software development process is locked and loaded; financials are strong; a great team is in place.

The attitude is both disciplined and can-do. I know this sounds a bit over the top, but I've seen it.  It's there.

So what's the current biggest risk on the path to success?

Well it seems to be that a founder has been elevated in his own mind to a position requiring a lot less work.  Coming in late, leaving early, and starting to drop in and give advice to all kinds of teams in the now-growing enterprise.  When the business was just starting he was eager and enthusiastic.  Now, he acts as if he's arrived, and can coast.  He's so far resisted quiet conversations about the need to change.

As they say, "can't live with him; can't shoot him."  This is going to be a real fixer-upper.  Bill, the founder, is valuable.  Has good marketplace credibility.  Knows a lot of people.  And is a good person, really.  I think he has the company's best interests at heart, and he is worth saving.

But it is going to take a disciplined process that has both consequences and allows Bill to change with his self respect intact.  Our CEO is going to have her hands full for a while.  And, of course, ultimately if Bill is intransigent, no one is worth the large time distractions that come with intransigence. 

But, this is a world of scarce resources when it comes to high level knowledge workers.  People with experience to really do what you want done are very precious. 

And, in the end, these are the issues that often get in the way in growth companies.

• Do we move quickly to acknowledge and give credit to the people and teams that make the difference?
• Do we offer course correction guidance privately and with an eye to personal growth?
• Do we have an infection of group think, where consensus is the most important team value?
• Do we get the right people on the bus, or do we hire expeditiously, instead of deliberately? 
• Do we hesitate to move the wrong people off the bus for non-core reasons?

Do angels use this kind of stuff for screening?  (Punch line -fill in the blank for your favorite version):   IS THE _______    __________?  or DOES A ______   ______ IN ____ ________?

Using Boards of Directors

I've been fortunate to have had a great board at RTMS right from the beginning in 1989 until the harvest in 2000.   Over the years, they were invaluable in both strategic matters and in helping company leadership over its, well, lack of experience in certain critical aspects of the business (that's me.) 

I've reviewed the following material from the Kauffman Foundation's eVenturing website and it's thorough and compelling.  There are a couple of stories, three or four articles about tools to use in building and using boards, and even a couple of lists of board related templates. 

If you're in growth mode, a board can be a critical success factor for you.  Using Boards of Directors (Kauffman)

Stories, how-to's, tools and templates.

Waterfall forecasting

Here is a link to Using the Waterfall from Josh Kopelman's blog, "Redeye."  This is really worth a look.  (You'll find an actual example of the spreadsheet there as well.)

One of the interesting questions to ask in a funding discussion is "how have you done versus your forecasts at various stages over the last X years?"  It gives the investor a view of the dynamics of the market and the company's reaction to them.

This spreadsheet encompasses that process in an easy to read, straightforward way.  I think I'm going to ask our portfolio companies to start using it.  It incorporates the quarterly re-forecasting paradigm as an expectation rather than an idea, and prompts a monthly - or more often - look.

Reduce Your Startup Risk

I’ve heard “spend the fewest dollars to reduce the highest risk” so often from investors that it’s become a cliché.   Often, however, just when we dismiss something like this as a cliché,  further examination reveals important principles.

This is one of them.

The general idea of reducing risk with early stage money (whether an entrepreneur’s own funds or an investor’s) is a weapon that not enough of us use well enough.  Put to work correctly,  it adds immensely to our chances for success in our venture, as well as our ability as an entrepreneur to keep more of what we start.

How? 

Risk in this context means those parts of the business plan that, if proven to be optimistic or unachievable for the costs or within the time specified, jeopardize the success of the business.  Examples might include wildly optimistic sales projections, dramatically understated customer acquisition costs, or product features  not validated by users.  Also included might be understated expense levels, or profit margins not achieved by any company in the industry. 

So, one way is to make sure that any information that can be obtained is obtained.  This certainly includes publicly available data about competitors, financial results, product lines, and the like. 

Figure out how to test the market for customer acceptance in both time and cost to acquire a customer.  See The Cost To Acquire A Customer. 

The reason to reduce risk is to increase the value of your company beyond the cost to reduce the risk.

For instance, a good idea that with only a cursory understanding of the market and no financial projections based on some comparable company might only be worth several hundred thousand dollars to an investor.  An investment of $100,000 might "cost" the entrepreneur 35% of the company.

The same company with a thorough market map (see Competitive Market Mapping) and clear, comparable financial projections might be worth up to $1Million.  The same $100,000 will "cost" less than 10% of the company.

If the product prototype is built, and market-tested, the value might jump to several million dollars. 

Does it cost  many hundreds of thousands to go from step one to step two to step three? No.  The difference in the value is the benefit the entrepreneur gets for reducing risk for the investor - even if the investor is herself.

Conversely, it is important not to spend money that dopes not reduce risk.   If the plan calls for a factory to be built when contract mfg is available is this risk worth reducing?  Almost certainly not.  (Later, when product volumes increase dramatically, internal manufacturing might be a consideration.  But that is a long way from now.)

Risk is a function of the next funding source.  What they consider to be risk reducing is more important than what you consider it to be.

Now if only weight loss were as easy as risk reduction!

Who's Who of Angels

This is an interesting article from today's VC Experts website (vcexperts.com) that they forwarded to me.  It's a discussion of return calculations for angels as well as a description of "types" of angel investors.

Download of_angel_investors_npv_and_irr.pdf