Startups and angels: Along the way to success

Bootstrap your venture

At last week's Business Plan Competition at Marquette University, the keynote speaker, Greg Gianforte, CEO of Right Now , talked passionately about the keys to bootstrapping businesses. 

Greg is the well known author of Bootstrapping Your Business, and a frequent speaker on the topic.  In addition to RightNow, where he is currently the CEO, he's started four other companies, including BrightWorks, successfully sold to MacAfee (prior to RightNow.)

It seems to me that bootstrapping is an overlooked technique, and it should not be.  A successfully bootstrapped start-up allows the entrepreneur to retain more equity (Gianforte hung on to 60% up to the IPO) and provides a lot more control and freedom from competing goals of various investors.  Listen to him talk about the principles he applies.  In a brief hallway conversation, he told me, several times, "there's always another way" to get going, aside from very early, and very expensive, capital. 

If a start-up, all things considered, can bootstrap, it should.  

Here's a podcast (will download to your iTunes library). It's about 35 minutes, and well worth the listen.  Greg Gianforte at Marquette University BPC, 2009.

Enjoy.

Forward to the past: The (re) rise of direct marketing

Your web strategy today has to be based on a day by day, hour by hour focus on tracked conversions to a goal or set of goals, with results forming the major part of your marketing person's job performance.  If it isn't, rub butter in your hair, because you might as well be toast.

This is not a subject left to webmasters, ad agencies, or lower level folks in your organization.  It's the entrepreneurial leaders' task.

Do you know how to measure web comparisons from others in your business? (Hint: look here for one example).  Do you know what comparable spending on web related advertising is per dollar of sales in your business?

Do you construct and apply daily tests for response (or sales) and, if collecting responses, measure the eventual outcome by source?

Do you know how your competitors traffic ranks compared to yours?  Do you know why?

In the "good old days" of direct marketing, this was all done by mail or telephone nd responses took weeks and months.  People tracked results seasonally, and adjusted and refined on the same basis.  It was more accurate at an individual level because of the individual nature of tracking. 

When I was running one of the largest database marketing companies in the retail business, we would've given anything for this kind of analytical firepower because of the ability it would've given us to turn on a dime and apply smarter, better strategies faster.

Now, results are virtually instant.  And that means that every competitor has access to a better toolbox. 

It's possible to split test ads and all of the facets of your business and adjust each day.  Yes, there's a bit more approximation at the individual level, but the exponential leap in the speed of cycles dwarfs any loss of specificity (in my opinion.) 

What "white paper" gets downloaded most?  Do those who do so respond more favorably to follow ons?  Do they request information, quotes, or so forth on their own? 

If you are selling on the web, what is the most likely product purchasing path?  What is your abandonment rate in your funnel?  (There are millions of variations; you need to determine which fit you best.)

None of this is new.  Google (and others) have been facilitating these opportunities for quite some time. 

And in more challenging sales environments, being in this game can make a huge difference in your success.  It's not an optional add on to a good sales force, marketing campaign, or print catalog.

It's a requirement for any business with a website.  Any business.  Including yours.

Raising More Than You Need

I heard this last week at the Wisconsin Entrepreneur's Conference.  We've all heard this before,  "You should raise more than you need while you can," said the speaker.   "It will be easier than it will be later if things don't go as well as planned."

"Well," I asked, "how exactly do you do that?"  

On the surface, it seems improbable that a plan that suggests you would like a $500,000 "cushion" in case you miss projections or overspend is going to inspire much confidence.  And, the more this "fact" gets uncovered during the investment give and take, the less likely it is to sit well with investors.  That may create a downward spiral of interested people, and things can go south from there. 

Another alternative is to pad the projections.  That's probably not a good idea, especially if the investor begins to try and understand the business model (as opposed to the plan) and deconstruct the numbers.  If they don't add up, the entrepreneur is right back to the same place.

Does this idea ever work?  Well, yes.  If the entrepreneur has what is perceived by investors to be a rock solid plan, (and passes all of the other investor's diligence) then investors may urge the entrepreneur to take more money than she needs so that the investors can "participate" more.  If the enthusiasm is high enough, this will generate more investment.  Of course, if the entrepreneur really doesn't need the money, it will also generate more dilution and a smaller return for all involved.  

At the extreme, this can be bad, of course.  Nothing would be worse than to have that extra $500,000 sitting in the bank and never put to work, since the company will eventually wind up paying whopping returns (if successful) for money that never did anything but earn a money market return.

But, in less extreme circumstances, it provides resources for the aforementioned great plan and entrepreneur to take advantage of growth opportunities more quickly and more fully.  

Entrepreneurship around the globe

In a post yesterday at Global Neighbourhoods, Richard Boly, Partnership for Growth Officer at the US Embassy in Rome makes the case for the tremendous work the US Embassy is doing promoting entrepreneurship.  Read it here: Boly. 

Perhaps we take for granted the engine for good that entrepreneurship can be - but what better example than this one.

Ideas Are Easy

...but execution is hard.  It's axiomatic that a bunch of bright people can dream up any number of ideas for startups. 

In any venture, however, relentless attention to the details is what separates the real winners from the also-rans.

Remember Startup.com ? The circa 2001 movie about the meteoric crash of govworks.com?   At one level it's a dramatic look at an appalling lack of attention to detail when it would've mattered.   

How many software companies died on the way to an SaaS model because they did not have the ability to think through the large scale changes a business model shift would require?

I wonder if the commonly accepted overoptimistic forecasting that every business plan seems to incorporate is really rampant optimisim, untested against any kind of comparable or experience base, or if it is a lack of ability to execute - really execute - on the details that make plans work?

When Google Analytics was Urchin there's a great story about how they needed a "Windows" version within three (weekend) days that the engineers said was "impossible."  Those same engineers rolled up their sleeves (do t-shirts have sleeves to roll up, really?) and got it done by Monday.  It's a legendary story at the company that is now Google Analytics.  They won by relentless hard work and attention to detail. 

Sometimes that lack of execution is an weak analysis.  Everyone starts analyzing a problem by looking at weaknesses and differences.  (I'm not the only one, am I?)  However, if the next level of action is to jump from the hypotheses being considered to assumptions, a huge mistake gets made.  A hypothesis cries out to be tested.  Assumptions - no matter how well grounded in experience or "obviousness" are simply a black hole waiting for the entrepreneur to fall into.

Obviously (not an assumption but a fact) a venture succeeds by filling a need in a new and more value added way.  The drive to aim higher is basic.  It's the well informed use of experimentation - rapidly, learning every step of the way, that makes the difference.

Do You Ask This Question...

...when you're hiring for your startup? 

"Am I selecting the right candidate by using performance based criteria rather than judging the candidate by their interviewing skills?"

When I'm asked by someone interviewing for a job how to assess the (often entrepreneurial) company, this is what I usually say.

When you get to the part of the interview where the interviewer asks you if you have any questions, ask this one (if it hasn't come up in the interview):

"In six months, if I am in this job, what specific, measurable achievements  would make me a great hire for you and your company?"

Of course, the answer you should get is obvious.  If it's anything other than a hard-nosed description of the specific challenges the hiring person is facing in filling this position, you have to ask yourself why.   My advice to people interviewing is that if they get a mealy mouthed "doing based" answer, run for the exit.

What's a "doing-based" answer mean? 

Consider the need to hire an accountant for your company.  One description is some variation of "perform the duties of the accounting manager, including managing the payables and receivables clerk, the monthly statement function, and the timely generation of management reports."

That's doing-based.  It's almost impossible to achieve quantifiable success.  How do you successfully manage a receivables clerk? 

A performance based description might be something like "The accounting manager, within 4 weeks of hire, will reduce defects in the inventory management system to less than 1% of all skus being improperly quantified and/or priced.  The manager will produce the monthly package of financial statements by the 7th business day of the month following, using the standard accounting package and report samples presented (attached.)  The manager will reduce receivables collection days by 15% and maximize payables cash flow by z% "  And so forth.

That's performance based.

Strong hiring people screen for performance.  They don't make a snap judgment based on a first impression and then listen for reinforcing evidence, positive or negative.  Inexperienced folks commonly make that mistake.

In addition, leaders hiring for performance have a pretty strong opinion of what is to be achieved and by when.  This has a couple of beneficial effects.  It laser focuses the successful candidate on the goal and immensely strengthens their ability to achieve the goal. 

It provides a channel for positive reinforcement.  It avoids the woefully common pitfall of assigning a "doing" based task (The successful candidate will perform the function of office manager...) that leads to self-defining success, falling into the trap of wandering off the task, and, if not caught in time, results in a lot of mutual dissatisfaction.   

And, a performance based task makes it easy to align compensation with performance that everyone will like.

If you are hiring for your new company, remember that the right hire for the right task is the single most important thing you can do.  Don't hire on impressions, but on performance. 

Carry this through past the interview to the reference checks.  Ask for specific instances for each area.  Find evidence.  Don't be afraid to ask the candidate for more references. 

Take your time.  Increase your hit rate.  Or "sin in haste, repent at leisure."

 

What's the Best Use of Your Borrowing Power?

I just talked to a business owner the other day who has grown her startup nicely - 15% a year or so - up to revenue of a bit over $2.5MM.  Now, (in the service business,) the venture is at the point where she could accelerate its growth.   Through managing expenses and getting paid for  added value, the business has some positive cash flow.  This "borrowing power" can be used to generate cash - once.  But that cash has to be used to grow cash flow faster - much faster - than the payments due to the bank. 

Obviously.

New equipment?  Expanded service force?  New salespeople?  Nope.

She wants to triple her current occupancy costs and build a new building.  There may be some efficiencies to be gained, but at a huge cost.  If the company is 15% EBIT, Every $1 in new debt obligations has to be supported by $6.60 in new revenue.  If occupancy costs, as an example, go from $45,000 to $135,000, that's almost $600,000 in new sales - just to stay even with the business as it is today.  (On revenue of $2.5MM, that's a 24% increase just to pay the bank.)

Is this really the best use of the business's borrowing power? 

When is the time?

Here's a great comment from Ryan that I just posted:

"My fellow angel network managers say that they usually won't talk to inventors because the company anticipated is usually not ready for angel investment."  I'm sure that most inventors pitch their idea with a powerpoint presentation and/or prototype, but at what point does an innovative idea or product become worthy of an investment?

Well, for an entrepreneurial company to be ready for investment - that is, to wisely use money to grow and increase the value of the Enterprise beyond the value of the money invested - it seems to me that there are four basic requirements.

1.  The idea must be focused on the market.  That is, the entrepreneur must be able to articulate what problem the company and its product is solving, why that solution is of value to the marketplace, and how the market will value it (and pay for it.)

2.  The entrepreneur must have financial foresight, either themselves or in some way that brings the foresight to the company in a daily basis.  That means, to me, understanding cash flow, minimizing expenses appropriately, investing in projects, processes and people well, and planning for cash flow and capital needs.

3.  The company must have a plan for a great team that fills all of the gaps required for success.  (I talked to someone today who clearly needs a particular kind of expert, but, as "CEO" is fearful of hiring someone in an area in which he is not an expert.  His company is going to struggle because of it.)

4.  The founding entrepreneur must be clear about their capabilities and their desired future role in the company.  He or she must articulate this upfront.

Rabbits or Dogs? The Startup Choice

If you are facing an investor presentation for your new venture, consider this.  Are you voting on rabbits - or feeding dogs?

Huh?

Well, in many situations, the venture founder spends a lot of time trying to convince the investor of "why" his idea/product/service will succeed in the market.  As the conversation - or presentation - goes on and on, it sounds like the old rabbit vote.  That is, if we have a rabbit in a cage, no matter how hard someone tries to convince the audience that it is a girl bunny - and no matter if the audience votes 6 to 0 that it is, that will not make it one.  If the founder convinces the audience that the idea is going to be great when it is tried in the marketplace, no matter what the audience decides, it won't change the outcome.

On the other hand, if the idea is a new dog food, putting a bowl on the floor in front of a small sampling of dogs will answer the question pretty convincingly, one way or the other.

I am struck by the all too common occurrence in venture planning of founders who spend lots of time and money theorizing and data-divining without getting to the dog food step.  And then, at the juncture that will bridge the greatest risk, and increase the value of their enterprise, they ask investors to pay for the dog food test, but assume in their value calculation that it is successful.

It's a tough chasm to leap across. 

At the end of the day, there are many ideas that can be subject to good old fashioned segmentation testing, proposed most famously by David Ogilvy during the late middle ages - well, OK, during the 1950s and 1960s.  It worked then, and it will work now.  It reduces risk, raises value of companies, and makes everyone happier. 

Plan B Strikes Again - The Value of Angel Groups

It's axiomatic that no matter how well planned, almost every startup needs a "plan B" because what it started out to do isn't what the opportunity turns out to be.  The software company I was involved in - RTMS - started as a consulting and services business, for example.

Well it happened last week at our angel group meeting.  I think this story highlights the value of angel groups.  A presenter of a medical device, well prepared, and well qualified, thought that the opportunity for the medical device was, well, in medicine.

It was a small market but interesting from an investment perspective.  Late into the meeting a member, who is in the manufacturing business, asked a question about capabilities of the product - and things got exciting.

Turns out our member is an industry expert on this kind of non-medical use and saw an enormous industrial opportunity.  It's a chance to be a first mover -- and faster to market since there is no need for regulatory approval.

If the entrepreneur hadn't met these folks, he may never have found "Plan B" - or at least not nearly as quickly and at a time when success here changes everything for the growth of the enterprise. 

He only got this opportunity to present because he was really well prepared, knew his science, and had a ton of credibility.  And without the group, he might've taken investment money from an uninformed source and spent a long time not seeing Plan B.