Wednesday, August 24, 2016

Are You Getting Your Fair Share Of Startup Equity?

partners-fair-shareI always tell entrepreneurs that two heads are better than one, so the first task in many startups is finding a co-founder or two. You need to find the skills or experience you don’t have in business, technology, or money. So the first question I usually get is what percent of the company or equity is that person worth? Giving a co-founder a salary won’t get you the “fire in the belly” you want.

The default answer, to keep peace in the family, is to split everything equally, but that’s a terrible answer, since now no one is in control, and startups need a clear leader. The next default of waiting until later is equally bad, since partners who bow out early will still expect an equal share of that first billion you make later.

Now comes the reality check. Just because it was your idea doesn’t mean you “deserve” 90% of the equity. The value in a startup is all about tangible results, so I see no equity value in the idea alone. Thus the real discussion must start with who will be doing the work, providing the funding, and delivering results. Each co-founder should get equity for value, based on these key variables:

  1. Lived a key role in a previous startup. Building a new business is quite different from an executive role in a mature company, so people from these backgrounds are often a liability. Value is embodied in previous success with investors, proven problem solving ability, and having built and executed a business plan with minimal resources.

  2. Experience and connections in your business area. Textbook knowledge and academic degrees don’t count here. Value factors include your related product breadth and depth, relationships with thought leaders, key vendors, and large potential customers. Building the product may be the easy part of your startup challenge.

  3. Key to required patents or trade secrets. In many cases, one of the co-founders may bring some work in progress that can be patented, trademarked, or copyrighted. Your idea is not intellectual property yet, so it has no inherent value. Every previous experience filing and winning a patent is a rare and valuable asset.

  4. Level of responsibility and time allocated. Co-founders only able to work part-time, with responsibility and major income sources elsewhere, don’t carry the same risk as others with more operational responsibility. Less dependence or startup success, or more cash compensation, generally means less equity assigned.

  5. Amount of venture funding provided. Investors may not be called co-founders, but they always get equity, commensurate with their share of the total costs anticipated, or share of the current valuation. The challenge is for real co-founders to keep their equity percentage above 50%, or they effectively lose control of operational decisions.

If none of these five items is a clear differentiator in your case, a logical approach would be to assign each an equal weight of 20% of the total, and partition the total equity based on each co-founder’s correlation to each variable. A friend or family investor thus might get 20% of the equity, even with no business activity contribution.

Because these considerations can be quite complex, very emotional, and have long-term implications, smart entrepreneurs don’t hesitate to get some legal advice at this early stage, in drawing up an agreement document to be signed by each of the co-founders. Obviously it should be amended later, as roles are more clearly defined, and execution proceeds.

Even with an agreed initial equity split, it’s smart to have Founder’s stock actually issue or vest over a period of at least two years, on a month-by-month basis. That way, if one of the partners disappears, or their role changes, a portion of the equity can be re-captured and reallocated to the other members. Other common terms, like the right to re-purchase, should be investigated.

In all cases, roles and titles should be clear, but not necessarily tied to any given percent of equity. In other words, the CEO need not be top equity owner, but should be the one with the most business skill and experience. The CTO of many technical startups was the original founder. The CFO may have a major financial background, but might be a minority owner.

Of course, all co-founders need to remember that allocated percentages will be diluted as Angel and VC investors are brought in. Keep your wits about you to make sure that dilution is done equitably and evenly. Naïve cofounders have found themselves squeezed out in some recent cases, including Facebook.

But don’t get greedy. It’s the power of the team that makes the business. Major equity in a startup that goes nowhere is not my idea of fun.

Martin Zwilling

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Monday, August 22, 2016

It Pays To Maintain Trusted Relationships In Business

Kathy_Ireland,_Warren_Buffett_and_Bill_GatesBased on my years of experience in both startups and large companies, trusted relationships are more the key to success than a great business model, how smart you are, or how much money you have. Aspiring entrepreneurs who struggle in a corporate environment often can’t wait to start their own company, only to find that relationships are even more critical and volatile there.

Many pundits will point to great entrepreneurs, including Steve Jobs at Apple, and Larry Ellison at Oracle, as examples of opinionated and egotistical leaders who succeeded without consideration for relationships. Yet insiders will tell you that both studied and valued the people interactions of prior leaders, and built very loyal relationships with many people who were key to their success.

The message here is not to use the public personas of leaders and entrepreneurs as the model for building and maintaining your business relationships. I’m convinced that the following personal strategies are required and practiced by every successful business leader, regardless of Silicon Valley myths to the contrary:

  1. Lead with business and technical acumen for people who count. As an angel investor, I’ve seen aspiring entrepreneurs who seem to be convinced that bravado and passion are a good substitute for real information and a plan. You only get once chance for a great first impression, so don’t forget that content wins in relationships over style.

  2. Building the right relationships requires proactive efforts. Don’t wait for the right people in business to find you – developers, investors, partners, or key customers. Part of the challenge in every business is to first recognize who can help you, and secondly take the initiative to build a productive relationship with that person or team.

  3. Avoid naysayers and downers. Smart business people learn to quickly recognize negative personality types, and avoid them at all costs. Innovative businesses are tough and unpredictable, so relationships with procrastinators, people handy with excuses and all the reasons something can’t be done, are not helpful and will drag you down as well.

  4. Maintain competitor relationships and seek alternate views. Good entrepreneurs recognize that strong competitors are smart people as well, and it pays to learn from competitors. Some of the best business partnerships come from “coopetition,” or finding ways to build win-win relationships rather than win-lose transactions with competitors.

  5. Don’t be afraid to ask for help from people who are ahead of you. These include other business leaders, mentors, visionaries, and influencers. Bill Gates still relishes his relationship and advice from Warren Buffett. Maintaining these relationships will require you to push your limits, think outside the box, and carry your own weight with them.

  6. Incent others to contribute to your success. This can be as simple as giving back as much time and emotional effort as you absorb from others, or it can be offering real business payback or equity for contributions. Smart business people understand their own agenda, and they figure out the agenda of others, to build win-win relationships.

  7. Don’t back away from conflicts that can be constructive. Some conflict is inevitable. Strong leaders learn how to manage conflict to make it productive, bring out alternate views, and strengthen relationships. If you surround yourself with “yes” people, you may feel good for a while, but the unmentioned problems no one surfaces will hurt later.

  8. Actively and positively end relationships that are not productive. We all have limited bandwidth, and it’s not possible to maintain relationships with everyone. Sometimes it’s better to move on, without burning bridges for the future. Smart entrepreneurs recognize when relationships have been outgrown, or need to be limited do to conflict of interest.

Today’s business world more than ever is a networked economy, requiring collaboration, and is most productive with trusted relationships, rather than a reliance only on legal contracts. Building relationships is not rocket science, and can be learned by anyone. It is the common ground between corporate professionals and entrepreneurs. Start practicing it today wherever you are.

Marty Zwilling

*** First published on Forbes on 08/15/2016 ***

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Sunday, August 21, 2016

How To Reduce Startup Risk Using Existing Technology

White_Castle,_Indiana,_USAIt may not be as sexy, but starting a new business which builds on an existing technology or business model is usually less risky than introducing that ultimate new disruptive technology. There are many levels of innovation that go beyond copying someone else’s idea, but stop short of pushing the leading edge (bleeding edge).

Many of the major business successes started this way. McDonalds didn’t really invent the fast food model – they simply improved on the cookie-cutter White Castle process. Before Wal-Mart made the low-cost high-volume business model famous, there was Ben Franklin and Two Guys who touted it way back following World War II.

The advantage of imitation, with innovation, is that it gives you a solid base for building experience. There is always time later for your next startup, using that disruptive technology of your dreams. Or you may decide that your dream was not really the great idea that you thought it was.

So don’t be intimidated by the negative image that imitation currently has in the startup world. Certainly I’m not recommending just one more Facebook, with a couple of features from Twitter, since social media has an unlimited potential for innovation. Risk level has always been directly correlated to the number of unknowns, so eliminating even one variable will improve your odds:

  • Eliminate one aspect of research and development. According to a classic Harvard Research study, first inventors spend at least a third more on their initial technology than later innovators. In addition, we all know that patent disclosure rules often facilitate legal reverse engineering, and innovation at this point is now much cheaper.
  • Capitalize on the lessons from early adopters and competitors. Smart startups save cost and time by capitalizing on the pivots of others before them. Market research can thus be based on real customers and a previously tested market. Studying and learning from the mistakes of others is the best way to reduce your own risks.
  • Attract investors who fear pioneers catching arrows. Banks have always been more likely to support the franchise model of cloning an existing business, while they avoid, like the plague, a new and untested technology. Most equity investors tend to avoid truly disruptive technology startups, since they take longer and more money to scale.
  • Imitation with continuous innovation predictably drives progress. The auto industry and others have used this model for generations, so business processes and metrics for innovation are well documented. Disruptive technologies are random and their success is unpredictable. Good imitators, like McDonalds, often bypass the original innovator.

  • There is always a related market or new country. The world is now a small place, but startups usually don’t have the resources to saturate all the related markets at once. Imitation with innovation is a great way to jump ahead of the curve. Especially if that new market is your home country, you will have the advantage.

But don’t be fooled by thinking this approach is easier than rollout out a disruptive technology. In many ways, more effort and attention is required to make sure you know what works and what doesn’t work in a given domain. Timing is critical, as well as focus on marketing and customer satisfaction. Competitors can move quickly, and there is no huge technology gap to protect you.

If this approach appeals to you, I recommend that you start by looking for successful businesses, rather than failing businesses, and focus on innovations you could offer to make the businesses even more successful. Innovations are often as simple as better delivery, more customization, or better distribution. Who knows, your imitation with innovation may turn out to be the bigger than the disruptive technology of your dreams.

Martin Zwilling

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Saturday, August 20, 2016

7 Business Limits On That Million Dollar Invention

Million-dollar-inventionEvery inventor seems to think their invention is worth a million dollars, but I haven’t seen anyone pay that much for one yet. In fact, I often have to tell aspiring entrepreneurs that their inventions have zero value, at least not until they are put in the context of a business plan, with qualified people committed to executing the plan. Early-stage ideas fall in the same category.

Don’t get me wrong. I have the greatest respect for inventors and idea people, who think outside the box to envision and even create solutions never before seen. But I have also learned from experience that there is often quite a distance between a great invention and a great business. A business is about making money, while inventions are more about spending money.

According to an old Harvard Business Review article, many people in history, famous for their inventions, like Thomas Edison, were entrepreneurs who only later were remembered as inventors of the products they commercialized. In fact, entrepreneurs will always tell you that the invention was the easy part, and building an innovative business was the real challenge.

Of course it helps to have innovative technologies before you start building a business. In other words, inventions are necessary but not sufficient to create real value for investors and customers. So what do investors look for in qualifying you for that million dollars you need to take your invention from your garage to the market? Here are some reality checks you should apply:

  1. It takes a business team to build a business. If you have been working alone, perfecting your idea, with no new business track record, your best strategy is to license the technology to a company or team with real business startup experience. You may get that million dollars someday in future royalty payments, but don’t expect anything today.

  2. Commercialization requires infrastructure. Many great technology solutions, like hydrogen engines for cars, look great on paper, but are extremely difficult to make a business. The value is tied to infrastructure outside your control, such as a pervasive network of fuel stations, trained service facilities, and new government regulations.

  3. You need a viable business model and customers. Investors expect proof that your invention can be manufactured in volume, and can justify a sales price at least double the cost, to a large customer set that has money to spend. I see too many technology solutions to world hunger, where constituencies don’t have money to sustain a business.

  4. Take a hard look at the alternatives. Just because your technology is “cool” doesn’t mean that it solves a painful problem that customers are willing to pay for. People like to complain about global warming and the plastics pollution problem, but they may not be ready to buy alternative energy at twice the price, or change bad habits for global gain.

  5. Lock in your sustainable advantage. Technology limited to a single product is seldom enough for a business. A long-term advantage usually also requires intellectual property, such as a patent, trade secret, or trademark. Investors look for technologies that can spawn a family of products, rolled out over time, for continuous innovation.

  6. Experts and market research agree you are first. Just because you haven’t heard of anything like your invention, doesn’t mean you are ahead of the pack. Even a patent search won’t uncover work in progress that may be well ahead of you in the business cycle. Test your idea with experts, scientific journals, and trade publications.

  7. Truly disruptive technologies carry an extra burden. Investors realize that big changes in technology usually take a long time, several false starts, and more money than expected to commercialize. They, and most customers, really are quicker to adopt evolutionary rather than revolutionary products. Early adopters are not a big market.

Ultimately you need to remember that customers buy solutions to problems from business people they trust – they don’t buy technology from inventors. If you really want your invention to change the world, maybe it’s time to give it to a proven entrepreneur, and split the ownership of a new company. The million dollars will come in due time.

Marty Zwilling

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Friday, August 19, 2016

7 Startup Pitfalls Can Kill Your Business Growth

Sean_Parker_2011In my role as an advisory board member for several startups, I’m always excited to see that initial surge of revenue from a great rollout campaign. Unfortunately, many passionate entrepreneurs read this initial surge as success, and charge ahead with more of the same passion, leading to a series of potential pitfalls that can quickly jeopardize the health of the entire business.

For example, early social media startup Friendster was so enamored with their early acceptance that they turned down a $30 million offer from Google, then quickly ran into money woes and tough competition. Napster created the free music sharing craze back in the nineties and found great acceptance, and ignored the legal pushback by content owners, only to lose it all in the end.

Early success is great, but it’s only the beginning of your hard work. In addition to the visible failures mentioned above, there are many less fatal, but critical pitfalls I see all too often that every entrepreneur can avoid with some careful planning of ongoing attention:

  1. Separating profitability from cash flow and managing both. An initial revenue surge, or a major cash advance from investors often leads to a mentality of building a large customer base at any cost. It’s easy to forget how quickly cash can be burned and how hard it is to find the next round. Keep your focus on business health through profitability.

  2. Assuming you can keep all relevant financial data in your head. At the startup entry level, most entrepreneurs find little need for Profit and Loss statements and Income statements – they know all the key transactions. As the business grows, it pays to learn how to use automated financial tools, and review the key financial metrics daily.

  3. Watch for margin erosion as real operating growth costs kick in. As the business grows, new overhead costs, including health and liability insurance, office administration, and payroll taxes. On the other end of the transaction, customer support, returns, and transportation can add up. Prices need to be reviewed to cover total costs and margin.

  4. Failure to follow-up on customer receivables delays. Most businesses expect payment in 15 to 30 days, but some customers will assume they can extend this period to 45 days or more, or until they receive a late payment prompt from you. Revenue does not flow into your business based on invoices sent, but only on checks received and cleared.

  5. Too busy to focus on hiring, training, and managing employees. Hiring the wrong people, or not training them, will destroy your business faster than running out of cash. Since first-time entrepreneurs rarely have experience in this area, I recommend extra training for all executives, and the use of an outside advisor to focus on this requirement.

  6. Delegating cash flow management to your accountants. With the crush of new business, many startup founders delegate cash transaction management to their assistant or accountant, while they focus on finding and satisfying customers. Well-meaning and diligent assistants can kill your business by over-ordering and early paying.

  7. Continue to operate without documented and repeatable processes. As any business grows, you need help to make it happen, and new employees don’t have the background knowledge, training, or the problem-solving ability you have developed. They need written processes and measurements to get the job done right.

A great vision, and the creativity to develop an innovative solution, are necessary but not sufficient to build a great business. When the first wave of customers finds you, and the revenue starts flowing, a whole new set of disciplines must kick in to keep the momentum going. With new disciples come the new pitfalls listed above, which can undo all the initial market acceptance.

My recommendation is to bring in some experienced business professionals at this point, who understand the challenges and realities of sales, marketing, personnel, finances, and operations. As an entrepreneur, you need their help in managing people, processes, and finances, and they need your vision and direction to change the world. That’s a win-win combination for everyone.

Marty Zwilling

*** First published on Forbes on 08/13/2016 ***

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Wednesday, August 17, 2016

Startups Providing A Service Are Difficult To Scale

Circle_scaling.svgThe critical success factors for a product business are well known, starting with selling every unit with a gross margin of 50 percent or more, building a patent and other intellectual property, and continuous product improvement. If your forte is a service, like consulting or web site design, it’s harder to find guidance on what will get you funded, and how you can scale your business.

On the product side, once you have a proven product and business model, all you need is money to build inventory, and a sales and marketing operation to drive the business. With services, scaling the business often implies cloning yourself, since you are the intellectual property and the competitive advantage. You have no shelf life, so you can’t make money while you sleep.

Indeed, there are some success factors that are common to both environments. For example, both need to provide exemplary customer service, build customer loyalty, and provide real value for a competitive price. Here are the additional success factors that are really key to a startup with a services offering:

  1. Get your service out of your head and down on paper. If you can’t quantify or document your service for repeatability and new employee training, you will kill yourself trying to grow the business. Even artisan-based services, like graphic design and writing good ad copy, have innovative processes and principles. Capture your “secret sauce.”

  2. Start with a service you know and love. A successful services business, more than a product business, comes from a skill or insight that you have honed from experience. If you don’t have a high level of commitment and passion, you customers won’t seek you out. Now all you have to do is pass it to the many new members as you grow your team.

  3. Don’t let your service be viewed as a commodity. Low cost and low margin products can be winners, if the volume is high enough. You don’t have enough hours in a day, or trained people, to succeed with lower margins in a services startup. Thus you need to highlight how your service is more innovative and higher value to your target customers.

  4. Recruit only the best people, with the right base skills. Customers won’t pay to see your new employees learning on the job, and outsourcing the real work to a cheap labor source is a recipe for disaster. Make sure they bring solid base skills, so your training can focus on the innovative and unique elements that your service brings to the arena.

  5. Be a visible and available expert in your domain. Be accessible on social media, write a blog or articles for industry publications, and participate in conference panels and speaking engagements. This substantiates your expertise and value, builds peer relationships, gives you access to the people and technology to keep you current.

  6. Practice being a good communicator. Customers can touch and see a great product, but services are a bit ethereal. You have to communicate how your service is the best, to your own team, as well as to your customers. If you deliver a great service, but no one knows it, your business will suffer. Make sure everyone knows your vision and values.

  7. The customer experience is more than the service. Product companies sometimes equate customer satisfaction with customer service, but it’s more than that, especially with services. Make sure that every interaction with every customer is positive, the service delivered is exemplary, and always follow-up for reference and repeat business.

For some entrepreneurs who feel the need to attract outside investors as a critical success factor, they should be aware that professional investors almost never invest in a services-only company. The investor perspective is that no manufacturing or inventory implies a minimal need for capital up front. They tell these entrepreneurs to sell themselves, execute well, and grow organically.

Thus your services business success totally depends on you, your skills and resources, and your ability to bring customers to the table. You are the ultimate critical success factor for your business. Are you ready to make it happen?

Marty Zwilling

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Monday, August 15, 2016

8 Insights For Millennials To Excel As Entrepreneurs

millennials-entrepreneurshipAs an advisor to startups and an angel investor, I encounter many Millennials as entrepreneurs who are leaders and great role-models for the rest of us in business. Unfortunately there are still others who have great ideas and passion, but seem to have a very naïve understanding or acceptance of what it takes to get ahead of the crowd and succeed in business.

The reality is that Millennials (also known as Gen-Y) are here to stay, and will soon be taking over the majority of our businesses, new and old. There are over 75 million of them in the U.S., now surpassing the number of Baby Boomers, and nearly two-thirds of them are already in the work place. It’s definitely to everyone’s advantage to make them winners, or we will all be the losers.

In the spirit of making us all winners, I offer the following collection of lessons and insights from my own experience and other business executives and investors I know on how to get there as entrepreneurs faster and more effectively:

  1. Embrace possible failure as one of the best learning vehicles. Unfortunately, many Millennials were raised by well-intentioned parents who never let them fail, and gave them awards for merely showing up. Most great entrepreneurs, including Steve Jobs, Bill Gates, and Michael Dell, have talked about their failures as the key to later success.

  2. Actively solicit mentoring from people with more experience. Most successful executives are more than willing to share what they have learned, if sought out, asked respectfully, and sense active listening. There is no need to be intimidated by tenure or title. Real experience reveals insights never found in a classroom or abstract logic.

  3. Remain intensely curious and seek out different points of view. It’s a given that Millennials understand the interests of other Millennials. But don’t always assume that everyone else will like and buy the same things. The best work hard to broaden their knowledge, and are not hesitant to challenge their own understanding of the market.

  4. Prove you can do the job before asking for the title. No one is entitled to a better job position or entrepreneur funding, no matter how passionate, educated, or articulate. Real leaders are evident by their actions, not by any appointment. I’m a strong proponent of letting your results do all the talking. Don’t fool yourself with your own over-confidence.

  5. Broaden yourself by taking roles outside your comfort zone. Smart entrepreneurs know what they don’t know, and work hard to fill the gaps. They are not afraid to ask questions, learn new tools, and seek opportunities to gather experience in every business role possible. In a startup, you can’t afford to outsource too many functions.

  6. Don’t burn your bridges with peers and current employers. Good working relationships are hard to build, and easy to destroy. In a startup, you can’t predict when you will need help from a past connection, advisor, or investor, so it pays to maintain old relationships rather than ignore them or lose them through petty disagreements or ego.

  7. Integrate social causes into a healthy business model. Many young entrepreneurs are naïve in assuming that doing good for society obviates the need to make money, and will motivate customers to pay premium prices. Smart startups, including Whole Foods, Etsy, and Patagonia, have figured out how to do both for long-term impact and success.

  8. Learn to balance personal and business priorities. Some aspiring entrepreneurs work themselves to frustration and loss of health, while others prioritize their social life above all else. Neither extreme is conducive to long-term credibility or success. Investors and employees look for leaders who can balance priorities and display a positive outlook.

The good news in the latest survey from Deloitte is that Millennials are holding on to their strong values, and continue to be steered by these values at all stages of their careers. The new news is that they are expressing a more positive view of the business role in society and have softened their negative perceptions of business profit motivations and ethics compared to prior surveys.

I love working with Millennials as aspiring entrepreneurs, with their unbridled enthusiasm, innovative thinking, and fresh perspective on market opportunities. With a few additional insights as outlined here, I believe we can all work together more effectively and look forward to new markets and world changes that we never even dreamed of.

Marty Zwilling

*** First published on Forbes on 08/09/2016 ***

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