Keep Term Sheets Simple for Quicker Cash to Spend

Remember a term sheet agreement is not a deal until the check clears. Entrepreneurs sometimes assume an initial agreement with an Angel is a commitment, so they start spending before any money is received. But due diligence and paperwork take time, and can change everything.

It’s true that Angel investors typically do not present entrepreneurs with overly complicated deal structures, especially when compared to venture capitalists. However, there is no set pattern of terms an entrepreneur might be able to anticipate from either. Your best strategy is to bring your own term sheet to the negotiation as a starting point.

When a company is at its earliest seed stage, the terms tend to be the least complex. As the company grows and the second or third group of investors comes in, the terms of each subsequent financing grow in size, scope, and the number of lawyers’ fingerprints on them.

Based on my experience, and the book “Attracting Capital from Angels” by Brian Hill and Dee Powers, here are some key clauses that any investors expect on the first term sheet for the investment you need:

• Set the price. The price is the percent of ownership given to the investor, calculated as “investment/post-money valuation.” The pre-money valuation is company value today, while the post-money valuation is the pre-money valuation plus the investment amount.

• Seat on the board. This does not mean that if you have eight Angels in your company, you will have to seat all eight of them on your board. But the lead Angel would certainly ask to be given a seat.

• Define equity type. The first capital a young company receives usually takes the form of common stock, the same class of shares the founders hold. Venture capitalists and later round investors like the preferred convertible shares.

• Outline multiple tranches. Investors may provide money in stages or tranches, based on defined milestones, to decrease investment risk. These “IV drip” financings may reduce risk for investors, but put more pressure on founders.

• Anti-dilution protection. This clause attempts to protect the conversion price of stock of Angel investors, prior to additional financing, from being reduced to a price equal to the price per share paid in a later “down” round. But some dilution is almost inevitable.

• Right of first refusal. Angels may want the first right to purchase shares held by the other angels in the deal before they are sold to an outside party. This allows a committed Angel to consolidate his ownership, rather than see it scattered to the wind.

• Liquidation preference. These are terms which basically say for the investor, “give me the option to get my investment back or my negotiated ownership, whichever is more”. It prevents the entrepreneur from selling early, at a loss to the investor.

Remember that due diligence and negotiation takes time. Not allowing enough time is one of the major mistakes made by entrepreneurs. You can end up becoming very frustrated with the investors, or cause the venture to fail if you run out of seed capital before the angel round can be completed.

In a survey for the above book, Angels reported that it takes them an average of 67 days to close, while the average closing time for venture capitalists was 80 days. This time does not include finding the right angels, which is the first and longer part of the effort.

You should expect that both parts, when combined, can take three, six, or nine months – or more. Don’t wait till your last dollar is gone before you start looking for the next one. The check won’t clear in time to save you.

Marty Zwilling

Great Startups Can Hook an Investor in 60 Seconds

An "elevator pitch" is a concise, well-practiced description of your startup and your plan, delivered with conviction and enthusiasm, that your mother should be able to understand in the time it would take to ride up an elevator. Everybody knows about these, but few people seem to deliver a good one.

A good elevator pitch is not just for an elevator discussion. Use it in every networking situation and business conference introduction. The elevator pitch should be the first few paragraphs of your business plan, your executive summary, your investor presentation, and the first page of your web site. A different message everywhere is no message.

An elevator pitch should always contain the following key elements:

• Problem-solution "hook." Open your pitch by getting the investor's attention with a hook. This is a statement or question that piques their interest to want to hear more. Good hooks succinctly define a real problem, and suggest the solution. For example, “I just patented a new cell-phone technology that will double battery life for half the cost. I need your help in getting it to market.”

• About 150-225 words. Your pitch should be about 30-60 seconds (average elevator ride). Don’t think that you can just talk fast to cram 500 words into that time. It won’t work.

• Obvious passion. Investors expect energy, conviction, and commitment from entrepreneurs. How do you expect them to get excited, if your startup sounds like a dull subject to you?

• A request. At the end of your pitch, you must ask for something. Ask for time to give a full presentation, or ask for a referral to someone who can help.

My friend, Dave Bittner, offers a simple template to get started that will work for most products and services: “We sell [product/service deliverable] to [market niche] who want [unmet market need]. Unlike [competition], we [differentiation].” All you have to do is fill in the brackets and you have the essence of an elevator pitch.

Here are some additional recommendations to increase the impact:

1. Describe your product or service. Provide a one-paragraph description of what you sell. Focus on customer benefits rather than features, indicating real pain, rather than just nice to have.

2. Quantify the market. Make sure you clarify how large the market is, how much money they have to spend, and a positive level of growth. A product may be great, but if won’t make a business if you don’t hit customers with money to spend.

3. Outline the revenue model. Giving the product away, or selling below cost may make it attractive to customers, but your business won’t be attractive.

4. Highlight people strengths. "Bet on the jockey, not the horse" is a familiar saying among investors. Tell them the high points about you and your team's background and achievements.

5. Present a sustainable competitive advantage. You need to effectively communicate how your company is different and why you have an advantage over the competition. This could be a patent, key partners, domain expertise, or a better distribution channel.

Most importantly, avoid the most common mistake of turning this into a sales pitch for your product or service. The investor is "buying" the business, not the product. Tell him why and how you will run a winning business.

Consistency and redundancy are the keys to communicating any message. Another key to effective communication is practice, practice, practice early. Remember, you only have one chance to make a great first impression.

Marty Zwilling

10 Ways Top Business Leaders Avoid The Loneliness

One of the toughest things about running a business is the feeling of loneliness and isolation. You are on your own and nobody supports you because it’s hard for them to see what you see and feel the excitement that you feel at the critical stages. This is especially true if you run your small business from home.

The leadership position alone can cause loneliness and disconnectedness, and that sometimes results in self-defeating behaviors. If your personality already leans toward narcissism, being the boss will likely bring out the worst in you, leading to intimidation, deception, and the use of coercive power. Of course, that leads to further isolation.

It doesn't have to be lonely at the top. Here are some ways to burst through the loneliness of being a top executive or manager, and be the healthy and respected leader of your business:

1. Join peer business groups. Join business organizations of like-minded executives. They provide a safe harbor to come talk about issues of leadership with other business owners. Groups like the Inner Circle and Entrepreneurs’ Organization (EO) are perfect.

2. Build a trusted team. Most people by nature get some satisfaction from team interaction, working toward the same goal. Even if your startup is a one-man show, you can find an intelligent outside mentor or advisory board member to bounce ideas off.

3. Balance home and family. The best leaders are able to maintain a balance in their lives. They have learned to say no. They accept that their families and their subordinates sometimes need to say no. They turn their work into play and then play hard.

4. Don’t work where you live. Just being able to live and work in separate environments can really help. The change of scenery and external stimulation, whether a coffee shop or just the sunlight, will allow you to switch gears and keep a healthy attitude.

5. Meet customers online. Use Twitter and Facebook to make connections with clients, customers, and peers online. It helps to socialize with several hundred people all at once, even if you never see them face-to-face, and you can “instant message” one-on-one.

6. Plan regular networking lunches. Get out of the office on a regular basis to break up the frustrations of daily crises. This combats the isolation that sometimes comes with leadership, helps you broaden your perspective, and gives moments of pure relaxation.

7. Nurture your charismatic side. Charismatic leaders don’t feel the loneliness, and use a wide range of methods to manage their image. If you are not naturally charismatic, practice diligently to develop these skills of body language and verbal language.

8. Maintain non-business activities. Hearing about your virtual coworkers going hiking, or just spending some time resting and relaxing can be very detrimental to your self esteem. Work to keep up on your own hobbies, and participate in community action events.

9. Let a select few see your frailties and fears. Pretending we have it all together only builds the walls of loneliness higher. On the other hand, opening the door to our frailties invites others in. A trusted team member is usually a safe start.

10. Build a good board of directors or advisors. People under-estimate the value of a good board. Yes, a board does decide whether you stay or go. They probably won't be your friend all of the time. But a good board can collaborate with you openly, provide advice, and provide you back-up especially when taking a risk.

Entrepreneurial leaders can also become de-motivated after working so hard and so long on something for which the reward may be months or years away, or perhaps never to come at all. Motivation, momentum, and clear progress are strong antidotes to loneliness.

But the best antidote to loneliness is successful leadership. This will give you the positive feedback you yearn for, and will allow both you and your business to become more than you ever dreamed possible.

Marty Zwilling

A Smart Business Knows 8 Ways to Pivot Their Vision

One of the hottest buzzword for startups these days is “pivot.” The term, introduced by entrepreneur and venture advisor Eric Ries in an article on Lessons Learned a couple of years ago, is properly used to describe smart startups that change direction quickly, but stay grounded in what they've learned. They keep one foot in the past and place one foot in a new possible future.

Over time, this pivoting may lead them a bit away from their original vision, but not away from the common principles that link each step. The pivot has to leverage previous learning about customers, technology, and the environment. The alternative is more risky, simply jumping compulsively from one vision to another, and is likely to lead to a death spiral.

The pivot can be applied to any element of the business model, without changing the underlying vision. Here are some of the most common pivot elements that Eric and others have noted:

1. Customer problem pivot. In this scenario, you use essentially the same product to solve a different problem for the same customer segment. Eric says that Starbucks famously did this pivot when they went from selling coffee beans and espresso makers to brewing drinks in-house.

2. Market segment pivot. This means you take your existing product and use it to solve a similar problem for a different set of customers. This may be necessary when you find that consumers aren’t buying your product, but enterprises have a similar problem, with money to spend. Sometimes this is more a marketing change than a product change.

3. Technology pivot. Engineers always fight to take advantage of what they have built so far. So the most obvious pivot for them is to repurpose the technology platform, to make it solve a more pressing, more marketable, or just a more solvable problem as you learn from customers.

4. Product feature pivot. Here especially, you need to pay close attention to what real customers are doing, rather than your projections of what they should do. It can mean to zoom-in and remove features for focus, or zoom-out to add features for a more holistic solution.

5. Revenue model pivot. One pivot is to change your focus from a premium price, customized solution, to a low price commoditized solution. Another common variation worth considering is the move from a one-time product sale to monthly subscription or license fees. Another is the famous razor versus blade strategy.

6. Sales channel pivot. Startups with complex new products always seem to start with direct sales, and building their own brand. When they find how expensive and time consuming this is, they need to use what they have learned from customers to consider a distribution channel, ecommerce, white-labeling the product, and strategic partners.

7. Product versus services pivot. Sometimes products are too different or too complex to be sold effectively to the customer with the problem. Now is the time for bundling support services with the product, education offerings, or simply making your offering a service that happens to deliver a product at the core.

8. Major competitor pivot. What do you do when a major new player or competitor jumps into your space? You can charge ahead blindly, or focus on one of the above pivots to build your differentiation and stay alive.

In all cases, the change is not linearly adding one more new feature, in the vain hope that this one will cause traction to magically materialize. The key to pivoting is spotting trends from real data and real market experience, and optimizing the basic product/market fit, without leaving a hole or divot in your market or your credibility.

Look for multiple data points before you pivot. You have to learn that no product will satisfy every customer, so don’t make random jumps based on a single customer, friend, or negative blog article. A good internal data point or early-warning is a chronically frustrated solution team.

Get your investors and advisors to do the pivot exercise right along with you, so there are no surprises. Adaptation and dealing with chaos is the key to survival for a startup, and your best competitive edge over large companies. The down side is that it may be bad for your golf swing.

Marty Zwilling

10 Hiring Shortcuts No Young Company Can Afford

Every startup with any traction quickly reaches a point where they need to hire employees to grow the business. Unfortunately, this always happens when pressures are the highest, and business processes are ill-defined. At this point you need superstars and versatile future executives, yet your in-house hiring processes and focus are at their weakest.

The result is a host of hiring mistakes that sink many young companies, or take years to fix. The solution is to never forget that hiring is a top priority task for the CEO, which should never be delegated, and which often has to supersede the urgent crises of the day.

A key success element is to start by avoiding the known list of interviewing and hiring mistakes that have been documented many times over by human resources professionals. Here’s a tongue-in-cheek summary of ten big ones to jog your recollection:

1. “I’m not quite sure what we need, but this guy sounds like a miracle worker.” The message here is that if you don’t know exactly what help you need, you probably won’t get it. Do your homework on a proper job description, and make sure the applicant credentials on the resume are a fit before you proceed to interview.

2. “He’s not quite what I’m looking for, but I think he is trainable.” This is the inverse of the first problem – you know what you want, but you are trying to force fit the candidate into the position. Maybe you are desperate to fill the position, or he’s related to the boss.

3. “I’m confident this candidate can learn a lot from me.” This is the arrogant position that you know more than anyone you could hire, so all you need is a helper, not help. Helpers are expensive, since it often takes longer to jointly do a job than it would take one qualified person to do it alone.

4. “I didn’t have time to read the resume, but he has great answers.” Some people talk a good story, but can’t produce results. Resumes won’t give you the positive conclusion, but they can highlight negatives, like job gaps, bad writing, and minimal experience.

5. “He couldn’t keep up with me on results, but we have to start somewhere.” It’s always a mistake to judge a candidate by using yourself as the bar. You should assume that you are looking for someone who has skills you don’t have.

6. “This one is such a good fit that I don’t need to waste time on a second interview.” No matter how good you are, we can all miss things the first time around. Never hire someone without a second interview, and without having a second interviewer verify your assessment. Everyone you hire has to fit effectively with many others on the team.

7. “After my sales pitch, he was so excited I knew he could do the job.” Some hiring managers spend the interview selling the company under some mistaken impression that the level of candidate excitement they can generate is indicative of future performance.

8. “He’s not perfect, but our only alternative is to let the work stack up even more.” This is pure desperation, guaranteed to have bad results. If you hire someone who can’t do the job, the work backs up more, and your work doubles to get them replaced.

9. “His experience is light, but he seems like a good guy.” Avoid evaluating just personality in lieu of job skills. All the statistical research shows that there is very little correlation between a good personality and any specific job. Look for job knowledge first.

10. “Based on the glowing terms I heard from my friend, I’ll just skip the reference check.” There are lots of factors that can’t be assessed in an interview, or by listening only to an advocate. In this litigious society, reference checks are more productive if you also listen to what is not said.

Another element is admitting that there are things you don’t know, and identifying what they are. Too many executives let their ego stand in the way, either in admitting that there might be things they don’t do well, or in identifying and communicating specific job requirements.

Take a lesson from an old Business Week article by entrepreneur Andy Dunn, aptly named “To Recruit the Best, Admit Weaknesses” where he admitted to the best applicants “I am not good at what you do, I need your help.” In my view, if every CEO and hiring manager followed this advice, as well as good hiring practices, their business would scale a lot faster with a lot less headaches.

Marty Zwilling

7 Ways to Avoid a Poor First Impression in Business

Entrepreneurs are all about firsts, and the most important is you making a great first impression – on investors, customers, new team members, and strategic partners. Poor first impressions can be avoided, but I’m amazed at the number of unnecessary mistakes I see at those critical first introductions, presentations, and meetings.

The key message here is “preparation.” People who think they can always “wing it,” bluff their way past tough questions, or expect the other party to bridge all the gaps, sadly often find that what they think is a win, is actually a loss which can never be regained.

We've all met people that we instantly like because of a great first impression, and want to do business with. Here are some common sense things that they do and you can do to maximize the first impression that you impart in any business environment or discussion:

1. Dress appropriately from the perspective of the person you are trying to impress. This one is so obvious that I hesitate to mention it, except for the fact that I see it ignored so often. Maybe you love wearing Hawaiian shirts to work, but when you visit a traditional banker to close on a loan, it will be worth your time to put on a solid shirt and jacket.

2. Always research the person online before a first meeting. In today’s world of LinkedIn and Facebook, there is no excuse for not recognizing a person as you meet them for the first time, and knowing their accomplishments, if not their interests and academic background.

3. Google the organization and the role they represent. It’s polite to ask a professional you just met about their company affiliation, but it’s much smarter to ask them about a current issue, making it clear that you already know a good bit about their company, and their role in that company.

4. Find a common business link or friend to warm up the connection. The best introduction to a new customer, or potential angel investor, is a warm introduction from a common friend, rather than a cold call. In my opinion, this approach will double or triple your probability for success, no matter what the transaction.

5. Be prepared to concisely state your key objective. Before the other party has to ask, you should look for an opportunity to net out what you are here to accomplish, and even have a couple of questions in mind that you would like to get answered. Think of it as not forgetting to ask for the order.

6. Know a lot, but don’t flaunt it. Some people do all the right legwork, but then kill themselves by appearing arrogant or obsequious in the way that they can’t stop talking about everything that they know. When you meet someone new who is important, your first words after “Hello” should be a question rather than a long personal dissertation.

7. Be positive, courteous, on time, and attentive. We have all met people who, when asked “How are you?” provide a long litany of their latest woes, or a diatribe on current political issues. Obviously, being late to your own meeting, or appearing distracted or uninterested, will also leave a bad first impression. Smile and relax.

All of the common first impression mistakes are avoidable, and elements of the right approach are easily learned. Most entrepreneurs have spent months, and hours of hard work, preparing the necessary business plans, executive presentations, and financial models to impress investors. Just apply the same diligence in preparing yourself for all those “first” opportunities.

That image of you that you first present usually lasts longer and has more impact that any document you can prepare. In the book “You Are the Message,” media executive Roger Ailes wrote that your first impression will be solidified in the first seven seconds. Use them wisely.

Marty Zwilling

Texting is Killing Real Business Communication

Whether it’s a business or personal interaction, multiple studies show that as much as 50-65% of the communication is nonverbal. That means that people who are addicted to text messaging and email may be sending only half the message, and receivers often misinterpret even that half.

Yet the use of text messaging for business purposes continues to grow, in concert with more of Gen-Y entering the workplace, and a continuing increase in the global rate of texting by everyone. This total rate for 2011 has been estimated at 7 trillion, or nearly 225,000 text messages sent every second, according to the Quora statistics website.

But are these text messages an efficient and appropriate business tool? Where body language is part of the message, it definitely is not. Let’s look at the most commonly recognized forms of body language, and see how they apply to business:

• Eye contact. The eyes are the most powerful part of our body language, and can express everything from happiness, annoyance, interest, to pain. Frequent eye contact is interpreted as honesty and forthrightness. Staring is interpreted as too aggressive. These are obvious in person, but lost in a text message.

• Posture. If you are trying to appear dominant or authoritative, stand erect with shoulders back. A slumped position usually indicates insecurity, guilt, or weakness. A dominant sounding text message, on the other hand, generates anger rather than acceptance.

• Mirroring. Most people feel more comfortable and open with people in a similar position to themselves. An example would be sitting down to meet with a key vendor, rather than standing to deliver demands. Good managers practice this one for personnel issues.

• Handshake. This, of course, comes into play to signal openness or goodwill at the beginning of an interaction, and agreement at the end. Palm-to-palm contact is important for sincerity. This cultural icon is totally missing from text messages and emails.

• Hand-to-face. Even when the words sound good, hand-to-face movements such as holding the chin or scratching the face shows concern or lack of conviction. If a person is covering his mouth while telling you something, he may be lying.

• Facial expression. A critical message delivered with a smiling face will have a totally different impact than one delivered with an angry face. ‘Smiley face emoticons’ were invented to simulate this in text messages, but they don’t always work, because the sincerity is lost.

• Arms and legs position. Folded arms or crossed legs, perhaps turning away slightly, indicates a lack of interest and detachment. Later uncrossed arms and legs may be a sign of acceptance of your position or terms. An extrovert will have toes pointed out, introvert will keep them pointed in. None of these come through in texting.

• Space occupied. Some people stand up and move around to be more dominant, maybe even threatening. Even sitting, you can stretch your legs to occupy more space. Standing while talking on the phone will make your voice sound more urgent. Maybe all CAPS will satisfy this one.

Sure, there are many cases where a 10-word text message, or 140 character tweet will communicate a simple message more efficiently than a face-to-face discussion. But most business processes, like negotiating a contract, closing a sale, customer support, or managing employees, are much more complicated than just words.

Overall, the most successful people in business learn to use the right tool for the right job. I’m supportive of using text messaging for agreeing on a time and place for a customer visit, but when I read that text messages are the new pink slips for layoffs, that’s just wrong!

Marty Zwilling