10 Ways to Size Your Company’s Value for Funding

Once you have a potential investor excited about your team, your product, and your company, the investor will inevitably ask “What is your company’s valuation?” Many entrepreneurs stumble at this point, losing the deal or most of their ownership, by having no answer, saying “make me an offer,” or quoting an exorbitant number.

I’ve written about this before, but it’s a mysterious subject, and I’m always learning more. This time I’ll use a hypothetical health-care web site company named NewCo as an example to illustrate the points.

Two founders have spent $200K of personal and family funds over a one year period to start the company, get a prototype site up and running, and have already generated some “buzz” in the Internet community. The founders now need a $1M Angel investment to do the marketing for a national NewCo rollout, build a team to manage the rollout, and maybe even pay themselves a salary.

How much is NewCo worth to investors at this point (pre-money valuation)? What percentage of NewCo does the investor own after the $1M infusion (post-money ownership percentage)? Well, if the parties agree to a pre-money valuation of $1M, then the post-money investor ownership is 50% (founders give up half interest, and lose control). On the other hand, if the pre-money valuation is $4M, the founders ownership remains at a healthy 80% level.

So what magic can the founders use to justify a $4M valuation (or even the $1M valuation) at this early stage? Here are the components and “rules of thumb” that I recommend to every startup:

1. Place a fair market value on all physical assets (asset approach). This is the most concrete valuation element, usually called the asset approach. New businesses normally have fewer assets, but it pays to look hard and count everything you have. NewCo might be able to pick up an initial $50K valuation on this item.

2. Assign real value to intellectual property. The value of patents and trademarks is not certifiable, especially if you are only at the provisional stage. NewCo has filed a patent on one of their software tool algorithms, which is very positive, and puts them several steps ahead of others who may be venturing into the same area. A “rule of thumb” often used by investors is that each patent filed can justify $1M increase in valuation, so they should claim that here.

3. All principals and employees add value. Assign value to all paid professionals, as their skills, training, and knowledge of your business technology is very valuable. Back in the “heyday of the dot.com startups,” it was not uncommon to see a valuation incremented by $1M or every paid full-time professional programmer, engineer, or designer. NewCo doesn’t have any of these yet.

4. Early customers and contracts in progress add value. Every customer contract and relationship needs to be monetized, even ones still in negotiation. Assign probabilities to active customer sales efforts, just as sales managers do in quantifying a salesman’s forecast. Particularly valuable are recurring revenues, like subscription amounts, that don’t have to be resold every period. This one doesn’t help NewCo just yet.

5. Discounted Cash Flow (DCF) on projections (income approach). In finance, the income approach describes a method of valuing a company using the concepts of the time value of money. The discount rate typically applied to startups may vary anywhere from 30% to 60%, depending on maturity and the level of credibility you can garner for the financial estimates. NewCo is projecting revenues of $25M in five years, even with a 40% discount rate, the NPV or current valuation comes out to about $3M.

6. Discretionary earnings multiple (earnings multiple approach). If you are still losing money, skip ahead to the cost approach. Otherwise, multiply earnings before interest, taxes, depreciation and amortization (EBITDA) by some multiple. A target multiple can be taken from industry average tables, or derived from scoring key factors of the business. If you have no better info, use 5x as the multiple.

7. Calculate replacement cost for key assets (cost approach). The cost approach attempts to measure the net value of the business today by calculating how much it could cost for a new effort to replace key assets. Since NewCo has developed 10 online tools and a fabulous web site over the past year, how much would it cost another company to create similar quality tools and web interfaces with a conventional software team? $500K might be a low estimate.

8. Look at the size of the market, and the growth projections for your sector. The bigger the market, and the higher the growth projections are from analysts, the more your startup is worth. For this to be a premium factor for you, your target market should be at least $500 million in potential sales if the company is asset-light, and $1 billion if it requires plenty of property, plants and equipment. Let’s not take any credit here for NewCo.

9. Assess the number of direct competitors and barriers to entry. Competitive market forces also can have a large impact on what valuation this company will garner from investors. If you can show a big lead on competitors, you should claim the “first mover” advantage. In the investment community, this premium factor is called “goodwill” (also applied for a premium management team, few competitors, high barriers to entry, etc.). Goodwill can easily account for a couple of million in valuation. For NewCo, the market is not new, but the management team is new, so I wouldn’t argue for much goodwill.

10. Find “comparables” who have received financing (market approach). Another popular method to establish valuation for any company is to search for similar companies that have recently received funding. This is often called the market approach, and is similar to the common real estate appraisal concept that values your house for sale by comparing it to similar homes recently sold in your area.

Remember that all the components, except the last, are cumulative. Even if a given investor excludes some of the components from consideration in your case, your credibility will be bolstered by the fact that you understand his interests as well as yours. In any case, the analysis will prepare you for the heavy negotiation to follow.

Precision is not the issue here – the task for the entrepreneur is to build a company that is worth at least $50M before thinking about an exit -- no investor wants to spend more than five minutes arguing the fine points of the last valuation dollar.

So what is a reasonable valuation for a company like NewCo? My advice for early-stage companies like this one is to target their valuation somewhere between $1.5M and $5M, justified from the elements above. A lower number suggests that the founders are giving away the company, while a much higher number may suggest hubris or lack of reality on the part of the owners.

Of course, we have all read about the “new” company with $100M valuation, but I haven’t met one yet.

Marty Zwilling

1001 Serial Articles for Entrepreneurs & Startups

As of today, I will have published an article here for entrepreneurs and startups every day for the last 1001 days, since I started Startup Professionals Musings near the close of 2008. It’s been a great ride, but it’s now time to dial it back a bit, and focus on some other priorities. I still plan to publish on this blog occasionally, as well as more frequently on my blogs at Forbes, Huffington Post, and others.

In my traditional notational style, I’ve taken a nostalgic look back over the ground covered and lessons learned in the past almost three years. Here are ten key messages that I would like to leave you with:

1. I continue to gain respect for entrepreneurs. After working with literally hundreds of entrepreneurs, I’m continually impressed with their vision, commitment, and determination to succeed, despite the obstacles. For all of you who live with an entrepreneur, my congratulations and my condolences. I’m sure you know what I mean.

2. Not everyone is cut out to be an entrepreneur. Many believe that entrepreneurs are born and not made. But that is far from the truth! Studies show that anyone can be an entrepreneur, but many won’t be happy as entrepreneurs. Check yourself against this list from a while back “Ten Quotes Never Spoken By a Happy Entrepreneur.” Be happy.

3. Finding funding for startups is a tough process. Too many people still believe the urban myth that you can sketch your idea on a napkin, and people will throw money at you. Fundraising is indeed brutally tough at all stages. The simple answer is that if you need funding, do your homework and start networking early.

4. You learn more from failure than from success. It’s the learning; not success or failure, that makes the difference. Failure is a condition that all of us experience. It’s our reaction to our failures that distinguishes winners from losers. Wear your failure like a merit badge, and investors will love you.

5. Social media is a huge resource for entrepreneurs. Sadly, too many entrepreneurs still think social media is only for play, rather than work. They don’t yet realize the low-cost potential for lead generation, branding, customer loyalty, direct marketing and e-commerce. It’s been essentially my only resource, and has paid off handsomely, for example, with almost 380,000 followers on Twitter.

6. Blogging is a learning process as well as a sharing one. You may think you are an expert in your domain, but until you try to write things down in simple terms in a blog for other people, you don’t realize what you don’t know. Doing the research to clarify allows you to share effectively. I learn something new every day in blogging.

7. Gen-Y has come a long way in the last three years. My own perspective is that the recession has been good for Gen-Y (Millennials), because it has forced them to face reality, often for the first time in their life. In the last few years, even college grads with advanced degrees don’t have job opportunities waiting. But I’m happy to report that I see more and more of them eschewing entitlement to become real entrepreneurs.

8. Every entrepreneur should work first on his elevator pitch. 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. You only have once chance for a great first impression.

9. Don’t plan to get rich from your startup. Over the years, I’ve had the privilege of working with some of the best entrepreneurs in Silicon Valley and elsewhere. On the average, the entrepreneurs I know are struggling financially. Remember, it takes about six years of hard work to become an overnight success.

10. Successful companies are all about the execution. A startup begins with a great idea, but all too often, that’s where it ends. Ideas have to be implemented, good implementation requires a plan, and a good plan and good operational decisions come from good people. That’s why investors invest in entrepreneurs, rather than ideas.

There are many more lessons available from all of you who have “been there and done that,” and share your experiences on your own blogs. If you have been reading and learning for a couple of years, it’s time for you to “pay it forward,” like I have, so others can learn from you. I’ll be waiting to learn from your insights.

Marty Zwilling

How To Kick Innovation Up a Notch to Nanovation

What sparks paradigm-shifting innovation in any business? It’s a special mix of entrepreneur and company, regular in every respect except for having the courage and foresight to make an idea happen that was supposed to be impossible. As an entrepreneur in a startup, how do you know if you have this potential, and what are the steps to get from an innovation to a revolution?

The first step is to meditate on the examples set by others, like Steve Jobs of Apple, Jeff Bezos of Amazon, or Thomas Edison with the electric light. There are many others, like the one I just finished about Ratan Tata bringing out the Nano car in 2009 in India for less than $2,500. The book is called “Nanovation,” by Kevin & Jackie Freiberg.

These authors have studied many such examples, and summarize my own perspective on the characteristics of entrepreneurs they call “nanovators,” that produce true, life-changing innovations, which they call nanovations:

1. Get wired for nanovation. We all agree that innovation is an adventure into the unknown. If you want people to follow, you need to be able to convince them of three things: (1) your mission is worth supporting, (2) you have the competence to build a critical mass, and (3) you have integrity to look out for their best interests along the way.

2. Lead the revolution. Nanovators have more than the vision; they have the drive to lead, and the focus to stay on target. They are wired to win. Organizations don’t produce game-changing innovations; people do. They allow a leap of faith in their own ideas, as well as in the ideas and capabilities of their team.

3. Build a culture of innovation. You need a culture where restlessness is tolerated, curiosity is encouraged, passion is inspired, creativity is expected, and people are always talking about what’s next. Ultimately, the mind-set changes so significantly that innovation is natural, and no one is conscious of it.

4. Question the unquestionable. Outsiders ask a lot of questions because they don’t presume to know why something is done a certain way. Make your insiders think like outsiders. Provocative questions like “What if?”, “Why not?”, or “So what?” can help to get everyone outside the box.

5. Look beyond customer imagination. First-of-a-kind products empower customers to do things they didn’t even know they wanted to do, and now can’t live without them. The computer mouse, Tivo, and Teflon are examples. Listen to customers, but remember that they can’t always tell you what they don’t know.

6. Go to the intersection of trends. Nanovators pay close attention to the early warning signs that precede major cultural, societal, and market shifts. Where most people see an isolated trend, nanovators connect the dots by relating one trend to several others. They focus on next practices, versus best practices.

7. Solve a problem that matters. The key here is to resist the temptation to pay more attention to the technology solution than the problem. Some people create brilliant solutions to non-existent problems, like maybe Segway and satellite phones. These solutions may be nice to have, but won’t ignite a revolution to get there.

8. Risk more, fail faster, and bounce back stronger. When you pursue a creative idea that takes you beyond, fear tempts you to make compromises. If you can push through this fear and doubt, or bounce back intelligently from initial setbacks, you often arrive at something that has truly never been seen before.

Jeffrey Immelt of General Electric argues that the next big thing, like the Nano, could well be from “reverse innovation,” where instead of industrialized nations adapting their products for emerging markets, innovation in emerging markets will bring new paradigms to home markets. In any case, the future is defined by what we put off until tomorrow, so don’t wait too long to get started.

Marty Zwilling

Entrepreneurs Challenge The Gartner Hype Cycle

The Hype Cycle was a concept put forward by Gartner, Inc. back in 1995 meant to apply to technology product evolution and acceptance. As I was reading about it recently, it occurred to me that the concept relates directly to how investors see startup opportunities and potential success as well, at least those with technology in their offerings.

For those of you unfamiliar with the concept, the Gartner Hype Cycle characterizes the over-enthusiasm or "hype" and subsequent disappointment that typically occurs with the introduction of new technologies. Hype curves then show how and when technologies move beyond the hype, offer practical benefits and become widely accepted. A hype cycle in Gartner's interpretation always comprises five phases:

1. Technology trigger. The first phase of a hype cycle is the technology trigger or breakthrough, product launch or other event that generates significant press and interest. This is the “truly disruptive technology” that startups often claim.

2. Peak of inflated expectations. In the next phase, a frenzy of publicity typically generates over-enthusiasm and unrealistic expectations. There may be some successful applications and startups using the technology, but there are typically more failures.

3. Trough of disillusionment. Technologies and related startups enter the trough of disillusionment because they fail to meet expectations and quickly become unfashionable. Consequently, the press usually abandons the topic.

4. Slope of enlightenment. Although the press may have stopped covering the technology, some businesses continue through the slope of enlightenment and experiment to understand the benefits and practical application of the technology.

5. Plateau of productivity. A technology reaches the plateau of productivity as the benefits of it become widely demonstrated and accepted. The technology becomes increasingly stable and evolves in second and third generations. Startups can now truly define a problem, and position their solution for rapid growth. Investors love this stage.

For the latest info, Gartner recently released their Hype Cycle Special Report for 2011, detailing some of the biggest trends in technology this year. This report evaluates the maturity of more than 1,900 technologies and trends in 89 areas. New this year are application services and outsourcing, cloud application infrastructure services, cloud security, privacy and smart cities. It’s definitely worth a look.

According to the report, private cloud computing, NFC and Internet TV are at the moment overvalued. While, in the field of social media, social monitoring and activity streams as well as shopping communities, have moved into the Peak of Inflated Expectations. Other newly featured high-impact trends include big data, and natural language question answering. Disillusionment, on the other hand arises in the case of augmented reality.

There have been numerous criticisms of the hype cycle, one of which is that it is not a cycle, and that all technologies don’t really have the same outcome. Another criticism is that the shape of the line has not altered or accelerated in ten years, even though all the evidence suggests that the half-life of new technologies is getting shorter, and the number of competing technologies is increasing.

So, of course you have the option of ignoring hype cycle predictions, and pushing forward with your latest technology startup. Just don’t be surprised if you get investor pushback while early in the cycle, and be prepared with counter arguments. Great startups always beat the hype.

Marty Zwilling

Entrepreneur: Challenge Yourself Before You Invest

The first question most people seem to ask when contemplating a new startup is where they will get the money. That’s certainly a valid question, but all the money in the world won’t make your business a success if you hate what you are doing, and you aren’t prepared to do the job. I suggest that there are several other questions even more important than the money one.

The best way to assure the success of your startup is to do something you love, as opposed to something that will make you a lot of money. Of course, all these things and many more are critical, so it’s important that you keep your priorities straight. Here are the right questions to ask yourself, in the right order, before asking others about money:

• Do you understand and aspire to entrepreneur lifestyle? Being a startup founder is not a job, but a lifestyle, like getting married versus staying single. In fact, it’s more like being single, since founders usually have no one to lean on, no one to make decisions for them, no one to blame, and no vision to follow but their own.

• Do you have a passion for your idea and business opportunity? There is no joy in starting a business, if you can’t stand the people, business climate, or the day-to-day responsibilities of the job. Some people relate to service businesses, while others are more comfortable with manufacturing or construction.

• What type of business startup best fits your mentality? Beyond the traditional new product or service model, you can always buy an existing business, purchase a franchise, join a multi-level marketing (MLM) company, or simply go out on your own as a consultant. Each of these has their unique challenges and payback. Ask around.

• What level of experience and training do you have for this business? Be wary of stepping into an unknown business area, just because it looks easy or promises a big return. The real secrets of any business are not in textbooks, and you can’t believe everything you read on the Internet. Experience is the best teacher.

• Do you have real self-confidence and self-discipline? Starting a business is hard work and will require sacrifices. You will be operating independently, making all the decisions, and shouldering all the responsibility. Will you be able to persevere and build your new venture into a success?

• Do you have a viable plan? If you haven’t yet written down a business plan, you probably have no idea how much money you really need, or even if the opportunity is real. I believe the process of writing the plan is more valuable than the result, because it forces you to think through all the elements, and make sure they fit together and fit you.

• How much money do you really need? From your plan, calculate the absolute minimum amount you need to make your plan work, and then buffer it by 50%. Consider the non-cash alternatives, like offering equity instead of cash and bartering for services. Fundraising is extremely difficult, which is why most entrepreneurs do bootstrapping.

If you have made it this far, it’s fair to now start asking people where and when you can find the money you need (if any). Professionals will tell you that the sequence is friends and family first, angel investors second, and only then venture capital. Each of these has a cost in time an effort.

The process for all of these is networking (not email blasts or cold-calling investors). Start with the local Chamber of Commerce, industry associations, or investor seminars. Just attending doesn't work. Use your entrepreneurial spirit to start some exchanges and relationships that can lead to your next step.

Starting a business is a marathon, so do your preparation and training before you ask for that bottle of water. Finding money is tough, but it’s not the hardest part. The hardest part is to do it all while enjoying the journey. Get busy, and have fun.

Marty Zwilling

Top Startup Success Factors Include Some Surprises

We can all dream about what it takes to make our startup a success. From recent survey feedback, it seems evident that the urban legends leading to success are wrong. The average entrepreneur is not the one who dumped a promising career, sketched his idea on the back of a napkin, and accepted millions from an investor to make billions of his own.

I was just perusing a more realistic report from the Kauffman Foundation for Entrepreneurship, titled “Making of a Successful Entrepreneur.” They surveyed 549 successful company founders across a variety of industries, and gathered their views on success and failure factors. Many are predictable, all were interesting, and a few even surprised me:

1. Stick with the business area you know. We all have a tendency to think that the grass is greener on the other side of the fence, but 96% of these founders ranked prior work experience in their business area as an extremely important or important success factor.

2. It’s the learning; not success or failure, that makes the difference. Successful founders try and try again. 88% attributed their success to prior successes; 78% attributed success to prior failures.

3. The management team is critical. In looking back on their success, 82% of the founders attributed their success to strength of the management team (not the idea, business plan, or money). No surprise here.

4. A little luck never hurts. Surprisingly, a full 73% said that good fortune was an important factor in their success. 22% even ranked this as extremely important. Perhaps we can discount this a bit for humility, but there is nothing like being in the right place at the right time.

5. Don’t discount the value of your network. Professional networks were deemed important in the success of 73% of the founders. 62% of the respondents felt the same way about their personal networks.

6. Dropping out of school is not recommended. 95% of these founders had earned Bachelor’s degrees and 47% had more advanced degrees. 70% said their university education was important, so only a few said skip it. Born to be an entrepreneur may not be enough today.

7. First-timers usually fund their own venture. Venture capital and private/angel investments play a relatively small role in the startups of first-time entrepreneurs. 70% said they had to use personal savings as a main source for their first business.

8. Advice from investors is not worth much. Of the entrepreneurs who received advice from their company’s investors, only 36% ranked it as important, and 38% said it was not important at all. Surprisingly, even in venture-backed businesses, 32% said it was only slightly important. It sounds like founders want to make their own mistakes.

9. Willingness to take a big risk. When asked what may prevent others from starting their own business, the highest ranked factor by 98% was lack of willingness or ability to take risks. Founders clearly found entrepreneurship to be a risky endeavor.

10. Huge time and effort commitment. Along the same lines as the previous item, 93% felt from their own experience that the work and time challenges were a major barrier (no support for the part-time, work from home, get rich quick crowd).

Hopefully, by understanding what entrepreneurs think and believe, we can foster more successes, fewer failures, and better guidance, to those of you who haven’t taken the big step yet. If you are already committed, take heed of the advice of those who have been there and done that. People who don’t learn from other’s experience pay a high price just to get to the starting point.

Marty Zwilling

Most Entrepreneurs Should Never Bring On Investors

There is so much written these days about how to attract investors that most entrepreneurs “assume” they need funding, and don’t even consider a plan for “bootstrapping,” or self-financing their startup. Yet, according to many sources, over 90 percent of all businesses are started and grown with no equity financing, and many others would have been better off without it.

According to a new book, “Small Business, Big Vision,” by self-made entrepreneurs Adam and Matthew Toren, it’s really a question of need versus want. We all want to have our vision realized sooner rather than later, but it can be a big mistake to bring in investors rather than patiently building your business at a slow, steady pace (organic growth).

In fact, most of the rich entrepreneurs you know actively turned away early equity proposals. Too many founders are convinced they “need” equity financing, for the wrong reasons, as outlined in the book and supplemented with a bit of my own experience:

• Need employees and professional services. Of course, every company needs these, in due time. In today’s Internet world, enterprising entrepreneurs have found that they can find out and do almost anything they need, from incorporating the company to filing patents, without expensive consultants, or the cost to hiring and firing employees.

• Need expensive resources up front. Many people think that having a proper office and equipment somehow legitimizes their business, but unless your business requires a storefront, everything else can be done in someone’s home office, or a local coffee shop, on used or borrowed equipment. Consider all the alternatives, like lease versus buy.

• Need to spread the risk. Some entrepreneurs seem to get solace and implied prestige from convincing friends, Angels, and venture capitalists to put money into their endeavor. If nothing else, these make good excuses for failure – no freedom, wrong guidance, etc.

On the other hand, there are clearly situations where your needs call for investors. Even in these cases, all other options should be explored first:

• Sales are strong – too strong. If you are not able to keep up with demand due to lack of funds for production, and your company is too young for banks to be interested, you will find that investors love these odds, and are quick to go for a chunk of the action.

• Your company has outgrown you. Some entrepreneurs are quick with creative ideas, and even excellent at managing the chaos of initial implementation. That’s not the same as instilling discipline in a larger organization, where most the challenge is people.

• You need a prototype. When you have invented a new technology, you need expensive models and testing, including samples for potential customers. If you don’t have the personal funds to make these happen, investors might be your only option.

• You need specialized equipment. If your solution depends on high-tech chips, injection molding, or medical devices, and you can’t get financing from suppliers, giving up a portion of the company to investors is a rational approach.

• General startup expenses are beyond your means. Investors are not interested in covering overhead, unless they are convinced that you have already put all your “skin in the game” (not just sweat equity), and have real contributions from friends and family.

When deciding whether and how an investor can help you, remember that finding outside investors requires a huge amount of time and work, perhaps impacting your rollout more than working with alternate approaches and slower growth. Perhaps you really need an advisor rather than an investor.

Even under the best of circumstances, working with an investor requires give and take. More likely, you now have a new boss – which may be counter to why you chose the entrepreneur route in the first place. Maybe that’s why bootstrapped startups are the norm, rather than externally funded ones. You alone get to make the big decisions on your big vision.

Marty Zwilling

Entrepreneur Success: It’s Not Always About You

Many entrepreneurs forget that their success is more about helping other people than about personally becoming famous, or overcoming the odds and getting rich. A successful business has to satisfy customers with a strong team, by helping them solve problems, save money, or experience more pleasure. That means more focus on helping others achieve their goals.

How and why this is true was brought home to me in a new book, “It's Not About You: A Little Story About What Matters Most in Business,” by Bob Burg and John David Mann. This is a fictional story about how an aggressive young M&A executive comes to realize that his aggressive style is actually making it harder to reach his goals.

He concludes that there are five leadership elements that include him, but are not always about him, that lead to success. These are lessons that every entrepreneur should take to heart:

1. Hold the vision. Many entrepreneurs are able to come up with a vision, but far fewer are able to hold on to it through thick and thin, and communicate it effectively and continuously to their team and their customers. Keep your eyes on where the company is going, especially when nobody else does. Watch your use of personal pronouns.

2. Build your people. Give people on your team the means, authority, and the motivation to do the job, you will be surprised at the value delivered. Make sure that the essence of your influence is pull, not push. See people for who they are, realize what they can be, and help to take them there.

3. Walk the talk and do the work. Most startups begin their life as “one-person shows” that over time evolve to teams of people, interacting with customers and vendors. By virtue of the growing workload and stress, too many entrepreneurs isolate themselves from the hands-on as the team builds. Don’t forget to be a mentor as well as a leader.<

4. Stand for something. What you have to give, you offer least of all through what you say, and in greatest part through who you are. Competence and character are most important, and visible to everyone. I believe in the old saying: “If you don’t stand for something, you’ll fall for anything.”

5. Share the mantle of leadership. The best way to increase your influence is to give it away. Don’t get stuck thinking that you are the deal. Let others lead in their own area of expertise, and your power will be expanded many-fold.

As early-stage entrepreneurs, it’s natural for you to focus on you – what you’re doing, what you want, and what you need. As the business evolves, you must expand your focus beyond yourself to motivating the team and delivering value to customers. At that stage, you are still important, but it’s not about you any more.

One mistake many entrepreneurs make, especially with online businesses, is a fundamental misunderstanding of how interesting they need to appear to others. Yes, you are a fascinating person. You know how to bootstrap a business, build it from nothing, and burn sweat-equity for long hours to push your dreams to reality. Your business brand needs to quickly supersede you.

Online businesses have removed the convenience of geographic connections. Today, remote relationships are far more important. The best way to turn someone into your devoted fan is to go out of your way to make them feel important. Put yourself first by putting others first as well. It really isn’t about how great you are but how you make others great.

What have you done for your team and your customers lately? How did you make your product manager shine in the last meeting? Being an entrepreneurial success is not about grabbing information and power, it’s about helping others succeed.

Marty Zwilling

Gen-X Sets High Standards for Gen-Y Entrepreneurs

What happened to Generation X? They are generally defined as anyone born between 1965 and 1980, sandwiched between 80 million Baby Boomers and 78 million Gen-Y (Millennials). Gen-X has just 46 million members, but they continue to lead the way and set the standards in the startup world.

Gen-X is the group that will bridge the two larger generations of Boomers and Gen-Y. I guess the bridge isn’t as exciting as what has happened on one side or what might happen on the other, so they are often referred to as the “forgotten” generation, or the lost child demographic.

A book I spotted a while back, which humorously characterizes the issues, is titled “X Saves the World: How Generation X Got the Shaft but Can Still Keep Everything from Sucking ”, by Jeff Gordinier, 42. He has a big generational chip on his shoulder, and his tongue-in-cheek rhetoric is inspiring age-based debates in offices across the country.

What are the legacies that Gen-Y inherited from Gen-X? Aren't Gen-X creations like YouTube and MySpace largely responsible for Gen-Y narcissism? Didn't punk rock begat Rock Band? Gordinier says in his book "We've created all these great websites that now Millennials waste their lives on."

In fact, one could argue that Gen-X actually created the Internet. The Internet then gave each person the ability to voice their own ideas and concerns, leading to new levels of group collaboration. Here are some additional characteristics often associated with Gen-X:

• Individualistic. Gen-X came of age in an era of two-income families, rising divorce rates and a faltering economy. Because they were the first “latch-key” children, Gen-X is independent, resourceful and self-sufficient. In the workplace, Gen-X values real responsibility and freedom.

• Technologically adept. The shift from a manufacturing economy to a service economy occurred during their watch. They were the first generation to grow up with PDAs, cellphones, e-mail, laptops, Blackberrys, and technology woven into their lives.

• Flexible. Many Gen-X’ers lived through tough economic times in the 1980s and saw their workaholic parents lose hard-earned positions. Thus, Gen-X is less committed to one employer. They adapt well to change and are tolerant of alternative lifestyles.

• Value work/life balance. Unlike previous generations, members of Gen-X work to live rather than live to work. They appreciate fun in the workplace and espouse a work hard/play hard mentality. Gen-X managers now sometimes incorporate games and humor into team work activities.

Gen-X is rife with entrepreneurs. In fact, they will likely make or break our country’s ability to transition to the new social Internet society. They have drive and independence. And they have a lot they can teach both the boomers and Gen-Y.

In fact, they currently make up 42% of the American workforce, compared to 32% Boomers (because some have already retired) and 26% Gen-Y (the rest are still at home or in school).

This generation felt the freedom to go into business for themselves, such as the many dot-com companies that emerged during the 90s. They were not as concerned with security, often returning to their parents' home after experiencing college and work for the first time.

For at least the next few years, Gen-X will be the major facilitators of change. They are now or will be soon running your company. Indeed, in these times we really can’t afford to forget this particular group. Show your respect today.

Marty Zwilling

Adopt the New Startup Model: Nail It Then Scale It

I see more and more entrepreneurs who seem to have everything going for them – vision, motivation, passion, even a good business plan, product, and money, and yet they can’t close customers. Maybe it’s time to look harder at the mantra of a new breed of gurus and successful entrepreneurs, including Steve Blank and Eric Ries, called “nail it then scale it” (NISI).

You can review all the specifics of this approach in a new book by Nathan Furr and Paul Ahlstrom, appropriately titled “Nail It then Scale It: The Entrepreneur's Guide to Creating and Managing Breakthrough Innovation,” but I will net it out here. I found their five phases of the process to be compelling, based on my own years of experience mentoring startups:

1. Nail the pain. Great businesses begin with a customer problem that has a big and monetizable pain point. Avoid the three big mistakes, of guessing but not testing the pain (on real customers), selecting a low customer pain (solution is only nice to have), or selecting a narrow customer pain (small number of customers willing or able to pay).

2. Nail the solution. Neither breakthrough technology nor maximum features will assure that “if we build it, they will come.” In fact, NISI recommends starting with the minimum focused set of features and technology that will drive a customer purchase. Success demands testing the solution early and quickly in the market, then iterating to get it right.

3. Nail the go-to-market strategy. In parallel with nailing the solution, you need an in-depth understanding of your target customer’s buying process, the job they are trying to get done, the market infrastructure, and a stable of serious pilot customers. Do real tests with real pricing to see if customers will pay you, without being pushed.

4. Nail the business model. Leverage your customer conversations to predict and validate your business model. For example, when you think about distribution channels, revenue streams, or the relationship with the customer, ask customers what they expect. Don’t forget a viable financial model of costs, margins, customer acquisition, and break-even.

5. Scale it. Don’t attempt to scale it until you have a proven repeatable business model that predictably generates revenue. Only then is it time to focus on the get-big-fast strategy, and the transformation of three key areas from startup to a managed growth company. These areas include market, process, and team transitions.

These pragmatics and points of focus can effectively counter three core myths which trap too many enterprising and capable entrepreneurs today:

• Hero myth: Why believing in your product leads to failure. All too often, founders fall in love with their products or technology, ignore negative feedback from customers, and spend years building a product based on a vision that no one else shares.

• Process myth: Why building a product leads to failure. Conventional wisdom is that after a great idea, the next steps are raise some money, build a product, then go sell the product. This doesn’t work when attacking unknown problems with untested solutions.

• Money myth: Why having too much money leads to failure. The old saying that “it takes money to make money” isn’t so simple. Money allows entrepreneurs to execute a flawed business plan far too long, rather than stay focused on the market and adapt.

At the heart of it, to be a successful entrepreneur you have to be totally customer centric, and learn to change and adapt as fast as the market. The pace of change in the marketplace is escalating, so entrepreneurs have to improve their ability to deal with change.

At the same time, more entrepreneurs are jumping into the fray, and less money is available from investors. It’s time for a new startup model. In my view, savvy “super angel” investors such as Mike Maples, Jr., and leading incubators such as Y Combinator, are already on this one. How far behind is your startup?

Marty Zwilling

How to Get Your Startup from Point A to Point B

By Bob La Loggia, CEO StormSource Software

I enjoy the ride on a good commercial airline flight. It’s time that I can use to catch up on tasks that require focus. I throw the headphones on, listen to the best music ever created by mankind (70s music - as if I needed to spell that out), and get to work on the laptop. Nary a thought is given to the route the plane will take to get from point A to point B. Once we do our initial turn after taking off, it seems like a pretty straight shot to me.

Well, it’s anything but a straight shot. The auto-pilot is correcting constantly the entire route. It is being temporarily taken off course the whole trip. And, each time the elements take it off course, it corrects and gets back on the right path.

It’s the same with your startup business. You’ll be blown off course every day. And each time your path starts to take you in the wrong direction, you must correct and get back on course toward your goal.

There are three elements that can lead you in the wrong direction. Beware of these and don’t let any of them steer you astray:

• Great ideas. Every startup has an abundance of ideas. That’s okay. Creative and innovative thinking are signs of a healthy culture. But, so is focus. If you change direction every time you or someone in your organization comes up with a better idea, you’ll never be successful.

  Great ideas don’t make you a success. Execution and persistence make you a success. Great implementations start with a plan, and a great plan and great operational decisions come from great people. Success requires all of these.

• Interruptions. One of the top productivity killers is interruptions. Phone calls, emails, chats, meetings, and people stopping by your desk all temporarily push you off course. It has been proven that productivity is highest when there are long periods of uninterrupted work.

  Only answer your phone and return calls during a designed time, have specific times throughout the day for checking email, and encourage your staff to keep meetings to a minimum. If you absolutely need to get something done on a given day, work at the coffee shop on that day. And if you do get thrown off course, get right back in line as quickly as you can.

• Challenges. Problems, issues, obstacles, challenges – different terms, but the same result. They take your mind and your time off the important tasks you need to be doing to achieve your objectives. In a startup environment, oftentimes there is no one else to take care of the problems, so it’s up to you.

  Every company has issues. But, how you handle the issues will play an important role in whether or not you succeed. The main concepts to remember when addressing problems are 1) gather as much information as you can about the problem and clearly define it, 2) write out the possible solutions, and 3) select a solution and act swiftly and decisively. Address the problem, then get back on course.

Yes, just like an airplane flying from New York to Los Angeles, your path to success will look like an EKG line. But as much as you’ll be blown off course temporarily by great ideas, interruptions and challenges, you must always get yourself back on track. If you don’t, you might take a left turn and end up in Cuba.

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Today’s guest post is by Bob La Loggia, who is the founder and CEO of Appointment-Plus online scheduling software. He is a veteran of four startups over his 22 years in the technology arena, and admits to his share of left turns. He can be reached directly via email or through his blog.

Mentor Secrets for Keeping Your Startup Alive

Behind most great startup success stories is a long list of mistakes! Unfortunately, for every success story you see, there is an even longer list of failure stories with mistakes that you don’t see. But rather than dwell on the failures, I’ve tried to extract from them a list of practical action items that will improve your survival probability.

Every startup mentor has his favorite list of basic strategies to avoid pitfalls, and I’m no exception. If my experience and insights can save just one founder from the stress, lost time, and lost money associated with a startup misstep, then I’m a happy man. I offer these pragmatic recommendations:

• Buffer your funding requirements. Consider both the money you need before funding, and the size of investor funding requests. You should buffer the first by 50%, and the second by 25%. You will be amazed at how many items you forgot to cover, and how fast the cash disappears. Severe cash flow problems may not be recoverable.

• Adapt your strategy monthly. Assume your initial strategy will be wrong. Most startups I know have “refined” their target market several times during their rollout. So be alert and be flexible. Watch out for the unknown, such as an economic recession you hadn’t counted on, or a new competitor with deep pockets.

• Reign-in expenses. The most important task of a startup CEO is to review every expense with a miserly hand BEFORE the money flows out. Do not delegate this task! Barter services and use equity to get things done for minimum cash. Make every effort to do things “in house”, rather than rely on outside services, accountants, and law firms.

• Create intellectual property. Start early by registering your company, and reserving the name as your website domain name. Reserve the same names on the leading social networks and blogs. The patent process is far from perfect, but it’s a huge step ahead of no proprietary content. Also don’t forget trademarks and copyrights.

• Make marketing and sales a priority. Every new startup needs to fight the urge to get the product out, and then start selling it. Do it in parallel, or the other way around, to keep from building the wrong thing. It takes leverage, effort and money to get in the public eye and stay there. Budget for it in time and dollars.

• Find and use top-notch advisors. One or two “experts” (largely unpaid) who have “been there and done that” can head off many mistakes and suggest a calm recovery plan for the ones you make. Resist the ego urge to “go it alone” or to convince yourself that you are smarter than your competitors.

• Temper theory with reality. There is no substitute for domain experience. No matter how well-educated you are, and how certain you are that you understand all the nuances of a business area, it is a good idea to work in a similar business for a few months to get a feel for the market and observe the unwritten rules before taking the plunge. This is especially true for students tackling their first venture.

• Manage your time. It takes practice and effort to focus on the most important things first. In business, “most important” means time to market, customer service, low cost, and beating your competitors. It also means knowing when to delegate, when to rest, and reserving time for effective communication with your team.

A final recommendation, which is really the most important one, is not to even start any business without an overriding passion, confidence, and commitment to it. These alone will play the largest part in defining your success along the way. Apply the recommendations outlined here, define your own rules and goals, and you will be well on the way to creating a successful and profitable business.

Marty Zwilling

Top 10 Ways Entrepreneurs Pivot a Lean Startup

The popular view of a real entrepreneur is someone with a big vision, and a stubborn determination to charge straight ahead through any obstacle and make it happen. The vision part is fine, but successful entrepreneurs have found that the extreme uncertainty of a new product or service usually requires many course corrections, or “pivots” to find a successful formula.

This reality has fostered a popular new startup approach which dramatically improves the efficiency and speed of these corrections, pioneered by Silicon Valley entrepreneur and author Eric Ries. His new book on this subject, “The Lean Startup,” lays out how today's entrepreneurs use continuous innovation to create radically successful businesses.

Eric espouses designing products with the smallest set of features to please a customer base, and moving products into the marketplace quickly to test reaction, then iterating. He does a great job in the book of making the case for management systems, rather than gut-level reactions, to make required course corrections (pivots), to dramatically improve the odds for success.

Pivots come in many different flavors, each designed to test the viability of a different hypothesis about the product, business model, and engine of growth. I agree with Eric’s summary of the top ten types of pivots to consider:

1. Zoom-in pivot. In this case, what previously was considered a single feature in a product becomes the whole product. This highlights the value of “focus” and “minimum viable product” (MVP), delivered quickly and efficiently.

2. Zoom-out pivot. In the reverse situation, sometimes a single feature is insufficient to support a customer set. In this type of pivot, what was considered the whole product becomes a single feature of a much larger product.

3. Customer segment pivot. Your product may attract real customers, but not the ones in the original vision. In other words, it solves a real problem, but needs to be positioned for a more appreciative segment, and optimized for that segment.

4. Customer need pivot. Early customer feedback indicates that the problem solved is not very important, or money isn’t available to buy. This requires repositioning, or a completely new product, to find a problem worth solving.

5. Platform pivot. This refers to a change from an application to a platform, or vice versa. Many founders envision their solution as a platform for future products, but don’t have a single killer application just yet. Most customers buy solutions, not platforms.

6. Business architecture pivot. Geoffrey Moore, many years ago, observed that there are two major business architectures: high margin, low volume (complex systems model), or low margin, high volume (volume operations model). You can’t do both at the same time.

7. Value capture pivot. This refers to the monetization or revenue model. Changes to the way a startup captures value can have far-reaching consequences for business, product, and marketing strategies. The “free” model doesn’t capture much value.

8. Engine of growth pivot. Most startups these days use one of three primary growth engines: the viral, sticky, and paid growth models. Picking the right model can dramatically affect the speed and profitability of growth.

9. Channel pivot. In sales terminology, the mechanism by which a company delivers it product to customers is called the sales channel or distribution channel. Channel pivots usually require unique pricing, feature, and competitive positioning adjustments.

10. Technology pivot. Sometimes a startup discovers a way to achieve the same solution by using a completely different technology. This is most relevant if the new technology can provide superior price and/or performance to improve competitive posture.

Every entrepreneur faces the challenge in developing a product of deciding when to pivot and when to persevere. Ask most entrepreneurs who have decided to pivot and they will tell you that they wish they had made the decision sooner. In fact, a startup’s runway is really not money, but the number of pivots they can still make. What are you doing to get to the required pivots faster?

Marty Zwilling

Explore Non-Standard Ways to Grow Your Startup

Startups are usually so focused on selling more of their branded product or service to their own customer base (organic growth) that they don’t consider the more indirect methods (non-organic growth) of increasing revenue and market share. Non-organic growth would include OEM relationships, finding strategic partners, “coopetition,” as well as acquisitions.

This initial focus is usually driven by limited financial and people resources, as well as the bandwidth of the executive team. Yet a creative and skilled team will often find that non-organic growth techniques can better leverage these limited resources.

An example of a startup which used non-organic growth early and effectively was Microsoft. Bill Gates started producing software solutions, like his Basic Interpreter and MS DOS, but quickly focused on adding thousands of small partners for applications, and major partners like IBM and other hardware manufacturers. Even mergers and acquisitions (M&A) came early.

Some people feel that organic growth is “better” because it requires real innovation and sustained effort to create long-term competitive advantage through differentiation and efficiency. They might agree that it cannot compensate for the speed and scale of growth of the non-organic approach, but has lower risks of failure.

Despite the risks, there are many advantages of non-organic growth, even in startup environments:

• New product or service lines. Organic growth assumes innovation in the product or service, but non-organic growth through white labeling and strategic partners may add totally new brands and services to your revenue stream.

• Fresh customer base. Teaming with another company, or buying another company, can add new geographical locations and new customer segments to the business. These relationships need not require cash investments; often they are done with exchanges of equity or assets.

• Economies of scale. In many cases business opportunities with competitors (coopetition) will open up a new marketing channel, and definitely give you the cost advantages of scale. Economies of scale also apply to marketing, distribution, and sales.

• New management skills. New business relationships mean new perspectives and new executives working on the opportunity. This can be a significant competitive advantage over major competitors, and overall reduces competition in the market place.

I’m certainly not proposing that one mode should be used to the exclusion of the other. Rather, I recommend that you pursue both concurrently, per the advantages of each. For example, if you are in an industry which is fragmented or has a slowing growth rate, with too many competitors, non-organic growth may be required for survival.

Use organic growth options for things which you do best, where there is plenty of room for growth by selling your products in new geographic areas, or using new sales channels, such as through a wholesaler or website. Organic growth is typically safer because you’re using a tried-and-tested business model, and you can reinvest profits back into the business.

Certainly non-organic growth has its pitfalls. Entrepreneurs, while partnering with or acquiring a new business, must check for compatibility and strategic fit. Yet startups looking for investors need to evaluate all the growth alternatives from the very beginning. “No growth” or even slow-growth companies waiting for an angel may have a long wait.

Marty Zwilling

6 Startups Actions to Survive a Volatile Market

Change is about the only thing constant in the world of startups. Despite their own focus on changing the world, they often forget that they too have to change rapidly and often as the market evolves. Too many find that out too late, and are left chasing a rabbit that is long gone.

The solution is to establish and maintain a culture and processes that don’t view change as a discrete event to be spotted and managed, but as an ongoing opportunity to improve competitiveness. Chris Musselwhite and Tammie Plouffe, in an HBR article last year on change readiness for large companies, define it as “the ability to continuously initiate and respond to change in ways that create advantage, minimize risk, and sustain performance.”

Since the startup environment is usually more volatile, the challenge there in balancing advantage, risk, and performance, is more critical than in big companies. The following initiatives that Chris and Tammie define for large companies apply just as directly to startups:

1. Improve change awareness. How good are you and everyone on your team at proactively scanning the environment for opportunities, emerging trends, and customer feedback? This contextual focus is critical to innovation and survival – the right product at the right time.

2. Increase change agility. Change agility represents a startup’s ability to immediately and effectively engage everyone in pending changes and innovations. It starts at the top with the founder and CEO, but has to extend quickly to the bottom of the organization. This requires leadership, teamwork, and trust at all levels.

3. Expedite change reaction. This is the ability to appropriately analyze problems, assess risks, and take responsibility for problem-dictated and market-dictated changes, while still sustaining the day-to-day business activities. It’s called the management of unplanned changes, or how well your startup reacts to crises.

4. Implement change mechanisms. Every organization needs to have specific mechanisms in place to facilitate change, including regular effective communication, reward systems that reinforce desired change behavior, and accountability for results. These won’t work in an autocratic or dysfunctional management environment.

5. Build a change readiness culture. Change readiness is hard work, and requires creativity sometimes in conflict with task orientation. People have to have the right attitude, and make the choice from the beginning to be ready to change at any time. They need a sense of urgency to handle change, and confidence in their leaders.

6. Imbue customer change focus. The more everyone in the startup is obsessed with satisfying customer needs and providing better customer service, the more effective the startup will be in adapting to change. Provide direct customer contact to everyone, as well as training.

Experts say that we live in a world where the pace of change is accelerating at the fastest rate in recorded history. On the other hand, change management practices seem to be changing very slowly, resulting in a 70% failure rate of change initiatives. Failure rates this high demand a new mindset and startups are the logical place for this to happen.

For starters, the whole team needs to be constantly trained and encouraged to develop their skills. Relevant skills include continuous improvement of existing methods, processes and devices against a set of quality metrics. The ultimate skills, which lead to innovation and totally new processes, usually come from experimentation and special studies.

In summary, change will happen. If your people and your startup do not change, statistics say you won’t succeed. It’s up to you to get out of your comfort zone and make things happen in your startup, rather than let things happen to your business.

Marty Zwilling

Entrepreneurs Must Bridge Several Market Chasms

Everyone in the business world has heard of the book by Geoffrey A. Moore titled “Crossing the Chasm” (1991), but most entrepreneurs have no idea how it relates to them. In fact, it’s all about the “focus” required to get early stage technology products across the deadly chasm from early adopters to mainstream customers.

Most investors and startup professionals expand this concept of focus to apply to key issues of every aspect of strategic and tactical planning in a startup. Missions and products that are too broad confuse your team, your customers, and potential investors. There are other chasms out there just as deadly as the technology one, such as the ones below:

• Market requirements chasm. The first chasm is getting the customer requirements right, product or service, to satisfy a real need that a large number of customers will pay real money to satisfy. It takes focus to resist adding a long list of features that seem to make the opportunity larger, but dilute to focus of both you and potential customers.

• Product development chasm. Another common chasm is never-ending product development. Focus is required to resist adding a few more neat features, made possible by the new technology, which in fact make the product more complex to use, impossible to test, and very expensive in time and cost.

• Marketing and sales chasm. Lots of people still believe the major cost of a new product is development. These days, with all the clutter in the marketplace, the highest cost is usually marketing. Focus is required here to pick the low-hanging fruit, break through the clutter, and then move on to the next segment. Marketing costs can be a deep hole.

• Customer support chasm. Products that have features which are unfocused, or aimed at too broad an audience, can be almost impossible to support. Customers need lots of help with installation, or can’t make the product work the way they expect. The result is that customer satisfaction in unachievable or at least very expensive.

In his book, Moore limits his discussion to the transition between customers that are visionaries (early adopters) and customer pragmatists (early majority), in the context of high technology products that appear “disruptive,” meaning they move innovation in that arena to a new level.

Here are the five customer segments outlined in his analysis:

• Innovators – they love the challenge of a new technology and expect problems
• Early adopters - customer visionaries driven by technology who expect it to work
• Early majority – pragmatists that buy only with peer review, references and support
• Late majority – conservatives who wait until the product is no longer state-of-the-art
• Laggards – skeptics who will only adopt when forced or the need is critical

The reason that his book was so popular, and is still studied in MBA programs and talked about by investors, is because his analysis has proven to be right so many times. There is a big gap between people who love to try new technologies, and the rest of us, who tend to be much more “technophobic.” Startups need to show real traction before attempting to cross the chasm.

I always recommend focus as the key to avoiding Moore’s chasm, as well as the others highlighted here. Start your business with a narrow niche and a focused strategy, but don’t stay there. As the company matures, and you learn more about your customers and your market, then it is time to go broader or deeper.

Build an overt strategy with feedback triggers to enhance the product to meet the needs of another segment of customers, and add more features to serve additional needs for the customers you already have. With this approach, you will find it a lot easier to jump all the chasms without crashing or breaking a leg.

Marty Zwilling

7 Ways For Entrepreneurs to Build Relationships

Investors invest in people, not ideas. Customers buy from people, not companies. Employees rally for a great leader. As an entrepreneur, you need relationships to succeed. That means relationships with team members, investors, customers, and vendors. One of the best ways to build a good relationship with anyone is to make them feel important.

One of my favorite authors, Brian Tracy, in his book “No Excuses!: The Power of Self-Discipline,” outlined seven ways to make other people feel important, which I believe are extremely relevant to entrepreneurs and business:

1. Accept people the way they are. Because most people are judgmental and critical, to be unconditionally accepted by another person raises that person’s self-esteem, reinforces his or her self-image, and makes that person much more likely to accept you and follow your lead.

2. Show your appreciation for others. When you appreciate another person for anything that he or she has done or said, they will like themselves and you more as well. The simplest way to express appreciation is to simply say, “Thank you” for an idea, some good feedback, time spent together, or an order.

3. Be agreeable. The most welcomed people in every situation are those who are generally agreeable and positive with others. Entrepreneurs who like to be argumentative, complaining, or disagreeable, will have a hard time closing a contract, investment, or a customer contract.

4. Show your admiration. People invest a lot of personal emotion in their possessions, traits, and accomplishments. When you admire something belonging to another person, it makes him feel happy about himself. Everyone has positives, and it’s up to you to find them. In turn, these positives will be reflected back on you.

5. Pay attention to others. The most powerful way to pay attention to someone is to listen attentively first, even ask questions, before you launch into a monologue answering every question they might never ask. Believe it or not, before you even say a word, you will become a more interesting and intelligent person in their eyes.

6. Never criticize, condemn, or complain. In business as well as personal relationships, the most harmful force of all is destructive criticism. It lowers a person’s self-esteem, makes him feel angry and defensive, and causes him to dislike you. If your target is someone not present, it still causes a loss of trust in you, since your listener could be the next target.

7. Be courteous, concerned, and considerate of everyone you meet. When you treat a person with courtesy and respect, they will value and respect you more. By being concerned, you connect with their emotions. Consideration is the discipline to do and say things to people that are important to them.

Think back on your own recent experiences as a customer or contractor. You don’t always buy the cheapest product or service, if you have a good relationship with the people involved. On the other hand, I almost never buy from someone that treats me like I’m not important.

If you want to be a leader, you need to inspire followership. Great leaders develop a good relationship with good people, who are then inspired to follow. A successful leader inspires people to do more than they might have done without the relationship, and more than they may have even dreamed possible.

So, if you follow all these seven ways to make other people feel important, you will receive a seven-fold payback on your own objectives of being a leader and building a successful business. That’s a lot cheaper and lot longer lasting than the best advertising and public relations you can buy.

Marty Zwilling

Don’t Let Paranoia Dampen Your Startup Spirit

With the tenth anniversary of 9/11 upon us, and the recent financial woes, there seems to be a growing population out there worried about all the people and companies watching to hurt them. Why is everyone so paranoid these days? My plea to entrepreneurs is to recognize it as an opportunity, and go the extra mile to make people’s life better rather than stoke the fires.

I must be the only one who believes that most of the “watching” in the real world, and on the Internet, is done by businesses to help you find what you want, protect you, and improve your experience, rather than invade your privacy or scam you.

I certainly agree that just like in the real world, consumers have to assume that there are always bad groups on the Internet, as well as down the street, trying to rip you off, so stay out of bad neighborhoods, and keep your wits about you at all times. Internet users need to start watching out for themselves, like looking both ways before you cross the street.

In addition, there is a real business opportunity here for startups. I know companies who collect sensitive data from consumers all the time, and still seem to keep a squeaky clean image (Amazon.com, Ebay). There are others who are always a bit suspect, or have been hit hard by their mistakes.

The opportunity is to take advantage of the new power and tools on the Internet. Here are a few specifics on how to be part of the solution, rather than part of the problem:

• Put a personal face and address on your site; don’t hide behind an “info” email address.
• Make your company visible, reachable and responsive through social networks.
• Market your solution and user benefits, not the mysterious technology behind it.
• Use video and audio, rather than jargon, abbreviations, and computer lingo on your site.
• Make navigation simple and consistent, with abundant online help

The good news is that, if your company does it right, it might be another Amazon. There seems to be an insatiable demand from consumers for a better shopping experience, meaning they will pay a premium to a company that can present them a better match in products to their interests, without jeopardizing their good name.

In support of this, despite qualms, consumers seem very quick these days to provide more personal data to get something they want. Young people naively enter their pictures and personal data for fun on social networking sites, ignoring constant feedback from the media that these are bad practices.

The bad news for startups is that your company can lose big if it’s caught in the middle. A couple of months ago, the Sony PlayStation Network was hacked, with personal data of up to 70 million people stolen, and this black eye won’t soon go away. A few years earlier, PayPal was hit by a scam to get the personal information of its users, and some feel it hasn’t really recovered since.

Sometimes the problem cause is that startups forget the technical standards and quality processes that every Internet rollout must follow to reduce the risk. Don’t take shortcuts on these. I see lots of new software put together on a shoestring as a “proof of concept” – but then gets rolled out to customers “asis” due to lack of time or money to “harden” the product.

What I learned from a panel discussion a while back, sponsored by an association of lawyers, is that lawyers don’t have any answers, and are all too quick to fan the flames of fear and paranoia. They merely highlighted consumer privacy rights, with much hand-wringing about big bad companies that are capturing shopping habits without consumer knowledge on the Internet.

A better approach is to use your marketing power to tell people that you can now ring their cell phone in front of their favorite store for a special sale, and allow them to “opt in,” rather than surprising them with your new technology. Few people are paranoid about something they want and expect. That’s just good business.

Marty Zwilling

There Are Alternatives When Your Startup Falters

When I heard a friend make the statement “Your startup can’t fail if you don’t quit,” I realized that every entrepreneur should adopt it as their mantra. Pivoting or dealing a new hand is not quitting. If we all take this mantra, we can drastically improve the statistic that over half of new startups fail within five years. Nothing is more discouraging to future entrepreneurs than a failed startup.

Why do most startups fail? There are a thousand reasons listed by pundits across the media, but most of them agree that the number one reason is NOT running out of money. The number one reason is that the founder quits. Of course, they may be quitting because they ran out of money, but good entrepreneurs tell me that running out of money is most often an “excuse” rather than a “reason.”

Let’s take a look at the main reasons given for startup failures, and suggest some alternatives to quitting:

• “I’ve lost interest – I don’t want to do this anymore.” This suggests you have lost your passion for the current business model, probably because someone suggested you change from your original concept to make it easier, or to make more money. My suggestion is to morph the current idea into one you love and enjoy, rather than quit and take an employee role you never wanted.

• “I can’t find any investors in this economy.” If you can’t bootstrap the venture yourself, find a partner, friend, or family member rather than a professional investor to carry some financial weight. Otherwise, look for advances from distributors, vendors, and even future customers. Try bartering services you have for something you need. I’ve seen countless creative solutions to the cashflow problem, from people who don’t quit.

• “The people around me are all turkeys.” We all make people mistakes. So you made some bad hiring or partner decisions. Now is the time to face up to these issues and move out the people who don’t fit, rather than let them destroy your startup. The sooner it is done, the happier both of you will be.

• “I don’t have the skills or discipline to run this business.” If you knew everything that had to be done, and could do it easily, you would be bored and lose interest (back to item #1). If millions of people all over the world run businesses, there is nothing implicit in the role that is beyond normal intelligence. Half the fun is learning, so get started today, don’t be afraid to ask for help.

• “I finally realized there is no market for what I do.” Big markets rarely spring “full grown” out of nothing. Every entrepreneur has the challenge of making a market, or differentiating his product to match an existing market. Every startup I know has tweaked (or totally transformed) their product several times, rather than quit.

• “I grew too fast and everything is spinning out of control.” This is probably a good reason to scale back and focus on organic growth, but it’s not a good reason to quit. You must have something of interest, or growth wouldn’t be the problem. Reset to the basics, get financial or management help, and failure should not be an option.

Another important point is that even if you declare your current startup a failure, don’t let it defeat you. Most people agree that we learn more from our mistakes than from our successes. The bright side is that investors tell me they are wary of funding an entrepreneur who has never failed (in his own mind), since that often leads to a cocky and unrealistic view of future expectations.

Overall, my view is that starting a business is just like everything else. Nothing important is all that easy, and all of us stumble a few times and pivot along the way as we learn. There is a real difference between cashing in your cards for a new hand, in the face of unbeatable odds, versus quitting and walking away from the challenge. You don’t learn any lessons by walking away.

Marty Zwilling

Logistics Required Before Approaching Investors

Don’t charge the hill until you are “ready.” This probably seems obvious to military types, but I see entrepreneurs violating this rule all the time. They approach key potential investors way too early, trying to talk their way up the hill, with no supporting business plan, and before they have a support team around them. Needless to say, they usually get shot down, and get no second chance.

The first rule is to separate your advisors from your investors. Perhaps a close personal friend can be both (the earliest stage and first tier investors should be “friends and family”). But for angel investors and venture capital investors, just remember that investors are not on your team (yet). You only get once chance to make a great first impression.

Continuing with my military analogy, here are some logistics, suggested ammunition, and an assault strategy (the bold points apply to every aspect of building the business):

1. Do your reconnaissance first. Before you meet a potential investor, check them out on the Internet and through your advisors. You need to know exactly what the investor has done before, what he is doing now, and what will interest him If you walk into his office cold, and can’t convince him you meet his interests, you will walk out cold.

2. Coordinate and brief your support team. Make sure all your advisors and team members know exactly what your mission is, and if possible, have at least one of them make prior contact to set the stage. If the investor thinks you are coming to ask for domain advice, and you ask for money, your success probabilities are shot.

3. Fully prepare for the assault. Don’t try to talk and demo your way up the hill. Talk bounces off and won’t stop any bullets. Lead with your two-page executive summary, be prepared to give a ten-slide investor presentation. Keep your big guns, the business plan and financial model, in your holster but visible for backup.

4. Put your ear to the ground before charging ahead. Offer to give your executive presentation, but he may want just the elevator pitch. Listen, and follow his lead with confidence and enthusiasm. Don’t insist on a product demo – he is buying the business, not the product. If you have an hour, use no more than 30 minutes for presentation.

5. Follow-up to assess progress or casualties. Have someone else, if possible, follow up with the investor the next day, to find out what really happened. If you didn’t learn anything from the meeting, you weren’t listening. Most VCs won’t volunteer to the founder what they think, because that limits their options later.

By now, you are probably saying that this is “old school;” when going to Sand Hill Road offices was like going to the principal’s office. There you were ushered into a gorgeously appointed conference room for a precise amount of time with a serious-looking partner. Now some VCs and angels actually hold court in a nearby Starbucks or Paradise Bakery.

But believe me, investors are, if anything, tougher now than then. Don’t be fooled by the informality. Preparation, professional image, confidence, and strategy are just as important as they ever were. The strategy of “I’ll talk to him informally and early, find out what he doesn’t like, and then I’ll fix it,” is pure folly. Napkins don’t really work as your business plan.

Some of the most prepared “teams” I have seen are essentially one person, with a few part-time advisors, who seem to overcome all obstacles. One person can look like an army charging the hill, if they use all the networking facilities of the Internet, all the tools available to build business plans, financial models, and product prototype.

Don’t be afraid to use some mercenaries to back you up (outsourcing, consultants). All the shortcuts up the hill are rigged with minefields. Better safe than sorry. This is serious business.

Marty Zwilling

If Your Dream is to Get Rich, Don’t Try a Startup

Over the years, I’ve had the privilege of working with some of the best entrepreneurs in Silicon Valley and elsewhere. On the average, the entrepreneurs I know are struggling. But one thing they all seem to have in common is a love for learning and change. They rush in with a passion to better the world, and money is just an indication of their progress.

The successful ones then invest their time and money in furthering their knowledge base. I’m not talking about academic classes, because at best these only teach you how to learn. In these days of rapid change, most experts believe that the facts college students learn as a sophomore are obsolete before they exit their senior year.

Learning should be viewed as an ongoing part of everything you do, and one of the most important things. It’s an unfortunate artifact of our educational system that young people spend a dozen years focused more on memorizing facts than the learning process, and then thinking that they will have all they need to know for the rest of their lives by the time they graduate.

In business, as in most other disciplines, there are practical steps towards learning what you need for the next stage of your company and your life. These include the following:

• Networking with people who know. A question I sometimes get from startup founders is “What do I talk to these guys about?” I say you can’t learn much if you are doing all the talking. Just ask investors what they look for in successful companies. I’ve never known any successful entrepreneurs or investors who were not happy to share their secrets.

• Read entrepreneur stories. Most successful entrepreneurs have been written up on the Internet, or in magazines, or books. Spend some time with these biographies and soak up the insights and inspiration. Follow up online with social networking to make contact, dig deeper, and maybe even line up a mentor.

• Adopt a mentor. Boomers who have been there and done that make great mentors. They have the time and interest in “giving back” some of what they have learned to the next generation. Gen-X executives are too busy running their own companies to be mentors. A mentor is someone who doesn’t let ego or money get in the way of helping.

• Formal learning. Some formal learning is always advisable, but get beyond university MBA courses to professional seminars and case studies. Formal courses work best for basics, like a business start-up course or financial accounting. Go with topics you are interested in and need today.

• Volunteering with local organizations. Work is highly valuable in any environment of universities and professional organizations. The payback is that you can get experience for free, while working on real stuff. I’ve done business plan judging at local universities, and learned more than I contributed.

• Just start a business. There is no better way to learn about being entrepreneurial than starting a business. No matter how much advice and counsel you have been given, I guarantee that you will encounter new challenges daily, to enhance your learning opportunities.

If you are one of those people who likes structured classes for learning, and counts on spending at least two weeks per year in the classroom to “catch up,” that’s laudable, but don’t try to start a business at the same time. It won’t happen.

If you have decided to become an entrepreneur solely to make more money, you are also likely to be disappointed. It’s that double challenge of learning to overcome all obstacles, while still surviving on the financial front, that keeps a good entrepreneur motivated to face a new day. Join us if you dare.

Marty Zwilling