Sunday, August 31, 2014

How Do You Select A Revenue Model For Your Startup?

The_Price_Is_Right_1963One of the toughest decisions for a startup is how to price their product or service. The alternatives range from giving it away for free, to pricing based on costs, to charging what the market will bear (premium pricing). The implications of the decision you make are huge, defining your brand image, your funding requirements, and your long-term business viability.

The revenue model you select is basically the implementation of your business strategy, and the key to attaining your financial objectives. Obviously, it must be grounded by the characteristics of the market and customers you choose to serve, the pricing model of existing competitors, and a strategy you believe is consistent with your future products and direction.

So what are some of the most common revenue models being used by startups today? Here is a summary, with some of the pros and cons or special considerations for each:

  1. Product or service is free, revenue from ads. This is the most common model touted by Internet startups today, the so-called Facebook model, where the service is free, and the revenue comes from click-through advertising. It’s great for customers, but not for startups, unless you have deep pockets.

  2. Freemium model. In this variation on the free model, used by LinkedIn and many other Internet offerings, the basic services are free, but premium services are available for an additional fee. This also requires a huge investment to get to critical mass, and real work to differentiate and sell premium services to convert users to paying customers.

  3. Cost-based model. In this more traditional product pricing model, the price is set at two to five times the product cost. If your product is a commodity, the margin may be as thin as ten percent. Use it when your new technology gives you a tremendous cost improvement. Skip it where there are many competitors.

  4. Value model. If you can quantify a large value or cost savings to the customer, charge a price commensurate with the value delivered. This doesn’t work well with “nice to have” offerings, like social networks, but does work for new drugs and medical devices that solve critical health problems.

  5. Subscription model. This is a very popular model today for Internet services, calling for monthly or yearly low payments, in lieu of one value or cost-based price. Startup advantages include a more stable revenue stream, easier customer retention, and increasing customer investment over time. The customer advantage is a lower entry cost.

  6. Product is free, but you pay for services. In this model, the product is given away for free and the customers are charged for installation, customization, training or other services. This is a good model for getting your foot in the door, but be aware that this is basically a services business with the product as a marketing cost.

  7. Product line pricing. This model is relevant only if you have multiple products and services, each with a different cost and utility. Here your objective is to make money with the portfolio, with high markup and low markup items, depending on competition, lock-in, value delivered, and loyal customers. This one takes expert management to work.

  8. Tiered or volume pricing. In certain product environments, where a given enterprise product may have one user or hundreds of thousands, a common approach is to price by user group ranges, or volume usage ranges. Keep the number of tiers small for manageability. This approach doesn’t typically apply to consumer products and services.

  9. Feature pricing. This approach works if your product can be sold “bare-bones” for a low price, and price increments added for additional features. It can be a very competitive approach, but the product must be designed and built to provide good utility at many levels. This is a very costly development, testing, documentation, and support challenge.

  10. Razor blade model. In this model, like cheap printers with expensive ink cartridges, the base unit is often sold below cost, with the anticipation of ongoing revenue from expensive supplies. This is another model that requires deep pockets to start, so is normally not an option for startups.

If you have real guts, try the Twitter model of no revenue for several years, counting on the critical mass value from millions of customers to sustain your company. This model was popular back in the heyday of dot.coms, when investors were buying followers, but is not so common today. It definitely requires founders with deep pockets and investors willing to take a huge leap of faith.

Your business model interacts closely with your marketing model, but don’t get them confused. Marketing is initially required to get visibility and access to the opportunity, but pricing defines how you will actually make money over the long term. A key challenge for every entrepreneur seeking funding is to convince potential investors that the marketing model will substantiate your positive revenue model, customers will buy the offering, and you have a viable business model.

Overall, I’m a huge fan of the “keep it simple (KISS)” principle – customers are typically wary of complex or artificial pricing. Your challenge is to set the right price to match value perceived by the customer, with a fair return for you. It’s not a game show, so don’t guess - do your research early with real customers. Your startup’s life depends on it.

Marty Zwilling


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Saturday, August 30, 2014

Relate Your Technology Solution to Customer Values

Google_GlassYoung entrepreneurs often are so excited by new technology or their latest invention that they forget to translate it into a value proposition that their customers or potential investors can understand. They can become frustrated with investors, senior executives and even customers who don’t seem to “get it,” with the result that everyone loses.

Senior business leaders, for example, are unlikely to relate when you pitch your latest web app that mashes up existing technology derived from early social-networking applications. Mashup probably reminds senior leaders of a train wreck, and social networking is still seen by many business executives as a frivolous waste of time.

It’s really your responsibility and to your advantage to translate your message into values and priorities that the intended receiver can readily relate to. Here are some key priorities that will resonate with every business leader:

  1. Ability to adapt quickly to changing requirements. Every business leader knows how difficult it is to keep up with a changing market. If you can quickly explain how mashup technology facilitates this agility challenge, the technology may quickly turn from a negative to a major positive. This priority applies to big companies, as well as startups.

  2. Customer data integrity and security. Customer data, as well as internal data, is a key resource for every business that must be secured and protected. If your message starts with a focus on this priority and related costs, the technology will likely be appreciated and valued, rather than challenged.

  3. Personal-privacy assurances. Customers are always looking for a better user experience, and they don’t want their privacy compromised. Before you focus a senior decision-maker on your new cloud and distributed data technology, make sure he or she understands how it will lower user privacy exposures, rather than increase them.

  4. Reduce litigation risks and support costs. Often new technologies are seen by senior decision-makers as new opportunities for litigation and hack attacks. You need to address these concerns early by highlighting patents, encryption capability or other features that mitigate these risks and costs. Skip the acronyms and implementation details.

  5. Payback on investment. Every business executive wants to understand how each new investment in technology relates to their bottom line. Quantifying the return on investment (ROI) is “top of mind” for every investor and executive. Entrepreneurs who make this case effectively will get the decision they want, no matter how esoteric their technology.

  6. Ability to integrate with existing apps. New applications that can’t communicate with existing data and applications are often more of a problem than a solution. Mashup technology may be your biggest plus, if you position it in this context. Highlight the mashup use of existing friendly interfaces and use of existing data in a new solution.

I challenge every entrepreneur to see how many of these priorities they can integrate into their new technology-solution elevator pitch. You may be able to turn a potential train wreck into a win-win decision for both you and the investor or customer. In any case, it pays to do your homework on the background and experience of the decision-maker you face. Don’t assume their understanding of technology is commensurate with yours.

Entrepreneurs need to remember that every investment decision, whether by professional investors or customer executives, is ultimately a financial decision, not a technology decision, driven by limited funds. If you can translate your technology power into a solution satisfying key business goals, you will win the investors you need, as well as the customers you need to make your startup a success.

Technology is the means, not the end.

Martin Zwilling

*** First published on Entrepreneur.com on 8/22/2014 ***


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Friday, August 29, 2014

Entrepreneurs Need To Be Experts On Social Change

social-innovationMany entrepreneurs think that adapting to the new technologies, like smart phones and Internet commerce, are the key to attracting new customers. In fact, businesses need to adapt just as completely to the changes in the buying and social behavior of consumers. High-technology product startups, without customers, don’t make a business.

Today’s customer buying dynamics are all about “user experience,” according to Brian Solis, in his recent book “What’s the Future of Business?.” This thought leader in new media asserts that every business needs to understand social psychology and rethink their business models, approach, and relationships in order to create unique and memorable experiences for both customers and employees.

Solis outlines the heuristics of social psychology that are key to building positive customer experiences today. These begin with the following Cialdini’s Six Principles of Influence, that consumers use to make decisions, buttressed by results from various social media surveys he references in the book:

  1. Social proof – follow the crowd. During today’s dynamic customer journey, consumers often find themselves at a point of indecision. When uncertain of what to do next, social proof kicks in to see what others are doing, or have done. Survey results show that 81% of consumers now receive advice through social networking sites prior to a product purchase.

  2. Authority – the guiding light. Perceived authorities guide decision making, by investing time, resources, and activity in earning a position of influence, leading to a community of loyalists who follow their recommendations. 77% of consumers now research online product reviews, blogs, YouTube, Twitter, and Facebook, for authoritative guidance.

  3. Scarcity – less is more. Greater value is assigned to the resources that are, or are perceived to be, less available. Driven by the fear of loss or the stature of self-expression, consumers are driven by the ability to participate as members in exclusive deals. 77% of people like getting exclusive offers that they can redeem via Facebook or other sites.

  4. Liking – builds bonds and trust. There is one old saying in business that is still very true in this age of social media: People do business with people they like. We all have a natural inclination to emulate those we like and admire. Almost 50% of shoppers surveyed admitted to making at least one purchase based on a social media friend recommendation.

  5. Consistency. When faced with uncertainty, consumers tend not to take risks. Rather, they prefer to stay consistent with beliefs or past behavior. When these do not line up in the decision-making cycle, consumers feel true psychological discomfort. The result is that 62% of online shoppers are brand loyal due to other online satisfaction data.

  6. Reciprocity – pay it forward. Perhaps the greatest asset in social capital is that of benevolence. We have an innate desire to repay favors in order to maintain social fairness, whether those favors were invited or not. Every month, over 25 billion pieces of content are shared on Facebook alone, with a major portion oriented toward reciprocity.

Social psychology in general deals with how individuals relate to one another. In today’s social networks, the social economy is defined by how people earn and spend social capital. Based on the commerce of actions, words, and intentions (or actions, reactions, and transaction), people build their own standing. Startups earn relationships and resulting stature the same way.

Another aspect of the social psychology of consumer buying today is the four stages where customers take actions that move them toward you or away from your startup. These are sometimes called the four moments of truth:

  • Zero Moment of Truth. The few moments before people buy, where impressions are formed and the path to purchase begins. It is that moment when consumers grab their laptop or mobile phone, and start learning about a product or service.

  • First Moment of Truth. This is what people think when they see your product and it’s the impressions they form when they read the words describing your product.

  • Second Moment of Truth. It’s what people feel, think, see, hear, touch, smell, and (sometimes) taste as they experience your product over time. It’s also how your company supports them in their efforts throughout the relationship.

  • Ultimate Moment of Truth. It’s that shared moment at every step of the experience that becomes the next person’s Zero Moment of Truth. This one is required to generating word of mouth, advocacy, and influence.

So for all you technologists, who routinely focus their resources on a great product (“if we build it, they will come”), it’s time to balance the business success equation. Learning how to craft and nurture great customer experiences around your product is critical. The future of your business these days depends on it.

Marty Zwilling


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Wednesday, August 27, 2014

10 Calculated Risks That Lead To Startup Success

business-riskThere is an old saying that good lawyers run away from risk, while good businessmen run towards risk. Entrepreneurs see “no risk” as meaning “no reward.” In reality, all risks are not the same. Many risks can be managed or calculated to improve growth or provide a competitive edge, while others, like skipping quality checks to save money, are recipes for failure.

The challenge is to avoid the bad risks, while actively seeking and managing the smart risks. There are no guarantees in business, but it pays to learn from the experiences of entrepreneurs and business experts who have gone before you. As a long-time mentor to entrepreneurs, here is my collection of smart risks that investors and I look for in new startups:

  1. Focus on a tough customer problem rather than a fun technology. Investors hate technology solutions looking for a problem, due to the high risk of no customers. If the customer need is obvious and large, the calculated risk is in the quality of your solution, your team, and marketing. These are risks that can be mitigated with the right resources.

  2. Schedule frequent updates to your solution to maintain growth. Assuming that you can quickly recover after competitors kill your cash cow is not a smart risk. You need a plan to regularly obsolete your own offerings, with continuous innovation, before customers send you negative messages. It’s hard to recover from a tarnished image.

  3. Plan to deliver a family of products, rather than a one-trick pony. Even a great initial product, with no follow-on, won’t keep you ahead of competitors very long. A smarter risk is to build a plan, with associated greater resources, that will put you in position to expand your product line and keep one step ahead of competitors.

  4. Implement a modern real business model. Providing everything free, and growing users to the max for years, like Twitter and Facebook, is a high risk approach requiring deep pockets. Risk is more manageable with subscriptions and even freemium pricing. Even non-profits need revenue to cover their costs, and continue to provide services.

  5. Find a strategic partner to accelerate growth. Everyone wants to forge ahead all alone, and kill every competitor in sight. Almost always, risks are more predictable when you use coopetition for access to new customers, economies of scale, and shared resources. Finding win-win deals is a manageable risk, versus a battle with one winner.

  6. Use metrics to measure results of marketing initiatives. Too many entrepreneurs put all their resources in one big make-or-break effort they can’t measure, or they count on word-of-mouth and viral marketing, which are totally unpredictable. I like marketing plans that come from both inside and outside the box, but have milestones and measurements.

  7. Recruit the best team members and provide incentives. Trying to save money by recruiting family members, or hiring only interns, is a bad risk. Great team members may take more time to find, and cost you stock options, but a qualified and highly motivated team that stretches your budget is a good calculated risk.

  8. Build your business with minimum outside funding. More money is not more likely to solve your problems or reduce your risk. Investors know that startups with too much money fail just as often as those with not enough. Strategically, you need a plan to survive through organic growth, with outside funding to effectively accelerate scaling.

  9. Don’t rely on conservative forecasts to reduce risk. Investors don’t fund conservative forecasts, nor wildly optimistic ones, since both imply a lack of commitment or homework. Opportunity and revenue projections based on deep market and customer analysis are a smarter risk. Measurements and business intelligence along the way also mitigate risk.

  10. Be a leader rather than following in the footsteps of another. Many entrepreneurs think they can reduce and predict risk by emulating previous winners like Google and Twitter. But stepping into a crowded space to steal customers is more risky than attracting new customers looking for a solution. Customers like leaders, not followers.

The risks you want to take are the ones that you planned for in your resources, set up metrics to measure, and manage on an ongoing basis. All the rest are bad risks, including problems you didn’t anticipate, competitors you didn’t know about, and customer expectations that you can’t meet.

An age-old measure of startup health is how much time top executives spend on containing bad risks, versus proactively exploring new risk opportunities. If the majority of your time is in recovery mode, your whole startup is likely a bad risk.

Marty Zwilling


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Monday, August 25, 2014

8 Principles For Getting Things Done In A Startup

unstoppablesWe all know at least one entrepreneur who always gets things done, and appears unstoppable in his quest. All of you probably know many others who talk incessantly about their great ideas, but never seem to even get started, or they give up at the first obstacle. What are the attributes that make an entrepreneur unstoppable, and is it possible for people to learn to be unstoppable?

According to my own observations, and a recent book by Bill Schley, “The UnStoppables: Tapping Your Entrepreneurial Power,” there are some key “emotional mechanics” that put entrepreneurs in motion, and principles that help entrepreneurs succeed in startups, as well as big companies. I believe we all have the power within us to learn and adapt to these principles.

Every entrepreneur needs to accelerate his proficiency by adopting and using this proven set of skills, rules, and emotional power principles, like the Graham Weston experiences at Rackspace summarized in the book. Here is an outline of the key essentials:

  1. Follow the law of motion versus contemplation. Everyone dreams and talks. Successful entrepreneurs do. This means yearning and starting, not quitting, and ultimately achieving some value that wasn’t there before. In a startup, the founding team and their key employees have to all be entrepreneurs, with an impassioned leader.

  2. Limit focus to the top three or four priorities. It turns out that focusing on three or four activities at a given point, like positioning your brand, prospecting for leads, or managing cash flow, are all that you need to survive. It’s also all that any entrepreneur can manage concurrently with proficiently. Adhere to the familiar 80-20 rule.

  3. Rely on mental “rules of thumb” or heuristics. Being unstoppable must include the power to think and innovate on your feet under real conditions in real time. That means developing an intuition or “gut feeling” based on preset “rules of thumb,” continually updated from peers, advisors, positive experiences, and prior failures.

  4. Simple beats complicated. If your unique difference can’t be explained on the back of a business card, you don’t have one yet. There is virtually no idea, no process, and no vision that simplicity and brevity can’t improve – and never let a consultant, attorney, or investor try to tell you otherwise.

  5. Find the center of an issue and go there. Unstoppable entrepreneurs wake up every day on a quest to keep the center of their brand, their performance, their culture, or their status as #1 choice locked in the crosshairs. They win by going all in where it counts, and nothing counts more than the center.

  6. Conquer the fear that is preventing action. When a person has something important to do, and they are not doing it, then some type of fear is stopping them. The biggest counter to fear is love – as in passion for the idea, love for teammates, and desire to change the world.

  7. Seek out smart risks. We can’t achieve any human progress without risk. In this new dynamic world, where change is accelerating all around us, the safety we feel by hiding behind a rock instead of putting ourselves in motion has become an illusion - the riskiest decision of all. It’s always less risky to do it, than to have it done to you.

  8. Embrace the unsurpassed power of belief. Henry Ford said simply, “If you think you can or think you can’t, you’re right.” Thinking “it’s possible” triggers confidence, determination, and energy. Thinking the opposite makes any task impossible. Belief is the outcome of mastering all the other emotional mechanics

Notice that none of these mention anything about how much money you need to start, extraordinary intelligence, or academic credentials. Accelerated proficiency is all about the art and science of getting entrepreneurs to be Minimally Functionally Qualified (MFQ) in a sharply accelerated time frame so they can get in motion, start doing, and effectively teach themselves, rather than talking and observing.

To be unstoppable, every entrepreneur has to decide to dream, to dare, and to do. Decide to stand with your fear, and turn the struggle into your best advantage. Decide to learn the essence, then get in motion. Where are you along this spectrum as an entrepreneur?

Marty Zwilling


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Sunday, August 24, 2014

Entrepreneurs Need To Keep Their Business Focused

Zappos-focusOne of the most common failures I see in startups is lack of focus. Unfocused entrepreneurs boast that their new technology will generate multiple disruptive products for consumers as well as enterprises around the world. Investors hear this as trying to do too many things with limited resources, meaning the startup will not shine at anything, and will not survive the competition.

For example, a while back I received a startup executive summary, requesting Angel investor funding, that touted technology for a line of new medical devices, also to be offered in a new military radar device. Even a company with unlimited money and people shouldn’t try to step into those two domains for the first time at the same time.

Other elements of startup focus are a bit fuzzier, so let me zoom-in on some key ones here:

  1. Type of business model. Startups that try to mix a non-profit entity with a for-profit entity to share resources don’t work, and scare off investors. Providing shoes for the poor is a laudable goal, but quite a different business than Zappos, which sells clothes profitably, and provides free shoes for the needy due to social consciousness.

  2. Solve one problem really well. Focus means starting with a problem that is painful, rather than a technology, and showing how you can solve that problem better than anyone else. Later in the pitch, you can show that you are not a one-trick pony by prioritizing related solutions in your long-term plan.

  3. Limited goals and priorities. No organization can manage more than 3 to 5 goals and priorities without becoming unfocused and ineffective. Keep these balanced and aligned between people (customers, employees) and process (quality, service, revenue), and keep the scope realistic (eliminating world hunger is too broad).

  4. Segment the opportunity. Targeting all the people in China as your opportunity gives you big numbers from a small penetration percentage, but will be seen as lack of focus by investors. Narrow the scope more realistically to people with specific age, income, and education demographics, that you can realistically reach with your marketing plan.

  5. Keep your value chain consistent. Your value chain is your preferred business model, like premium quality, high service. If you mix that model with some commodity items, with no service, that will be seen as a lack of focus. Your team, customers, and investors will all be confused, leading to a lose-lose situation.

  6. Simplify product scope. Your product will never have enough features to satisfy everyone, and it will never be perfect. Focus means creating a minimum viable product (MVP) first, and validating it in the marketplace. Feature-rich products take too much time and money to build, are hard to pivot, and will likely be slow and difficult to use.

  7. Realistically frame the competition. If you really believe that IBM, Microsoft, and Oracle are your competition, you probably don’t have a business. It’s better to focus on a niche that none of them do well, and build your plan around that opportunity. Claiming you have no competition also implies lack of focus, or you don’t have a business.

  8. Prioritize marketing channels. For a startup, it’s impossible to run an effective Facebook, Twitter, content marketing, and Google AdWords online campaign all at the same time. Focus on one channel at a time, measure results, and then move to the next. Offline, it’s not credible to talk about direct marketing, distributors, and integrators all in the same breath.

I certainly understand the pressure add more of everything to your plan, as you listen to more and more people, all with their own priorities and biases. But in the long run, you need a narrow and memorable focus to build a strong company. Even in the short term, customers and investors alike will help you carry a simple and clear focus all the way to the bank.

Marty Zwilling


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Saturday, August 23, 2014

How Entrepreneurs Must Reinvent Themselves To Thrive

invent-reinvent-thriveSometimes entrepreneurs are so focused on making change happen for others, that they forget that continually changing themselves and their company is equally important. Some get stuck in a rut and get run over by competitors with new technology, like Eastman Kodak, and others get pushed into a crisis, like Apple did, before they reinvent themselves into a new market.

Everyone and every company needs to continually learn from their experience and adapt to a changing world to thrive. “If it ain't broke, don't fix it” is an old adage that really doesn’t work in today’s business world. If you don’t plan to reinvent yourself regularly, your competitors will make you obsolete, and any success to-date will likely be short-lived.

I just finished a new book “Invent, Reinvent, Thrive,” by Lloyd E. Shefsky, Entrepreneurship Professor at the Kellogg School, which highlights this message, and provides some expert insight on how entrepreneurs can apply the principles to their own career and company. Here is a summary of recommendations from both of us, based on my own business mentoring insights:

  • Re-launch using your enhanced core competency. Use that same technical and business expertise that served you well on this startup to find the next opportunity. I’m sure you have seen many new ones, and now understand even better the due diligence required to validate the opportunity, and the executions steps required to make it happen.

  • Ignore the voices of dissent again. Negative advice on an unknown is easy and safe to give, so every entrepreneur hears it over and over. As an entrepreneur with some success, you had the confidence to prove them wrong once, so don’t lose your nerve and try to play it safe now. Proven problem solvers only get better with practice.

  • Listen and act on the ideas of others around you. Take advantage of the fact that you have surrounded yourself with key people who have good ideas, but may lack the skills or confidence to act on them. Skip the arrogance of “not invented here,” and re-invent your current company, or start a new one, before a crisis occurs.

  • Move to a higher platform. Many entrepreneurs get their first taste of success running their own consultancy or practice. A few are able to move to higher platform, like moving from a sole practitioner physician to create and run a much larger medical organization. That’s a type of re-invention that can give you a major advantage over competitors.

  • Changing times call for a new skill set. Smart entrepreneurs in any given industry, like publishing, recognize the appearance of new technologies which threaten their survival, including digital publishing and print-on-demand. The best immerse themselves in these technologies, and invent new businesses, rather than fight in the old one to the death.

  • Seek out customer trends before they become an avalanche. Don’t stop doing the in-depth communication with customers that brought you initial success. Plan an annual set of customer sessions that you don’t delegate to subordinates. If customers don’t convince you to re-invent a part of your business each year, you probably aren’t listening.

  • Find mentors who have the skills you lack. Proactively seek out mentors who will tell you what you need to hear, rather than what you want to hear. Work on the new skills you acquire from your mentor, and test incrementally what you have learned. With each new skill you acquire, your likelihood of long-term success is improved.

  • Expand your investment alternatives. If your business success so far is based on family and Angel investors, perhaps it’s time to start working with institutional investors and external business partners. Their expectations and insights will broaden your view, and may incent you to upgrade your strategy, or re-invent a portion of your business.

Entrepreneurship is not a one-time transformation that qualifies you long-term success. It is a lifestyle, like many others, which requires constant effort to keep you ahead of the crowd in a rapidly changing business environment. Standing still is falling behind. What is your action plan to continually re-invent yourself and thrive?

Marty Zwilling


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Friday, August 22, 2014

Investors Love A Credible Entrepreneur Market Sizing

market-research-reportMany entrepreneurs are so enamored with their product vision that they believe their own hype, and are convinced that the market for their solution is so huge that no one will ask them for independent market-research data. They don’t realize that business projections with no third-party validation have no credibility with investors.

Every good business plan needs an early section that sizes the total market opportunity, and then breaks down that total into the most relevant segments for your focus. If 10 percent of these numbers, multiplied by your average product price, will get you the revenue you need to scale your business, you will get the love you need from angel and venture capital investors.

A common excuse I hear from entrepreneurs for not doing the work is that real market research takes too much time and costs too much money. Perhaps that was once true, but in this age of the Internet, big data and pervasive business intelligence in every industry, you can use the following steps to get the data you need with very little time and cost:

  1. Start your research with Google. Use your favorite search engine and keywords describing your solution to find online sales reports, trade association statistics and online newsletters with the latest statistics. The wealth of data available online is already much larger than the entire Library of Congress, and much more current.

  2. Modern libraries are still worth a visit. Universities and large municipalities still maintain subscriptions to the latest market-research reports from key sources, including Nielsen, International Data Corporation and Gartner Group. In most cases, these are available to the public for free access, and can be referenced and footnoted in your plan.

  3. Explore municipal-development resources. The local Small Business Association (SBA) offices, or their equivalent in other countries, can often provide statistics on key market domains in your area. New business-development specialists there can also provide good additional sources for the specific information you may need.

  4. Browse the business section of your favorite bookstore. These days, it’s a great way to get some work done, while enjoying a cup of coffee, so you may not even have to buy a book. Pay particular attention to the titles discussing the latest big opportunities, such as alternative energy, global warming and technology trends.

  5. Peruse company reports from your business domain. Competitor's annual reports, white papers, press releases and presentations are great sources of data and trends that you can use to support your own efforts. These are also important for your product positioning in the competitor section of your business plan.

  6. Conduct your own customized market research. With social media and the new survey tools, it’s easy and fast to set up and run your own focus group or opinion survey. Just make sure your results are statistically significant, rather than anecdotal, and avoid any personal biases in the questions that may be used against you.

You need to find just enough information to quantify the real need out there for your product or service. For example, if you are offering an accounting service for small-business owners, you would want to quantify the number of enterprises in your area, with the size, age and spending demographics that you are targeting.

Buying large detailed reports from market-research freelancers and name-brand providers usually costs several thousand dollars, and often is not required to find the summary data you need to satisfy investors. One of the free sources above, or just the teaser data from an online report advertisement, is often more than adequate as a third-party reference for credibility.

We all know that people can use statistics to prove any point they want, but not having any opportunity sizing is certain to raise a red flag above your whole business plan. On the other hand, spending your entire startup budget on market research won’t improve your odds of success or funding.

Successful entrepreneurs get the job done quickly, without breaking the bank.

Martin Zwilling

*** First published on Entrepreneur.com on 8/15/2014 ***


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Thursday, August 21, 2014

Startups Who Hide Early Work Only Fool Themselves

stealth-mode-startupsIt’s popular these days for startup founders to operate in stealth mode, meaning no details about the idea or progress are shared with anyone until the big reveal and rollout. The common reason given is that this prevents any competitor from stealing their idea and beating them to market. In my view, this paranoid approach costs them much more than the risk of being open.

I’m not suggesting that a startup should ever disclose patent details to others before filing, but I can’t imagine why a startup would not seek visibility and feedback for their idea and solution while they could still make changes with minimal cost. Pivots and corrections are inevitable for startups in this age of rapid change, and the earlier you make them, the quicker you get to success.

Being open is the new business culture around the world. Entrepreneurs talk to customers and competitors talk to each other about the new trends and technologies they see. Coopetition is the new mantra for growing your business faster. Here are seven key reasons that being open is better for your startup than trying to fly under the radar:

  1. Visibility generates interest. You can’t get any word-of-mouth or media activity by hiding. Before you finalize the product is the best time to talk about it and see if you can get some buzz started. This will do more for your first mover advantage than more time in the lab. Most people agree that even negative media attention is better than none.

  2. Evaluate customer response prior to development. It’s never too early to get real feedback from the people who count. No matter how passionate and certain you are that your idea is perfect, the reality is that you will likely need to pivot at least once. Why not make the change before you have wasted significant time and money?

  3. Get competitors to surface early. You may be convinced that no competitors exist, which is very unlikely. If there really are no competitors, then there is likely no market opportunity, or you haven’t looked yet. If your position is so tentative that knowledge of your idea puts you in jeopardy, you need to know it sooner, rather than later.

  4. Demonstrate a minimum viable product (MVP). Surface your prototype, get customer feedback, make corrections, and iterate until you get it right. Startups in stealth mode often have a false sense of security that they can take extra time to do the job right the first time. Customer feedback is required to get it right, and hidden time is wasted time.

  5. Meet investors before asking for money. The time to build investor relationships is before you need the investment. It gives you credibility to mention your idea in general terms, without immediately asking for money. This can help you get in the door when you are ready, and asking questions early will give you insights on investor priorities.

  6. Pivots can be done gracefully at this point. Customer credibility actually improves when they see you making changes based on their input, and the cost of correcting mistakes early is lower. Operating in stealth mode for an extended period tends to convince entrepreneurs to believe their own biases, and visibly fight the need to change.

  7. Optimize your web history and presence. Stealth mode normally means no time for search engine optimization prior to product launch, not to mention relevant blogging activity, and link building. This means your whole startup effort will appear as very early stage for investors, and will likely not be adequately tuned for customers.

On the other hand, stealth mode does make sense for large companies, like Apple and IBM, who will likely be sued for pre-announcing a future product, since other companies have used this ploy in the past to freeze the market and lock out new competitors. Of course, even startups can get into serious trouble by talking about products and direction with no intent or ability to deliver.

I also realize that there are a limited set of startups, facing particularly entrenched and unscrupulous competitors, where early stealth mode is necessary. With most other classes of startups today, including smartphone apps, web services, and social media applications, early customer feedback is critical, and time to market is of the essence, so secrecy is more of an excuse than an advantage. Who are you fooling by not allowing your startup to be found?

Marty Zwilling


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Monday, August 18, 2014

Savvy Entrepreneurs Plan Both Business And Product

business-product-planMost technical entrepreneurs I know demand the discipline of a product specification or plan, and then assume that their great product will drive a great business. Serious investors, on the other hand, look for a professional business plan or summary first, and hardly ever look at the product plan. Is it any wonder why so few entrepreneurs ever find the professional investors they seek?

Just for clarification, I characterize a product plan as a formal description of your product or service, with a quick business description at the end for effect. A business plan is a careful layout of the business you are building, with a quick product overview in the intro to set the stage. In reality, you need both, to clarify for yourself and team that you have a viable business solution.

A product plan has tremendous value inward facing, telling your product people what to build, while the business plan has maximum value outward facing, explaining to the rest of the world how your new company will survive and prosper. A product plan is never a substitute for a business plan.

Because the product plan is aimed internally, it can assume the reader has the relevant technology and jargon background. Here are the major elements of the best product plans:

  • Market requirements section. This first section of every product plan defines the market, sizes the opportunity, and discusses individual needs and requirements that will be provided by your product and service. These requirements must be based on market analysis, expert input, and existing customer feedback.

  • Technology, architecture, and feature descriptions. This section of the product plan details every element of the product or service that is your solution. It allows all members of your team, including marketing, support, and sales, to size and build the business plan processes they need to find customers, deliver, and maintain grow the business.

  • Development schedule and checkpoints. A product plan must include the timeline and milestones involved in product research and development. Each of these activities should have associated costs and resource requirements. Related activities must be defined, including performance expectations, quality certification, and proof of concept.

  • Quality testing and approval processes. Product certification or product qualification requirements and processes are a key part of every product plan. This section of the plan would include the definition of specific test processes, how results will be measured, and who has responsibility for execution and approval.

Now let’s talk about the basic components of a business plan. Since this document is outward facing, it is important to keep the terminology and tone consistent with that of your customer set, investors, and business partners. It does need to include a high-level summary of the components in the product plan, with key additional sections as follows:

  • Definition of customer problem, followed by your solution. The customer pain point must be defined before the solution is presented, so it doesn’t look like you have a solution looking for a problem. Use concrete terms to quantify the value of solution, like twice as fast or half the cost, rather than fuzzy terms, like cheaper and easier to use.

  • Opportunity segmentation and competitive environment. The market for your solution should be quantified in non-technical terms, with data sourced from professionals in the industry, rather than your own opinion. List key competitors and alternatives, highlighting your sustainable competitive advantages, such as patents and trademarks.

  • Provide details on the business model. Every business, including non-profits, needs a business model to survive. Providing your product or service free to customers may sound attractive in marketing materials, but you need revenue sources to survive. Free is a dirty word to investors, since it’s hard to get a financial return from free.

  • Executives, marketing & sales, financial projections, and funding. These are additional critical sections of a business plan to define who is running the business, business strategy activities, and financial expectations. There are many good books and Internet articles describing each of these sections, so I won’t cover the details here.

In principle, there is very little overlap between these two plans, so it never makes sense for an entrepreneur to build one without the other. Yet I’m still often approached by aspiring entrepreneurs who have neither. If you are still in the idea stage, meaning you have nothing but a passionate verbal description of an idea, approaching investors is a waste of time and a recipe for failure.

Savvy entrepreneurs always remember that they are the key investor in their company, so they measure themselves against the same standards as professional investors. That means they invest first in a set of plans.

Marty Zwilling


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Sunday, August 17, 2014

5 Clues To Investor-Friendly Financial Estimates

financial-projectionsMost entrepreneurs struggle with financial projections, not wanting to commit to numbers they can’t deliver, and having no clue what investors might consider reasonable. However, making no projections, or non-credible projections will get your startup marked as unfundable. I recommend a simple set of guidelines, which work for at least 80% of the business domains I see.

Equally important, you need to make these projections first as goals for your own use, to convince the team as well as investors that you have a business which is achievable. Projecting the financials should be the last step of your business plan preparation, since it assumes you already know the opportunity size, customer buying habits, pricing, costs, and competition.

Here are some basic “rules of thumb” that every Angel or venture capital equity investor uses, to help you anticipate their reactions. The rules are obviously not absolute, but you must be prepared to explain to potential investors why your startup is the exception to these guidelines:

  1. Five-year financial projections are the norm. According to a recent Dow Jones VentureSource report, the average time to liquidity of an equity investment in a startup is now about five years. Thus most investors ask for 5-year projections, to get a sense of the opportunity and trajectory that you’re envisioning while their money is tied up.

  2. Aggressive revenue projections and growth rate. The first filter applied by most investors is to identify high-growth investable startups from ones that may be a good family business with organic growth, but could never generate a 10x return. Revenue in the fifth year should be at least $20 million, with a growth rate average of 100% per year.

    But don’t go crazy with this number. If your fifth year projection exceeds $100 million, that puts you in the rare category of the next Google, and probably won’t be credible with investors, unless you have a track record in this range. In other words, revenue projections are not the place to be too conservative or wildly optimistic.

  3. Gross margins greater than 50%. Most entrepreneurs, with no experience, believe that they can make good money with lower margins than competitors. The reality is that even if you eat Raman noodles and do survive with low margins, your growth rate will be stunted, yielding a low return for investors.

    Financial projections for investors should always show an annual cost of goods sold and gross margins line, as well as revenue. Low gross margins in the first couple of years are expected, but they better climb to the 60% range by year five.

  4. Show red ink to match your funding request. Financial projections shown to investors should always be pre-funding projections, to illustrate what revenues and expenses you think are possible, and how much your current funding falls short. Don’t ask for funding if your projections imply you don’t need it. Investors don’t like their money used frivolously.

    If you show a negative cash flow of $800 thousand before the business turns cashflow positive, it is fair to buffer that amount by 20% and ask for a $1 million investment, since we all know that there will be un-anticipated additional costs.

  5. Build a path to 10x return. The only path to any return for equity investments is a liquidity event, like a merger or acquisition (M&A), or IPO. That’s why investors want to hear about your exit strategy. If you don’t have one, or intend to buy out investors with their own money, you probably won’t get much interest.

    What investors want to hear is that your company will demonstrate that high rate of growth to get you to $50 million in revenue in 5 years, making you a premium acquisition alternative to one of your partners, selling for 5 times revenue, for a total of $250 million. That makes their $1 million investment for 10% equity worth $25 million, or 25x.

Be aware that investors will be testing your financial projections in real time against your opportunity numbers, volume projections, pricing model, and performance to date. If you have no data in one of these areas, be prepared for the “come back when you have more traction” message. Investors don’t want to antagonize a potential winner, but you are not fundable yet.

Of course, the quality of your management team, or demonstrated performance in prior similar ventures, can override any or all of these rules of thumb. On the other hand, you must remember that only about one percent of Angel investor funding requests get satisfied, according to the Angel Capital Association. Venture capital requests that get satisfied are even lower.

Overall, financial projections that make sense in your business domain, and cross-foot with available data from independent market analysts are no guarantee that you can deliver. They do show you already stand out from the crowd of talk-only entrepreneurs, understand financial realities, and are willing to commit. What more could an investor ask, since he is really investing in you, not the numbers?

Marty Zwilling


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Saturday, August 16, 2014

Street-Smart Entrepreneurs Need High-Tech Partners

Zappos CEO Tony HsiehTechnology is so key to every business these days that experienced business-smart but non-tech entrepreneurs are falling deeper and deeper in the hole. Even if they realize that they need real technical strength at the top, they are not sure how to attract and select the talent and expertise they really need. Should they go after high-tech nerds for partners, or professional technologists?

The right answer for a good business partner today is neither of the above. Startups succeed most often when the founding partners know how to build and run a business, rather than how to build and run technology. Only one component of running a business is managing technology, but it is a critical component, so no entrepreneur can afford to ignore it or totally delegate it.

That means every entrepreneur needs to learn how to attract, hire and manage technical people for their team. Just like you don’t have to be a financial guru to recognize a good CFO, or a marketing genius to hire a VP of marketing, you can find the right technical partner or team member by using the right evaluation and hiring steps, including the following:

  1. Engage a technical advisor to assist with recruiting and early interviews. Much like executive recruiters recognize the best executives, a technical expert in your business domain will recognize the right combination of skill, creativity and experience you need for a co-founder or key team member. Don’t fall for a technical pitch you can’t comprehend.

  2. Look for a match in culture and values, as well as technical strength. A great technical LinkedIn profile is a good start, but not enough to assure success in your environment. The non-technical leadership attributes of excellent communication skills, high integrity, passion and perseverance are critical for the success of the whole team.

  3. Spend time informally with candidate peers and former employers. This approach works best with business associates that know you, peers that you meet at industry conferences, or technical gurus that have no business connections to the candidate. Former employers will normally only give you candidate employment dates or good news.

  4. Let candidates educate you on attributes you need. The key here is to do more listening than talking in both formal and informal interviews. I find that many entrepreneurs are so passionate about their own idea that they can’t stop selling it to potential partners. They are attracted to people who agree, although may not be able to help.

  5. Evaluate their problem-solving ability in the context of your business. A business startup is not an academic environment, or a big company research organization. Practical problem solving and communicating to business people is often a big challenge for technical experts. Test them with problems outside their comfort zone.

  6. Challenge current team members to bring in the best and the brightest. Start with existing co-founders, extend the request to advisors and investors and finally to existing team members. Make them part of the interview and decision process, since they all have a large stake in the ultimate success of the new venture.

  7. Continually ramp up your own technical competence. Although technology is getting more pervasive in business, it’s not rocket science. If your kids can use computers by age six, every entrepreneur ought to be able to stay current with the latest social-media marketing and ecommerce technologies. You can’t manage a technical team or negotiate with technical partners without understanding their view of the business.

  8. For non-core technical strength, look for outside partners. Outsourcing to expert freelancers or business partners is often a better solution for startups than managing everyone into the inside team. You may not have the breadth of technical challenge, or the budget, to lure in and keep motivated the caliber of technical expert you need.

Even if your company doesn’t sell high-tech products, for example, Zappos, having and using the right technology in the business, for distribution, marketing and customer support, can easily make the difference between winning and losing in today’s high-tech world. It’s no anomaly that Zappos CEO Tony Hsieh graduated from Harvard with a degree in computer science.

On the other hand, there are many technology companies successfully started and run by non-technologists. For example, Richard Branson, CEO of Virgin Group, with no technical background at all, has started and run many technical companies, including the futuristic Spaceship One and a new orbital space launch system, and reportedly does his own social-media work.

Thus non-technical entrepreneurs must not shy away from technical issues, and must also learn to find and effectively work with technical partners, inside their company and outside. Street-smart today means the ability to survive and prosper in a technical world. Are you there?

Martin Zwilling

*** First published on Entrepreneur.com on 8/8/2014 ***


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Thursday, August 14, 2014

Investor Secrets For Smart Competitive Positioning

hydrogen-engineIn their passion and excitement about a new product or service, entrepreneurs tend to continually narrow the scope of potential competitors, and often claim to have no direct competitors. This raises a big red flag with potential investors, who conclude that no competitors means no market, or you haven’t looked, and the new startup is likely not investable.

They are looking for startups that have a sustainable advantage over direct and indirect competitor offerings, as well as obvious value to customers living without your product today. First to market, for example, is not normally a sustainable advantage for startups. They simply don’t have the resources to keep ahead of large competitors who see initial traction and go after it.

A narrow scope doesn’t help your case either. Competition for your new hydrogen fuel auto engine is not limited to other hydrogen auto engine offerings, or even other autos. Remember the transportation transitions from horses to autos to trains to airplanes. All of these are competitors in terms of speed, price, or luxury.

A sustainable advantage also has to be quantifiable and large enough to overcome the natural resistance everyone has to change, or learning a new approach. My perspective as an Angel investor is that once you get past early adopters, most people won’t switch to a new approach unless they perceive a cost or time savings or speed advantage of at least 20 percent. Non-specific terms, like better usability and low cost don’t incite customers to action these days.

So what are some of the key points that you should highlight in your investor slides to convince investors that you indeed do have a long-term competitive advantage over other alternatives in the marketplace? Here are some of the key ones:

  1. Patent protection in place as a barrier to entry. Investors understand that patents can be broken by unscrupulous competitors, but they prove your conviction that you have created something innovative, and are willing to do the work to defend it. Other intellectual property has similar value, including trade secrets, copyrights and trademarks.

  2. Your solution is just the beginning, not the only solution. Your startup needs to be focused on a specific solution, but you need to show a long-term plan for a continuously innovative product line, or a series of follow-on solutions, that will keep you ahead of competitors. No investor wants to be tied to a “one-trick pony.”

  3. Order-of-magnitude cost reduction or productivity increase. Entrepreneurs often proclaim that they will work harder and more efficiently than competitors, thus reducing costs and improving productivity. This approach is not convincing. Investors are looking for technology, process, or business model breakthroughs, to move costs to a new level.

  4. Startup team with experience and connections is this domain. Teams that have worked together in a previous startup are always a plus. Expert knowledge in the relevant business domain is another plus. Warm connections to required distributors, suppliers, and large potential investors is a major plus. Investors check connections.

  5. Thought leadership position in your market and customer set. Prior recognition and visibility in the target market is invaluable from a competitive perspective. Successful entrepreneurs start early building their own brand through social media, industry forums, scheduled events, book publishing, and speaking engagements.

  6. Clear product differentiation and a singular focus. Solutions that primarily integrate the functions of several existing products will likely not provide a sustainable competitive advantage. The focus is diluted, it’s hard to keep up with individual product changes, and you will always be on the defensive. Investors want focus and breakthrough innovation.

Almost as bad as positioning no competitors is trying to position a large list of competitors (ten or more). I recommend never naming more than three specific ones, and using each of these as representative of a group of competitors. For example, “Company A is representative of many who provide commodity solutions in this space.” Investors are wary of a crowded space.

Of course, a great competitive advantage won’t do you much good if your market opportunity is small or not growing, or you don’t have the resources to deliver. Investors like billion dollar opportunities with double digit growth rates.

Now that I think about it, your biggest competitive positioning challenge with investors may be your peer startups down the street, also looking for investor dollars. How do you stack up against the ones you know?

Marty Zwilling


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Tuesday, August 12, 2014

Every Small Business Founder Needs An Advisor

business-advisorSponsored by VISA Business

Friends tell you what you want to hear. Advisors tell you what you need to hear. When the message is the same from both, you don’t need the advisor anymore. In that sense, you should think of an advisor more like your mentor who has done all he can. You always need the friend.

Also don’t confuse a business advisor with a business coach. An advisor’s aim is to teach you what to do and how, in specific situations, unlike a coach who helps you develop your generic skills for deciding what to do and how. The advisor helps the entrepreneur fill an experience gap, and a coach helps fill a skill gap. Both may be required.

Before you are ready for an advisor, you must know yourself. Have you assessed your strengths and weaknesses? What are your goals? Where are you heading? Unless you know these things, no one can help you. Also, you need to be prepared to take advice and criticism if it is honest, helpful, and given in a friendly way.

Once you are ready, what are some attributes of a good advisor that you should look for? You need someone who:

  1. Applies pragmatics to your ideas. Most entrepreneurs have lots of ideas. Some can be put into practice easily, but others will be off-the-wall and need refinement to implement. A good mentor will have some knowledge and some perspective on almost every business subject, which compounds their effectiveness.

  2. Challenges your accountability. Entrepreneurs tend to be driven by the crisis of the moment. As such, it is easy to neglect the real priorities of growing the business. Sharing your goals with your advisor means that if you don't complete them, you have a credible voice to remind you and help get you back on the right track.

  3. Able to extrapolate the business. A successful business never stands still. You need a constant stream of ideas for scaling and expanding, with a realistic understanding of the costs and resources required. Then, there is the exit strategy which needs planning, connections, and forethought.

  4. Has the contacts you need. When you need contacts for investors, equipment, and legal or accounting advice, your mentor has the contacts and knows where to find the information. More importantly, the advisor tells you what you need to do to build and maintain your own list of contacts.

  5. Provides perspective as someone from the outside, looking in. An advisor knows what to look for, and sees what your customers see. It’s natural to become so immersed in your business that you forget to step back and look in from the outside. Like living next to the railroad tracks; after a while you don't hear the trains.

How do you find a person who meets these criteria? Sometimes an advisor just appears naturally, but continues to network among friends and colleagues. Look for a person who could be a good role model, someone who has the skills and personality that match your chemistry.

This person could be a professional who does this for a living, or a role model in a related business who is willing to help you. An ideal candidate is someone from the Boomer generation, who is semi-retired, but still active in local organizations or the investment community.

I don’t mean to imply that an entrepreneur needs an advisor more than a friend, just that friends are not normally positioned for double-duty as mentors. You need at least one of each, and the ability to tell the difference.

Marty Zwilling

Disclosure: This blog entry sponsored by Visa Business and I received compensation for my time from Visa for sharing my views in this post, but the views expressed here are solely mine, not Visa's. Visit http://facebook.com/visasmallbiz to take a look at the reinvented Facebook Page: Well Sourced by Visa Business.

The Page serves as a space where small business owners can access educational resources, read success stories from other business owners, engage with peers, and find tips to help businesses run more efficiently.

Every month, the Page will introduce a new theme that will focus on a topic important to a small business owner's success. For additional tips and advice, and information about Visa's small business solutions, follow @VisaSmallBiz and visit http://visa.com/business.


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Monday, August 11, 2014

Inventor Entrepreneurs May Be The Rare Exception

Thomas_Alva_Edison1In my experience, inventors and technologists aren’t interested or aren’t very good at building a business, and entrepreneurs aren’t usually good scientists. These people need to find each other, and can jointly make a great team for a new startup. Without the synergy, companies like Apple might never have gotten off the ground.

Historically, it’s also not often that a good inventor was also a good entrepreneur. There are some old arguments that even our entrepreneur heroes, like Thomas Edison, really cheated on the invention side. Most of the great entrepreneurs of recent times, like the young Steve Jobs, had a great technologist, Steve Wozniak, who could implement his dreams.

I’m convinced that this is because the personal characteristics required for these two jobs are quite different. For example, here are a few of the attributes that come to mind for a good technologist:

  • One idea, one focus. They have perseverance, based on strong personal conviction that something is possible. An inventor has to know precisely how things work. Inventors build solutions to a problem, and they relish in the success of having solved the problem.
  • Good with details. If you have ever written a patent application, you know it’s all about details, linkages, and causes vs. effects. Good inventors love to diagram out all the details, algorithms, and get their reward from finding new ways of getting things done.
  • Creative and artistic. You have to give the creator some resources, time, and throw in some food once in a while, and a “completed design” will appear in due time. Then they are done. They hate sales, and don’t understand what making a profit even means.
  • Realistic if not pessimistic. Every inventor, programmer, musician, and artist will tell you that you can’t schedule invention. They won’t commit to a completion date, and always dream of an unlimited budget. They expect many attempts will be required.

Entrepreneurs, on the other hand, have a complementary but different set of strengths and weaknesses:

  • Lots of ideas, can’t focus. Most good entrepreneurs are idea people, and can flood you with ideas. The reason they can't focus is that they haven't yet flushed out all of the half-baked ones. When teamed with someone who can focus, things work, and a lot of wasted effort is avoided.
  • Likes the big picture, not good with details. An entrepreneur always has a “vision” of a bright future. But many fail, or have lots of stress because they don’t like to deal with the details. They tend to leave the details to others, who don’t have the vision or the skill, so the business suffers.
  • Good at starting a business and selling. Every entrepreneur reads everything they can find on running a business, maps out all the steps in their head, or explicitly on paper (business plan). They love talking about their business and their product, and dream of having millions of customers.
  • They exaggerate and are too optimistic. Exaggeration, pipe dreaming and denial are the tools and comforts of the trade of entrepreneurism. The psychological source of this "always at the edge" may be an addiction to adrenaline, the pleasure/high of "pulling it off" at the last minute, or the high that victory brings.

For a successful business, it takes the discipline and creativity of a technologist, as well as the vision, planning, and optimism of an entrepreneur to create customer value. So if you’re an entrepreneur, find yourself a frustrated technologist and likely both of you can find more success and happiness.

Marty Zwilling


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Sunday, August 10, 2014

Should Entrepreneurs Grow Revenue Or User Count?

Google_ApplianceSome analysts argue that revenue drives growth, while others say user growth drives revenue. Both have worked.Google reached $1 billion in revenue within five years of incorporation, and now has a market capitalization of over $400 billion. Twitter showed no focus on revenue in the first five years, but was able to parlay 500 million users into a $22 billion public company, now growing revenue.

Every startup dreams of achieving that milestone, when they can focus more on scaling the business and enjoying their earnings rather than fighting for another investment infusion. Most are still confused about the right priority. Should they focus on increasing revenues and profitability, or entice more and more users with “free” services to increase their valuation.

Traditionally, it was simple. A business only achieved critical mass by becoming cash-flow positive. Revenue growth (top line) then had to be converted into profit growth (bottom line), before a business was deemed to be self-sustaining and worthy of public investment.

It’s only been in the last 10 years that social-media companies, such as Facebook and Twitter, have achieved market valuations in billions of dollars, while clearly sacrificing revenue to gain users. In my view, the pendulum is swinging back, with investors looking more for the traditional indications of business integrity, stability and growth. Here are factors to consider:

  1. Some element of organic growth is a good thing. The purest form of capitalism has always meant charging a fair price and making a fair profit. Re-investing profits to grow the business is organic growth. The concept of free goods and services to get you hooked, financed by deep pockets or advertising, seems marginally ethical to many.

  2. Long-term stability requires revenue growth and profit. Most modern investors still look for a business model that embodies a gross margin over 50 percent and a net margin in the 20 percent range. A healthy business, ready to scale, has been doing this for a year or more, with an existing customer set generating a non-trivial and growing revenue stream.

  3. High customer loyalty and high team passion. Startup productivity is embodied in key ratios, including low cost of customer acquisition, high retention and high revenue per employee. High customer churn and lackluster team members are still indicators of a high-risk investment opportunity to be avoided by both public and private investors.

  4. Growing appreciation for the value of the solution provided. These days, you need customer evangelists who see the value and will pull in their friends through viral actions to keep the business growing. Too many of the high user-growth startups have been fads, and numbers can go down as fast as they go up, as per Friendster and MySpace.

  5. Understanding competitive early-mover requirements. First movers in a new space need users more than revenue to maintain market share, so investment pitches need to highlight this priority in requests for funding resources. More complex and defensible businesses should highlight their organic drive to profitability and brand leadership.

Unfortunately, the Internet and heavily-funded startups have nurtured a customer expectation of free web services and smartphone apps. In these domains, it is now difficult to monetize at all until you have a large critical mass of users. Growth scaling is important in these cases, both before and after revenue flow begins. The business plan must reflect both growth phases.

Even after a startup has achieved a critical mass of users, the expectation of long-term revenue growth and profitability does not go away. Twitter is facing this challenge right now, as the large majority of public investors expect a near-term financial return on their investment, every quarter of every year.

A higher focus on user growth may be necessary early, but is never sufficient. If you are in it for the long run, don’t forget the basic business principle that if you lose money on every customer, you can’t make it up in volume.

Martin Zwilling

*** First published on Entrepreneur.com on 8/1/2014 ***


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Saturday, August 9, 2014

Entrepreneurs Must Start Selling And Listening Early

social-media-logosSavvy entrepreneurs start testing their ideas on potential customers even before the concept is fully cooked. They have enough confidence in their ability to deliver that they don’t worry about someone stealing the idea to get there first, and they don’t forget to listen carefully to critical feedback. They become walking public relations machines for themselves, as well as their idea.

The alternative is to spend big money later on pivots, lost credibility with investors, and delays at rollout trying to build visibility and credibility. I’m not proposing that anyone promise things that they don’t intend to deliver, but it’s time that founders switch to start selling their product before they build it, rather than believing the old adage of “if we build it, they will come.”

I still hear too many excuses for not working early on the elevator pitch, like wanting to fly under the radar, don’t have the team together yet, or can’t afford an agency. In fact, you don’t need a third-party public relations agency at this stage. There is real value in doing the key things yourself, before your startup is even started:

  • Demonstrate thought leadership before selling a product. Highlight the problem and your concerns in industry blogs, speaking in public forums, and making yourself visible on social media and networking opportunities. You want people to see you as an evangelist for hydrogen fuel, for example, so your later auto engine will have credibility by default.

  • Craft and hone your elevator pitch early. Before the product is set in stone, you can test your message and continue to refine it until it connects well with investors, as well as customers. Later you may have the problem of being told by public relations firms to stay on message, even after you suspect it is not working.

  • Visibly be a bit controversial to test the limits. This early in the game, any coverage and peer review is better than just being another unknown entrepreneur. It’s human nature that challenging the status quo gets more attention than quiet concurrence. People tend to forgive controversial views if you aren’t perceived as pushing a product.

  • Proactively seek out thought leaders and journalists. Entrepreneurs who wait to be found are destined to spend a lot of time alone. Social media sites today, including Facebook, LinkedIn, and Twitter, provide ideal forums for presenting your cause and your concept. Start actively blogging on your own site, as well as on industry forums.

  • Make your business cards stand out in the crowd. Everyone exchanges business cards, and most are forgotten immediately or never really seen. These days, images are especially important, as well as a tag line, and your social media links. Unique and professional business cards are still well worth the investment.

  • Follow up personally on every new connection. Key introductions in a networking meeting will be quickly lost, unless you take the next step of calling or emailing later to request a personal meeting. Use these meetings to build the relationship, more by asking questions than by pitching your concept. Requests for investment come later.

Every entrepreneur has a story, perhaps the inspiration for your idea, or the path taken to get to this point, or a key lesson learned from past mistakes. Stories are the grist reporters look for, and they make you unique and memorable. Find your personal hook – it can be more key to your entrepreneurial success than any given product or service that you are about to offer.

If you are a social entrepreneur, a natural hook is the environmental or humanity cause that you espouse. Perhaps you can amplify your position by sponsoring an event, travelling to a visible location, or donating your time and other resources.

These days, winning in the crowded startup world is all about marketing. The sooner and more effectively you utilize all the available marketing channels, the more visibility and impact you will have later when your product or service arrives. As an entrepreneur, you are the most important part of your brand, not the other way around. Capitalize on yourself early.

Marty Zwilling


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Friday, August 8, 2014

Are You Properly Managing Your Core Competency?

large-call-centerIf you have a software development background like mine, I’m sure you often get questions about when to outsource, versus building the solution in-house. The same applies to manufacturing and almost any process these days. Outsourcing is defined as contracting the work to another company, usually located in a developing country, like India, China, or Eastern Europe.

This alternative has been around for several decades, with the generally accepted advantage of reducing costs. Recently, I’ve seen a lot of discussion about bringing the work back home, since costs have gone up in less-developed countries, there are issues with intellectual property, and time zone and language differences make management difficult.

In reality, the considerations haven’t changed all that much over the years, and are worth repeating for those of you who haven’t previously faced this decision. So before you decide to move your manufacturing, software development, or call center out of town, make sure you understand the following considerations:

  1. Don’t give someone else control of your competitive advantage. If your software or your manufacturing process is your “secret sauce,” you need to keep the work in-house. Saving cost won’t help you if you can’t make the daily innovations required to stay competitive. Let someone else do the ancillary processes where you have no economies of scale, like accounting and support.

  2. Keep intellectual property keys in-house. Despite some recent advances, there are still some cultures which have less regard for patents and other intellectual property. For example, it is no secret that software pirating is still very common in China, Vietnam, and other cultures. Don’t count on contracts and non-disclosure agreements to save you.

  3. Don’t let leading edge become bleeding edge. Leading edge technology software and manufacturing require constant course corrections and iterative restarts. These can’t happen with outsourcing, without long time delays and excessive rework. Results on commodities, including mature software maintenance, adapt well to low-cost contracting.

  4. Factor in all the cost elements. It’s easy to find companies in certain countries that will quote cost reductions up to 75 percent. Your challenge is to factor in the right additional costs for these deals including contract negotiation, increased project management, and extensive travel. Apparent cost reductions can quickly evaporate into increased costs.

  5. Look at internal services versus external services. Customer-facing services, like call centers, should rarely be outsourced. You can’t isolate your customers from language idiosyncrasies and empowerment issues, per reduced customer satisfaction highlighted a while back by the Wall Street Journal. Internal services, like marketing and accounting, are more manageable and have less customer visibility.

  6. Focus on operational processes, rather than innovative new ones. It’s hard to write a detailed specification on an evolving new service, process, or product that embodies your core competency. Don’t expect a contract company, either offshore, onshore, or near-shore, to implement a vision that is still in your head. You need to capture the learning in your own team from the evolution.

In any case, before you select a specific outsourcing or contract alternative, there is no substitute for doing good due diligence. Visit the contract location, investigate their skill level, training, and quality of their facilities. Spend time building relationships, ask for referrals, and follow up. Make sure the chemistry, values, and culture of the owners is compatible with yours.

After the contract is signed, make sure that both you and they have strong project management skills in place to prevent scope creep, incomplete specifications, and lack of acceptance criteria. If you are a typical startup operation, consisting of an unpaid founder and co-founder, both working part-time, outsourcing is not likely the solution to your resource constraints.

Overall, I believe the utility for outsourcing is going up, rather than going away. The world is becoming a smaller place, and more homogeneous. Startups are often distributed entities, so adding and managing freelancers, contractors, and outsourcing firms is not a big step. But customers are not looking for yet another homogeneous product or service, so be careful.

Marty Zwilling


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Monday, August 4, 2014

How Much Founder Stock Should You Offer Co-Founders?

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

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

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

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

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

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

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

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

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

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

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

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

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

But don’t get greedy. It’s the power of the whole team that makes the business.

Martin Zwilling

*** First published on Entrepreneur.com on 7/28/2014 ***


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