Monday, June 29, 2015

7 Ways To Turn Team Conflict Into Positive Results

business-team-friction The best startup teams don’t shy away from some healthy friction and heated debates between team members or founders. That’s the way smart people with innovative insights make real change happen. Yet we all know that there is a fine line here, beyond which heated debates generate so much emotion and drama that the entire team becomes dysfunctional.

The obvious challenge is to channel these interactions in a way that maximizes their value to the startup as positive results, without letting them slip into a non-productive or even toxic mode. An equally important challenge is to maintain a culture that rewards engagement, since many people are uncomfortable challenging the views of others.

For feedback of any type to be effective, there can be no quick judgment of right or wrong. Yet it certainly is possible for team members to not deliver feedback well, or for the receiver to accept it poorly or even ignore it. Either of these problems turns conflict into unhealthy friction, which can be avoided with the following initiatives:

  1. Be the one to ask the right questions. By asking open-ended and relevant questions, you allow team members to feel that you respect them and are debating their ideas rather than judging them because of their views. By default, this role falls on the entrepreneur or a senior team member to establish a culture of openness to innovation and change.

  2. Make team debates a managed rather than ad hoc process. Pick an appropriate forum for questions and debates, such as weekly quality-review meetings, rather than water-cooler gatherings. Make sure the discussions are facilitated and limited in scope and time, to prevent wandering off subject and redundant discussions.

  3. Don’t allow titles and roles to limit the communication. A large perceived power difference will change the dynamics of any feedback discussion or debate. Less experienced team members will only really communicate with peers, and maybe their direct manager, while executives may interact more with mentors and outside experts.

  4. Constrain debates to neutral and non-confrontational language. Make all feedback constructive and non-emotional, and avoid personal judgments and labels, such as lazy or inept. People tend to listen and accept feedback more readily if it is couched around recent relevant activities and clarifications.

  5. All members must provide a balance of positives and negatives. Always include positive recommendations when pointing out problems. Team members who consistently provide only negative arguments will be discounted and will poison the problem-resolution process. Everyone must be perceived as participating for maximum impact.

  6. Eliminate indirect and second-hand feedback and arguments. Team members who highlight comments from people who are not present create unhealthy friction. Always stick to the facts that you know, your own observations and available published sources, rather than quoting anonymous industry experts. People are wary of second-hand data.

  7. Keep the discussion focused on business rather than personal. Disparagement of a team member’s character is always inappropriate and toxic. Don’t mix observations about work issues with revelations about private relationships, or activities outside the work environment.

By definition, startups are dealing with uncharted territory and change. As an investor, when I meet a team that exhibits no conflict, I conclude that either the founder is a tyrant, or the team is weak. Neither of these alternatives bodes well for long-term success. On the other hand, excessive and unmanaged conflict is debilitating and unproductive.

As an entrepreneur, you can’t survive alone, and you can’t make every decision alone. The best entrepreneurs surround themselves with people smarter than themselves, ask the right questions, coalesce and learn from the input, and motivate the team forward to success.

Have you worked lately on your ability to rise above the conflict?

Marty Zwilling

*** First published on Entrepreneur.com on 6/19/2015 ***

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Sunday, June 28, 2015

4 Entrepreneur Types That Survive Best In The Hunt

Diorama_cavemen Most entrepreneurs believe they are “different,” but they can’t quite understand how. They usually explain it by insisting that they are driven to follow their passion, need to be their own boss, want to get rich quick, or want to change the world. I now believe that the roots of the difference may go back more than 10,000 years, when hunting and farming became two different lifestyles.

The classic book, “Hunting in a Farmer's World: Celebrating the Mind of an Entrepreneur,” by serial entrepreneur and business coach John F. Dini, tied together several threads I have often seen in my own experience of mentoring and helping aspiring entrepreneurs. Dini makes the case that entrepreneurs are hunters, while the rest of us (large majority) are farmers.

This is not a statement of good or bad, right or wrong, but just an explanation of why some people see and do things one way, and others do it another way. In business, entrepreneurs hunt for new innovative solutions to problems, new ways of beating competitors, new markets, and new customers. Farmers are the management that comes after the hunt, to build repeatable processes, do seasonal planning, and make sure all employees are well-fed and trained.

All this made more sense to me as Dini defined the types of entrepreneurs into four categories. Within each of these types, I can easily highlight strengths and weaknesses that we both see every day in startups:

  1. Technicians. The good news is that technicians are entrepreneurs who have previously learned a skill or job so well that they can do it without a manager. The bad news is they may not be good at managing people, or even managing basic business. Technicians can become true hunters when they learn to provide for both employees and family.

  2. Inheritors. These are former employees who find themselves thrust into owning a business, due to family ties or evolution. Unfortunately, most inheritors have been farmers for too long, or never had hunting instincts. The best ones learn to be hunters, or revert to that mode, allowing their business to grow and change with the requirements.

  3. Acquirers. Entrepreneurs who are willing to acquire an existing business, and believe they can make it a better business than previous owners, are clearly hunters. Farmer acquirers, who want to manage a proven opportunity, with no change, buy a franchise. Hunter franchisees move on quickly, or end up owning the entire franchise system.

  4. Creators. These are the ultimate hunters. They build businesses as their lifestyle, not as a job. They love the continuous hunt, for investment capital, resources, talent, and new markets. Only a few of these slide into farming, as the company grows in employees and products. The remainder usually exit within five years, to start the process over again.

In addition to the right type, there are clearly traits that every aspiring entrepreneur should recognize as critical for business success and happiness:

  • Creativity. Hunters thrive on the challenge of the unknown. They look at every situation as a puzzle that has an answer. Success at any level always brings a new set of problems. Hunters live for solutions and change. Farmers live for repeatable processes, minimal risk, and predictable results to feed the family.
  • Tenacity. Hunters never quit. There are no defeats, only setbacks. Success is always just a little further down the road. “Never” is not an option. If a solution doesn’t work, there is always another, then another, and another. Farmers are easily frustrated by setbacks, and count on “leadership from the top” to give them new fields for growth.
  • Business sense. Hunters need “street smarts.” If you are looking to create a business, you better have a strong “gut feeling” or “third eye” for business that goes beyond the usual five senses. Farmers have a narrower view of what is required, to optimize quality production, customer satisfaction, or close a sale.

There once was a time in mankind’s history when almost everyone was a hunter, for survival. Our civilization has evolved now almost to the other extreme, where the vast majority of the people in business are farmers (managers and employees). For those of you who have the hunter gene, or the yearning to learn, the time has never been riper to be an entrepreneur. How long has it been since you have taken a hard look in the mirror?

Marty Zwilling

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Saturday, June 27, 2015

8 Ways Entrepreneurs Can Lead With New Work Models


remote-work-telepresence The new era of highly connected and interactive technology is changing not only how business employees interact with customers, but also how they interact with each other, and with their company. I am happy to see reports that young companies are in the forefront of these trends, on both the customer trends and the employee trends. Both are required to stay competitive.

Much has been written about the trends on the customer side, but I find less specific guidance on the changes which are impacting the way we interact with peers at work. An exception is a recent book by Alison Maitland and Peter Thomson, “Future Work: Changing Organizational Culture for the New World of Work,” which offers some real insight on this subject.

They point to several key trends in organizational cultures and working practices that can boost output, cut costs, and give employees more freedom. I have added my own insights, based on my experience advising and working with entrepreneurs and startups:
  1. Pay for results, rather than pay for work. Measuring results in itself is not new. What is new is the trend and mentality to just look for results and ignore other traditional management constraints, like the amount of time spent. When and where you do the work does not matter; producing the outcomes to the right quality on time does.

  2. Reward shorter hours of high productivity. People who get paid by results have every incentive to think up smarter ways of getting work done. Their reward is more free time for leisure, or more time for bonus objectives and stock options. It does not mean the culture is soft or lacks discipline. Peer pressure keeps productivity standards high.

  3. Encourage people to work where and when they are most productive. People concentrate better if they can work at least some of the time in a quieter location, or escape the stress of a long commute. Trusted to get on with the job, people tend to be more motivated to do so, especially if they gain more rewards as a result.

  4. Bring your own device to work (BYOD). An increasing number of startups are adopting a BYOD policy, realizing that individuals have their own preferences in the way they access data, collect emails or ‘chat’ to colleagues. Computers are no longer stand-alone dedicated devices, but are built into personal devices, like phones and tablets.

  5. Use of collaborative and other social media platforms. In startups, and even corporate environments, I see the spread of collaborative social platforms such as Slack and Yammer. Customers and clients are already on LinkedIn and Facebook, so it makes sense to go where they are, rather than limit your team at work to internal systems.

  6. Explore benefits of employing “mature” workers. New research and case studies show that the more mature workers are just as productive as their younger counterparts, are just as successful in training, take less short-term time off, and offer better judgment based on years of experience. They are now actively recruited for many roles.

  7. Mobility and connecting to work via the ‘cloud.’ Virtually every collaboration platform and mainline business process today has a cloud-based deployment option. This follows the ‘work from anywhere with any device’ trend, gives everyone the freedom to work more productively, and not be forced into an outdated standardized solution.

  8. Trend to a ‘contingent’ workforce. Work is becoming more of a tradable commodity, rather than a job, with freelancers and independent contractors, according to recent data. In the US, nearly 18 million workers identified themselves as independent in 2013, up 10% from 2011. Another study predicts this number could grow to 24 million by 2018.
Certainly, there is still much work to be done in finding the balance between physical gatherings of team members in the same place at the same time, versus remote working and remote collaboration. The announcement by Yahoo a while back, pulling home workers back into the office, triggered a debate on whether some new companies have gone too far.

Overall, as an entrepreneur, you just need to be aware that the notions of work are changing just as fast as the technology for products. It’s an opportunity for innovation that cannot be ignored as a success and competitor differentiator. When was the last time you applied real innovation to the work model in your business?

Marty Zwilling

Hindi translation provided by MHA Degree USA.
Latvian translation provided by Simona Auglis
Indonesian translation provided by ChameleonJohn.com
Portuguese translation provided by Travel-Ticker.com

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Friday, June 26, 2015

7 Keys To A Compelling Investor Executive Summary

business-plan-executive-summary Few investors these days have the time or patience to read a full business plan, so a better way to catch their eye is with a tightly written and well formatted two-page executive summary. As a model, think high-quality marketing collateral, with text and graphics in columns and sidebars, but focused on the value of your business, rather than selling your product.

Once you have their attention, content is key. I see too many executive summaries that are simply heavy-duty customer pitches, or lightweight visions of the future. As an angel investor, what I’m looking for is key data from your business plan, including financial projections, how much money you are looking for and a quantification of my potential return.

Skip the fuzzy marketing terms, such as "easier to use," "lower cost" and "disruptive technology." Investors want to buy into an entrepreneur with a startup that can provide evidence of an ability to double customer productivity, at half the cost, with patented technology. The summary must cover all the key topics in a full business plan, including the following, in this order:

  1. Lead with a painful customer problem and how you solve it. This is your elevator pitch and customer value proposition, and is your key to getting an investor to read even the remainder of the summary. Skip any history lesson and your vision to change the world. Nice-to-have solutions and customers with no money are not compelling.

  2. Show you have a large and growing market opportunity. Investors expect to see credible third-party evidence that you are targeting a billion-dollar opportunity, with double-digit growth. Your passion is necessary but not sufficient to prove a market. Focus on a specific market segment to match your solution.

  3. Include your sustainable competitive advantage. Patents or other intellectual property are a real competitive advantage for a startup, but first to market and working harder are not sustainable. Don’t kill your credibility by asserting that you have no direct competition, since to investors that means you have not looked or there is no market.

  4. Clearly define your business model. If you sell for half the price of a competitor, but you lose money on each item, it’s hard to make it up in volume. Remember you are talking to investors, so they don’t associate free with providing any financial returns. Quantify all the key elements of the equation, including price, margin and volume.

  5. Highlight why your team is the best for this challenge. Make sure you name your key players and advisors, and include any prior startup experience and prior experience in the relevant business domain. Current and past titles don’t convey this information. Professional investors look for the right people more than the right product.

  6. Project revenues, costs and investment expectations. If you are not willing to set targets for yourself, don’t expect investors to commit their funds. Major milestones along the way should also be outlined. When sizing your funding request, be aware of the value of your startup today, since most investors expect an equity share for their contributions.

  7. Outline the potential investor return, and payback process. The best way to do this is to highlight a recent similar company payback to investors, via going public or acquisition exit. Angel investors look for high-growth potential companies who can double revenues yearly, and sell for a high multiplier, providing a 10-time return.

You may think it’s impossible to get all this information into two pages and still have room for graphics, but the best entrepreneurs do it every day, and they get the funding that more wordy marketing pitches don’t win. This outline is not a magic formula, but when key points are skipped, investors see these as red flags, which can push your request to the bottom of the pile.

Most important of all, don’t forget to ask for the order or ask for an opportunity to meet and review your investor presentation and answer questions. Attracting an investor requires building a relationship, not a one-night stand. A great executive summary shows the true depth of your character and your plan.

Marty Zwilling

*** First published on Entrepreneur.com on 6/17/2015 ***

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Monday, June 22, 2015

The Peter Principle Can Paralyze Your Startup Team

businessmen-shaking-hands The good news is that recent big company financial woes and layoffs have generated a flood of candidates with real experience seeking positions at startups. The bad news is that many of these frustrated employees may have already reached their level of incompetence (The Peter Principle). They are not the ones you need in the few key team positions to drive your startup.

Back in 1968, Dr. Laurence J. Peter first published evidence that most organizational promotion strategies are based on current task fit, and result over time in every role being occupied by an employee who is in over his head. Thus all innovative critical work is accomplished by team members who have not yet reached their level of incompetence.

Too many entrepreneurs naively believe that candidates with lofty titles from a larger company can easily do the same job for their startups. Nothing could be further from the truth. Titles don’t reflect competence, even in a big company, and the unstructured domain of a new startup is a whole new creative and innovative challenge.

Starting from the top, it’s a broadly accepted axiom that big company CEOs are rarely good candidates for a startup CEO position. The worlds are simply too different. In the same fashion, we all know excellent technologists are not usually good business people. The challenge of bringing in strong team members, rather than helpers, is job one in every startup.

My recommendation is to fill every team position based only on demonstrated fit, motivation, commitment and results, not based on any past title or their ability to convince you that they can do the job. Here are some key things an entrepreneur must do in selecting team members to minimize exposure to the devastating effects of the Peter Principle:

  1. Select people who can both communicate and perform well. Startups can’t afford two or more people for every task -- one to do work, and others to communicate results to all constituents. As the founder, you won’t have a finance chief, a marketing staff or a requirements manager. Everyone must know how to listen, talk and write.

  2. Look for existing skills and a demonstrated ability to learn. People who haven’t changed in a while find it harder and harder to do so. If you don’t hear an enthusiasm for new challenges, you won’t find the flexibility you need to anticipate and create the pivots required for success. People trapped by the Peter Principle won’t be happy fixing chaos.

  3. Keep the focus on results. Don’t hire or reward for effort. A common refrain I hear from team members in over their heads is how many hours they work and how busy they are. If you hear that in the interview process, change the subject to results, and then move on quickly to the next candidate. Set your own metrics and rewards to map to results.

  4. Practice an “up or out” growth policy to prevent role stagnation. Look for team members that see every job as a step to a new opportunity as the company grows. Make it clear through your words and actions that you expect upward growth, and no growth is a failure for both of you. The alternative is to lose your best people to new startups.

  5. Look for ability to manage a task, as well as do the task. Some people are workers, and others just want to be managers. The best have done both, and approach every task from both perspectives. Most big company executives have forgotten how to do the work -- they make decisions and expect staff members to implement them. This doesn’t work in a startup.

  6. Provide mentoring and self-learning opportunities. Most startups don’t have the time or resources to send team members to formal training classes, either in-house or off-site. Yet every new team member can be assigned an in-house mentor, provided with online seminar opportunities and given special assignments to facilitate new learning.

The hard part for most entrepreneurs is being able to deal immediately with the Peter Principle in team members, once they see it or recognize that they made a hiring mistake. It’s as hard as every other pivot you will have to make as a startup, with the same penalty that the longer you wait, the higher the cost of recovery.

If you as the leader don’t deal quickly with incompetent people in key team positions, they will paralyze your startup. The best people will drift away, and only the ineffective ones will remain. That makes you the final proof of the Peter Principle.

Marty Zwilling

*** First published on Entrepreneur.com on 6/12/2015 ***

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Sunday, June 21, 2015

5 Principles That Lead To More CleanTech Startups

Klassieren The cost of entry for an aspiring entrepreneur has never been lower, and the total wealth of opportunities has never been larger. You can start a new web site business on the Internet for as little as $100, with cheap smart phone apps, new technology innovations, or tapping the multitude of opportunities brought by capitalizing on our concern for dwindling natural resources.

Last month, I focused on the new sharing economy, so this time I wanted to highlight how a shortage of something, like natural resources, should be seen by an aspiring entrepreneur as a wealth of new startup ideas. I was inspired by a recent book, “Resource Revolution: How to Capture the Biggest Business Opportunity in a Century,” by Stephan Heck and Matt Rogers.

Based on their work in CleanTech and sustainability, Heck and Rogers outline five principles for existing companies to apply to current practices and processes for dramatic efficiency improvements in the use or production of resources. I have recast these principles here for new entrepreneurs and startups, who thrive on change, to show the wealth of opportunities for them:

  1. Substitute new materials for scarce natural resources. Entrepreneurs have huge opportunities to deliver higher-performance materials at lower cost, like carbon fiber for steel. These will not only save some weight, but build better vehicles, and improve the environment. Consider the startup MarkForged, which takes carbon-fiber to a 3D printer.

  2. Eliminate waste throughout existing processes. Mature companies often lose sight of scrap and changeover time in existing systems. Entrepreneurial minds can more easily see energy, water losses, and inefficient material usage. For example, a startup named Dirtt has been able to take reusable building components to a whole new level.

  3. Upgrade, reuse, or recycle every product. Make every product a natural loop, from creation to use to recycle to reuse. The tighter the loop, the greater the value captured and the stronger the competitive differentiation. Reusing a phone, like the ecoATM story, is more valuable than reusing a chip, or just extracting the gold and silver.

  4. Optimize existing product efficiency, safety, and reliability. Sadly, cars are parked 96% of the time, and shipping containers takes lots of space while empty. You don’t have to be an aspiring entrepreneur to see opportunities for improvement. Startups like Uber for cars, and Staxxon for containers are already there, but these are only the beginning.

  5. Move physical products and services into the digital realm. Steve Jobs has led the way here, by turning music, movies, cameras, and flashlights into apps. The opportunity is to reinvent whole products and whole industries, making things ten times better in the process. This not only saves scarce natural resources, but adds value to the economy.

Relative to all these principles, the “big three” of scarce natural resources consist of land (food), water, and energy. The stark reality is that the people and businesses of the world need to produce more with less in all these areas, while eliminating wasteful practices and policies. The effort has started, but there is still a huge need in all areas.

A key fact for both startups and existing businesses is that we have more than 2.5 billion people in developing countries to support who need to be moving out of poverty and into industrial and service occupations by 2030. This number almost doubles the number who have already moved into the middle class and urbanized. These will be your customers, and your competitors.

Overall, with all these opportunities, entrepreneurship is perhaps the most scarce and valuable natural resource in today’s society, for driving economic growth and social development. So now is the time to invest in all natural resources, by supporting aspiring entrepreneurs, in support of the opportunities they are mining. It’s a higher calling than one more social media platform.

Marty Zwilling

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Saturday, June 20, 2015

10 Recommendations For Entrepreneurs Who Hate Norms

Trey_Parker_Matt_Stone Every culture and community puts pressure on its members to follow the norms. Even young people who start out wanting to be different are called “freaks,” and most are slowly bent back into the norm by the time they “grow up.” Maybe that’s why so many entrepreneurs struggle with building a disruptive new business, where breaks from the norm are the key to success.

I suspect that there are really a lot of “grown-up closet freaks” out there who could be great entrepreneurs. We should really be enticing them to overcome their fears of thinking differently. Chris Brogan, in his recent book, “The Freaks Shall Inherit the Earth,” offers some great steps of encouragement for them on how come out of the closet, some of which I will paraphrase here:

  1. Declare your freakiness (even if only to yourself). Get comfortable with your difference in thinking, and commit to run your business your way. You will be the best entrepreneur when you make your new startup personal, and keep your heart in mind along the way.

  2. Define the parameters of your own success. Whatever will make your success yours, list it out on paper on in your favorite note-taking software. Try to list a success criteria for each role that’s important in your life and for your success. Know your strengths, and learn some new skills. Start working on your weaknesses.

  3. Establish a daily framework for action. You will build discipline and get much more accomplished if you build a self-imposed schedule, and commit yourself to following that framework. This will lead to you defining your path, knowing what matters most to where you are at this moment, and facilitate planning where you are going next.

  4. Get comfortable with not knowing. Learn to be okay with the unknown, and learn how to really appreciate what comes next in the universe. Don’t be afraid of being dumb; always be willing to ask questions. You should be afraid of being stupid; being stupid means that you think you know everything and don’t ever ask questions.

  5. Appreciate obstacles and challenges. One way to overcome obstacles is to set a new challenge for yourself every day. The more challenges you face daily, the stronger you will feel about doing more with your business and your life. Obstacles and challenges help you to grow your intestinal fortitude and your skill sets.

  6. Create work processes that get things done. Similar to the framework step, you have to build systems that get the right work done. For example, you might block your working day into half-hour segments, and never allow any activity or meeting to take too much of your time. Reserve time for tasks important to you, rather than just urgent to someone.

  7. Expand your communication media world. Start wherever you can to grow beyond the phone, texts, and email, to a blog, photos on Instagram /Pinterest, or YouTube. Build your world up a little at a time. This is a big benefit others won’t likely copy and it’s where you can get ahead.

  8. Connect with all the freaks like you. The more you communicate to find the people you seek to serve, the better your opportunities. Also connect with people you can help. Connect two people who might benefit from knowing each other. Do everything you can to extend your network, and keep it alive and well.

  9. Expect to encounter some bad times. Remember that you can hit bumps in the road at any time. Be ready. Know how and when to apologize. Be ready to assess what needs to get done when there are issues. Know whether or not you have to pull the plug. Keep your mind open to how your ideas might have to shift.

  10. Take action, any action. The biggest difference between you and other closet freaks, who will just accept what life and work brings them, is that you’ve chosen to take action. The big opportunity for you is to do something based on ideas you have had lingering in your mind for a long time. Where do you start? Anywhere.

My conclusion is that you don’t have to be a freak to be a good entrepreneur, but you do have to be willing to think differently, to get beyond the norms of business today, define a platform for real change, and make it happen. If you are a freak in your own mind, relish that thought, and take action to turn your passion into a successful new business. We need more of you!

Marty Zwilling

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Friday, June 19, 2015

Check Your Entrepreneurial DNA Before You Start Up

entrepreneur-DNA As an angel investor, I get requests almost every day to review a new product or website, and provide feedback on its potential success. Yet I can’t remember the last time any entrepreneur asked me to assess personal potential, despite the fact that most investors will admit they invest in the person more than the product. It is people who drive successful businesses.

So it behooves every aspiring entrepreneur to understand their own DNA before picking a project to bet their life on, and to facilitate effective communication with all constituents, including partners, investors, team members and customers. We all have strengths and special interests, and it always pays to capitalize on these, rather than assume all opportunities are the same.

To confirm the value of checking yourself, I find more and more investment organizations and startup incubators, including StartupAmerica and CoFoundersLab, already use a formal process, such as StrengthsFinder, as part of their screening process. If they find your strengths are not consistent with the project you are bringing forward, their interest may come to an abrupt end.

A newer methodology that seems to be gaining traction measures an entrepreneur’s fit or DNA in each of four quadrants: Builder, Opportunist, Specialist and Innovator (BOSI). It was developed by Joe Abraham, who manages a portfolio of successful high-growth international companies. You can even check your own DNA with his self-assessment against the four key types:

  1. Builder. The Builder excels at constructing a business from the ground up. These people are the ultimate chess players in the game of startups, always looking to be two or three moves ahead of the competition. They are usually described as driven, focused, cold, ruthless and calculating. Many might say Donald Trump epitomizes this category. They usually win, but don’t often get the appreciation and happiness they crave.

  2. Opportunist. The Opportunist is the dreamer in all of us. It’s that part of us that maneuvers to be in the right place at the right time to make big money. If you ever felt enticed to jump into a quick money pitch on the Internet, that was your Opportunist side showing. These entrepreneurs dream big, go big and too often crash big.

  3. Specialist. The Specialist entrepreneur will enter one industry and stick with it for a lifetime. They build strong expertise, but often struggle to stand out in a crowded marketplace of competitors. Picture the graphic designer, the IT expert or the independent accountant or attorney. These types of people start good family businesses, but can’t scale.

  4. Innovator. You will usually find the Innovator entrepreneur in the lab working on their invention, recipe, concept, system or product that can be built into one or many businesses. The challenge with an Innovator is to focus as hard on the business realities as the product possibilities. If one of these entrepreneurs teams with a Builder, the sky is the limit, and every investor wants to get a piece of the action.

Of course, understanding your type and tailoring your plan is still no guarantee of success. The second principle that all investors live by is that successful businesses are also about execution, rather than the idea. That’s why I also put major emphasis on startup traction, milestones achieved and metrics rather than listening again to how great it’s going to be.

Nevertheless, I see tremendous value in understanding your entrepreneurial DNA, as part of your personal preparation, or in conjunction with incubators, accelerators or advisory boards. I am not convinced that any organization has the ultimate system to map your DNA to business success, with all the unknowns of a new business and personal idiosyncrasies, but it’s a good start.

There is still no substitute for personal relationships and effective teams. That’s why most angel investors only invest locally, where they can do that assessment of the founder and his team personally over time. Venture capital investors have the resources to travel to entrepreneurs with high potential.

So before you initiate your next startup, I recommend that you spend some time looking inward, or working with a mentor who will tell you where your strengths lie. At the very least, you can then find a co-founder who has complementary strengths, and prove the theory that one plus one equals three. All too often the alternative is that one plus zero ends up as zero.

Marty Zwilling

*** First published on Entrepreneur.com on 6/10/2015 ***

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Monday, June 15, 2015

6 Challenges In Going Public Through The Backdoor

With the uptick in the economy, as an active startup mentor, I’m seeing a new surge of entrepreneurs and startups, with the commensurate scramble for funding. There just aren’t enough Angel investors and VCs to go around. Thus I’m getting more questions on new mechanisms, like crowd funding, or going public through the backdoor as a reverse merger.

A reverse merger is the acquisition of an already public company (usually a dormant shell) to avoid the Initial Public Offering (IPO) process and cost, to quickly get your startup on a public exchange for fund raising through visibility and selling stock. It sounds like a great way to raise money, but here are some of the challenges you need to consider before trying it:

  1. Make sure the shell you choose is squeaky clean. The image of shell companies has long been tarnished by true stories of shareholder lawsuits and “pump and dump” schemes. I recommend you work only with financial and broker organizations who have done the due diligence required, and who have a track record of success.

  2. It takes real money to get into the game. The cost of the shell, plus the cost of navigating the process, can now easily exceed a half-million dollars, depending on the shell company, according to The Labrecht Group, a law firm based in Irvine, California and Salt Lake City. This approach is not for entrepreneurs already out of money.

  3. Being a public company isn’t cheap or easy. Is your startup really ready to play in the corporate world? It better be an established company, with millions of dollars in annual revenue and profits, following generally accepted accounting, reporting, and audit procedures. Experts estimate the burden of public companies at up to $1M a year.

  4. Increased jeopardy and less fun for the entrepreneur. The increased exposure and opportunity of a public company comes with a higher risk to you and your Board of severe civil and criminal penalties for regulatory mistakes and non-compliance. These looming constraints can turn your startup dream into a nightmare, all to increase funding.

  5. Reverse mergers may not get your startup on the Nasdaq. Most public shells ready for sale are not listed on a national securities exchange, but are instead traded in a less glamorous setting, such as the OTC Bulletin Board. Of course, they can be renamed and moved, but that may negate the cost and time advantages originally sought.

  6. Make sure that your team can motivate shareholders. The reverse merger process itself doesn’t raise any capital. That still requires a business team and story that continually motivates stock brokers and public stockholders. You may no longer have the option of investing all earnings into growth, or servicing your special corporate cause.

Yet reverse mergers are not all bad. Even the New York Stock Exchange did one with the acquisition of Archipelago Holdings via a "double dummy" merger in 2006 in a $10 billion deal to create the NYSE Group. Some people believe that reverse shell mergers may soon become the preferred IPO approach for emerging high-growth companies.

In fact, the quality of companies taking the back door into a public exchange seems to be getting stronger, and has become the avenue of choice for Asian companies seeking to go public in the American market. Being public makes the company more visible to shareholders and potential acquirers, and provides a presumption of future liquidity.

Other than raising money, the reverse merger may be the quickest way to get you to other benefits of a public company. These include the ability to offer meaningful stock options to employees, the use of liquid shares to purchase other companies, and the credibility and public access to information you need to attract key customers and suppliers.

In summary, a reverse merger, or going public through the “normal” IPO process should never be seen as just a way to fund your startup. It is a strategic decision that may indeed attract more funding, but also will likely change the culture and focus of your company, and your role from an entrepreneur to a corporate executive. What price are you willing and ready to pay for funding?

Marty Zwilling

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Sunday, June 14, 2015

7 Ways To Illuminate Your Business Leader Blind Side

blind-spot Every business leader has blind spots which limit their effectiveness and success, but due to ego, over-confidence, or deferential subordinates, many live totally in the dark. Some are smart and humble enough to assume that they don’t know what they don’t know, but lack an effective process for shining a light on their blind spots. Both are equally surprised by their every setback.

I recently found some real insight on this subject in a recent book by Robert Bruce Shaw, aptly named “Leadership Blindspots.” Shaw specializes in organizational performance and has helped a wealth of business leaders identify and overcome their weaknesses. He provides a detailed analysis of the blind spots of many well-known business powerhouses, including Steve Jobs of Apple, Ron Johnson at JCPenney, and Jamie Dimon at JPMorgan Chase.

Shaw argues that every successful leader balances two conflicting needs. The first is to act with a confidence in their abilities and faith in their vision for their organization: The second is to be aware of their own limitations and avoid the hazards that come with overconfidence and excessive optimism. That means that they have to see themselves and situations accurately.

I agree with him that the best way to do this is to continually ask the right questions, in the right way, to identify blind spots. Here are some key guidelines that he offers to drive this process:

  1. Avoid yes-or-no questions. Closed-end questions (yes-no) are efficient, but don’t surface data that may be critical to a leader’s understanding. Questions are called open-ended when they allow for a variety of responses and provoke a richer discussion. These allow a leader to know what he doesn’t know, and ultimately make a better decision.

  2. Don’t lead the witness. Hard-charging leaders often push to confirm their own assumptions about what is occurring in a given situation and what is needed moving forward. This can result in questions that are really disguised statements, like “doesn’t this mean that we really don’t have a quality problem?” These usually prevent contrary points of view and further data from surfacing.

  3. Beware of evasive answers. All too often, people will avoid giving direct answers to direct questions. They may not know the answers or not want to provide the answers, to appear smart, or not want to offer incriminating data. Leaders need to keep coming back with directed questions until they get a straightforward answer or “We don’t know.”

  4. Ask for supporting data or examples. Leaders need to ask questions that surface points of view and, at the appropriate time, also clarify which answers are based on fact and which are based on speculation. They should encourage people to say what they know from data and what they think they know, and make sure they clarify the difference.

  5. Paraphrase to surface next-level details. One technique to push people to provide more information is to paraphrase what you are hearing. While this may result in a yes or no response, proceeding to next-level questions opens up the dialogue. Smart leaders sometimes mis-paraphrase what they are hearing in order to provoke a richer dialogue.

  6. Ask for alternatives. Another approach to surfacing non-confirming data is to overtly ask for an opposing point of view. A related line of questioning is to ask the respondent to alter his or her fundamental position, like “You are asking for $10 million to grow this brand. What more could you do if we gave you $25 million?”

  7. Give an opening for additional input. Leaders also need to provide an opportunity for others to offer additional input and, in particular, dissenting views. Often, the final moments of discussions are the richest, as people will wait until that time to surface what is really important to them. Ask if there is anything left unsaid that should be heard.

In today’s global business world, you should assume that all your peers are smart and experienced, but have blind spots just like you. These are automatic behaviors that are not flaws, but they do need to be identified and mitigated by continually asking the right questions as outlined here. Otherwise they will undermine your organizational performance and may well destroy your legacy when you least expect it. Early learning is a lot easier than a later recovery.

Marty Zwilling

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Saturday, June 13, 2015

Social Media Marketing Should Not Be Used Alone Today

marketing-social-media-other Entrepreneurs and startups often ask if they should select only social media for marketing, or stick with digital media, or just count on traditional media. The answer is yes to all, and the challenge is how to choose how much of each, and how to integrate them for maximum impact and the least cost. None should be considered competitive mutually exclusive to any other.

Social media as a marketing tool is here to stay, and is now widely accepted. According to a recent article in Entrepreneur, 94% of small and medium businesses (SMBs) now use social media as a marketing tool, and 81% use it to drive growth. The challenge is now to effectively integrate social media with traditional media, and thus move your marketing ahead of the crowd.

This integration, or fusion with traditional marketing, is discussed in detail, with examples, in “The Fusion Marketing Bible,” by Lon Safko, author of bestseller “The Social Media Bible.” I like his outline of five steps to the proper utilization of integrated media as follows:
  1. Analyze your existing media. Every business should look at its cost of customer acquisition (COCA) and return on investment (ROI) twice a year and after each campaign. This is independent of whether your existing marketing media include traditional or social media, or both. The tools and measurements are the same for both.

  2. Focus first on the social media trinity. Don’t try to tackle all 20 major categories of digital social media at once. The big three, which have 90 percent of everything you need, include blogging (Wordpress or Blogger), microblogging (Twitter), and social networks (Facebook or LinkedIn). These give good customer connection and SEO.

  3. Integrate your social media content with some traditional media. Traditional marketing is sales-focused, one-way push. Social media is relationship-building, interactive, two-way pull. To get first-time buyers today, you need push for coupons and business cards, and you need relationship pull through social media for customer service.

  4. Assimilate available resources to determine the level of rollout. Available resources are a function of management buy-in, staff, and budget. Of course, more resources are “better” for marketing, but re-allocating existing resources can be equally effective. Pay attention to in-house skills, skilled contract workers, and even students for social media.

  5. Iteratively implement and measure value received. You can’t manage what you don’t measure. Digital and social media all go through a computer at one point or another, so it’s much easier to measure than billboard “impressions.”
The goal of these steps is to create a seamless interface between getting your message out there and heard, and listening and responding to customer feedback. This will insert your brand into the online and offline conversations, drive traffic, and drive sales, at the lowest possible marketing cost.

With integrated marketing campaigns, Lon asserts that companies like SAP and IBM are reporting that targeted prospects are responding at a 3 to 5 percent rate on the average, which is an increase of 73 percent compared to standard e-mail campaigns. Others, like TransUnion, learned long ago that they could get an improved ROI after integrating social media, with $2.5 million in savings in less than five months while spending about $50,000.

But don’t jump into social media or any marketing program without a plan. Lon references one Fortune 500 company he worked with which accumulated more than 19 million friends, all chatting about its products. But he could not find any evidence of monetization, or even a strategy. I talked to a company last year who identified 37 employees with social media in their title across the country. I wouldn’t want to do the ROI on that one.

The importance of effective marketing has never been higher, for every startup, in this age of information overload and customer relationships. How integrated is your marketing, and how carefully are you measuring your marketing investment? The success of your business depends on both.

Marty Zwilling

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Friday, June 12, 2015

Grants May Be Free, But They Do Come at a Price

government-grants Every investor in your startup, even friends and family, normally expects a share of your company (equity), which means your return for all your effort goes down quickly. Thus founders seeking funding for a good cause or a new technology often seize on grants from universities, government agencies and philanthropic organizations as free money to solve their problems.

In the U.S. they can visit the directory of government grant alternatives, which is searchable and features more than a thousand federal programs, or more locally the Small Business Innovation Research (SBIR), with opportunities for high technology startups. They can find additional grants from large philanthropic directories, and your favorite alma mater site.

Of course, nothing is really free in the business world. The indirect costs of time and effort to find the right grant, complete the application and manage the process, even if you win, can be substantial. Here is my summary of some major considerations that every entrepreneur needs to evaluate against the cost and effort to attract equity investors:

  1. Completing a grant application is real work. Every organization willing to give you money is looking for specifics on what you will do with it and how it will help the grantor and expects answers to every detailed bureaucratic question. This requires heavy research and lots of time. Your visionary one-page idea description won’t work here.

  2. Turnaround cycles are excruciatingly slow. After months of preparation, you should expect another six to nine months for reviews and funding cycles. This is at least double the time required for most equity investments, and may be a delay you can’t afford in keeping up with the market and your competitors.

  3. Experts are available but expensive. Just like you can hire investment brokers to find equity investors, you can hire grant writers and expeditors to help you through the process and improve your odds of success. These people will get you on the fast path and lobby your case to executives, but expect a chunk of your money up front.

  4. Grant spending and accounting rules may be painful. Grant providers may not require a seat on your board to help you make decisions, but your spending processes will be carefully monitored and audited. Venturing outside the limits will lead to legal consequences. Don’t assume you are free to be your own boss with grant money.

Here are some best practices that I recommend for inexperienced entrepreneurs to maximize their odds of survival and success in dealing with grants and making the tradeoffs:

  • Look for assistance, not experts. Don’t try the grant process alone the first time. If you still have any connections at the local university, look for some guidance from related subject-matter professors. Professors get grants for research, but they need you for the current focus on commercialization. Otherwise find an inexpensive class on grant writing.

  • Seek funding from multiple sources concurrently. Grants should never be seen as the only alternative to equity investors, or vice versa. Funding is a seemingly never-ending task for startups, so make sure all your research, business plan work and execution plans will work in either environment. Pursue at least two sources in parallel.

  • Search for special stimulus areas and tax breaks. Capitalize on current initiatives, such as the recent Obama Administration Green Energy Stimulus, which pumped more than $50 billion into startups. Every organization and agency has special focus areas and related tax incentives. Enhance your business plan and marketing with these in mind.

  • Highlight an element of social entrepreneurship in every plan. Every technology advance has the potential to help people in the medical, environmental or cultural sense. Think outside the technology for social applications and value and highlight these in your grant application, and in networking with authorities. Technology is not enough.

In all cases, grants should be seen as primarily an early-stage development assist, and not the last step to commercialization. Some entrepreneurs become stuck in development, fixated on winning just one more grant, rather than moving on to marketing and real customers.

The only real funding that counts in startup success comes from customers. They don’t ask for equity either.

Marty Zwilling

*** First published on Entrepreneur.com on 6/3/2015 ***

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Monday, June 8, 2015

7 Entrepreneur Mistakes To Avoid In Early Meetings

adult-first-impression Relationships are the key to survival and success for entrepreneurs, and first impressions usually turn into lasting impressions. As an advisor to many early-stage entrepreneurs, I caution them to always be prepared for that chance meeting with a famous investor, a potential partner or an industry guru. It’s not smart to believe that your passion and gift of gab will impress anyone.

Advance homework and preparation is key to every good first impression. With smart people, you can’t bluff your way past tough questions, and talking more and louder about your dreams won’t fill the gap of relevant content. Despite the fact that you can’t predict the circumstances of every first meeting, there are many faux pas that you can avoid, including the following:

  1. Failure to recognize an important person before introduction. Every entrepreneur should build a “cheat sheet” of 10 key individuals they hope to encounter at any given meeting or networking opportunity. The impact of responding first with facial recognition from LinkedIn or Facebook is huge compared to possible alternatives.

  2. Start talking immediately about your project and background. Asking questions and listening will leave a greater first impression more often than talking. Even more impressive are targeted questions that indicate you already have done your homework on their current role, expertise and company affiliations.

  3. Quick to name-drop common friends and business links. A mention or introduction from a shared friend will always give you an advantage. But be cautious about dropping names of people who may not really know you, or whose recollection of you may not be so positive. The investors I know are quick to do some real due diligence.

  4. Ask a thousand questions, with no apparent objective. To make a memorable first impression, you need to make your objective clear in simple and non-emotional terms, before the other party has to ask or guess. Think of it as not wasting the other person’s time, and always positioning the next step, like asking for a meeting or a partnership.

  5. Flaunt how much you know about every subject. It’s important to do your homework and appear knowledgeable on relevant subjects, but a good impression will turn bad if you interrupt every answer with a correction, or can’t stop talking about any given subject. Good initial conversations should never be turned into debates or political platforms.

  6. Easily distracted by a friend or someone more important. We all hate being dumped quickly in a business or personal situation for someone more attractive or important. Smart entrepreneurs learn how to smile and maintain eye contact, make transitions positively and proactively follow-up to solidify their impact, rather than lose it.

  7. Dress to make a statement or stand out in the crowd. Appropriate dress is all in the eye of the beholder, so that should be your criteria. If you are presenting to a group of angel investors, assume business attire or match the norm of members. Washed-out jeans may be your norm at work, but won’t impress most long-time business executives.

With a little forethought and business sense, all these mistakes can be turned into opportunities for you to be remembered. All it takes is the same diligence that every entrepreneur puts into solution development, their business plan and investor presentation. You shouldn’t be surprised to learn that first impressions usually last longer than any documents you prepare.

Psychologists say it only takes three to five seconds for someone to form a lasting first impression. Either consciously or unconsciously, people important to your future will make quick judgments about your professionalism, character and trustworthiness quickly.

Don’t jeopardize the future of your startup, and your chosen lifestyle, by assuming you can wing it. Only preparation will keep you and your image from flying astray.

Marty Zwilling

*** First published on Entrepreneur.com on 5/29/2015 ***

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Sunday, June 7, 2015

Entrepreneurs Who Improve Society Make More Profit

Triple_Bottom_Line_graphic Many entrepreneurs still don’t understand that building a business culture today of doing good, like helping people (society) and planet (sustainability), is also a key to maximizing profit. Employees and customers alike are looking for meaning, not simply employment and commodity prices. Every company needs this focus to attract the best minds and loyalty in both categories.

In a recent book by Christoph Lueneburger, “A Culture Of Purpose,” he details how to build this new culture, and why it is becoming more instrumental in bringing about success, as well as sustainability, in organizations as diverse as Unilever and Walmart. He outlines a three-phase process to develop the necessary business culture of energy, resilience, and openness:

  • Nurture your current leadership strengths. Learn how to recognize, cultivate, and leverage the competencies of your current talent to develop your leadership team. Highlight leaders with business acumen as well as purpose as role models. Change leadership is a critical competency in the early stages of a transformation.
  • Hire the right team. Ask the right questions to identify the innate personality traits in potential new hires, regardless of level and function, to bring on board those most likely to succeed in and shape your organization. Employees with a purpose actually are easier to recruit and retain. They also tend to stay longer with the organization, reducing costs.
  • Craft your culture into an actionable plan. Create an environment that unleashes these competencies and trains and pushes them to the fore. Shape how people relate to one another and collectively go for what would be out of reach to them individually. Success is people moving from a reactive to a proactive focus on doing good.

In summary, the transformation starts with placing leaders with a purpose at the core, hiring talent with a purpose at the frontier, and then building and extending the culture of purpose both inside and outside the organization. I can think of at least five ways that this benefits the business, as well as customers:

  1. Products in a purpose culture more readily sell at a premium price. Evidence is growing that consumers are willing to pay at least a small premium for sustainability, and have started to demand a discount for “un-sustainability.” Companies can use this strategy to improve their profitability and competitive advantage.

  2. Doing good opens the door to a broader customer base. By adding to perceived value, a company attracts more sophisticated and demanding customers less expensively and more quickly. More and more customers choose a company based on their perceptions about the good that they do, as well as their price and service.

  3. Customer loyalty and trust go up for companies with a purpose culture. According to the Edelman 2015 Trust Barometer, 81% of global consumers believe it is acceptable for brands to support good causes and make money at the same time. We all know the cost of retaining customers is far less than the cost of new customers.

  4. Companies with a purpose culture have more productive teams. Doing business is a human process. Team members interact on a daily basis with the stakeholders of the company and the way they feel about the organization has a major and direct impact on how they perform their tasks and do their job at the end of the day.

  5. Investors like startups that foster planet and social responsibility. Investors believe these startups demonstrate more integrity and less risk, as well as being better positioned to deliver long-term, sustainable value to their stakeholders. Of course, investors still require a profitable business model, and the potential for high returns.

Thus doing good leads to doing very well, not less well. Lueneburger contends, and I agree, that the most effective and remembered leaders of our time, and the most successful companies, will be builders of cultures of purpose, which inspire the hearts and minds of people both inside and outside the organization. Is your personal leadership shining well or less well in this direction?

Marty Zwilling

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Saturday, June 6, 2015

8 Ways For Logical Business Thinkers To Get Creative

bill-gates-the-thinker Traditionally, the majority of entrepreneurs have been logical thinkers, problem solvers, with full attention to details. These are the stereotypical left-brain engineers. Yet I see a big shift from the knowledge age, with its left-brain foundation, to a critical focus today on visualization, creativity, relationships, and collaboration, which are more in the domain of right-brainers.

Of course, the best solution would be a new wave of so-called whole-brain thinkers, but this term is usually reserved for Einstein and Picasso, and no entrepreneurs that I can name. Even right- brain dominant adults are hard to find, according to many expert views. They say most children start out this way, but after their years in school, less than ten percent retain their high creativity.

That means we need all the help we can get to bring out the right-brain attributes we need to be the best entrepreneurs in this challenging new age. Fortunately, there are resources available to help, like the recent book by right-brain entrepreneur Jennifer Lee, “Building Your Business The Right-Brain Way,” which teaches you to capitalize on these strengths, and still build a business.

Obviously, there are places for right-brain thinking as well as left-brain thinking, as it relates to starting and building a business. Lee offers the following guiding principles to right-brain thinkers who need to balance their focus, but I’m convinced that the same principles apply to every entrepreneur-minded person:

  1. Be uniquely you and embrace your creativity. Creativity is the key word here. Engineering creativity, like innovate low-cost solutions, needs to be combined with marketing creativity, like viral social media campaigns, to build a sustainable competitive advantage today. Be visual and imaginative, but don’t forget the business details.

  2. Dream big but start small. Don’t be seduced by the bigness of your right-brain vision and expect everyone to follow, based on the strength of your passion alone. Challenge your left-brain side to break things down into manageable pieces and structure a practical plan to unfold things over time. It doesn’t all have to happen at the same time.

  3. Keep it simple and focused. Opt for easy, broad strokes instead of detailed, complicated solutions. The advantage goes to right-brain thinking on this one. Too many entrepreneurs (engineers) I know define the ultimate system and processes that even a large company can’t afford, and no startup has the money or time to execute.

  4. Take action, make it real, and tweak as you go. Be willing to take action and put yourself out there, even when you don’t feel ready and even if your idea is not yet perfect. You’ll actually learn more and gain more clarity the more you interact with your idea and get feedback. Neither right-brain nor left-brain entrepreneurs will success without action.

  5. Look for the learning and repeat what works. Always have your eyes peeled for valuable new insights to help you continuously improve. Then, when you find something that works, keep doing it until it doesn’t work anymore. Don’t be afraid of using your intuition and feelings to guide you with customers, but don’t ignore real data.

  6. Consider where you are headed and don’t get ahead of yourself. Stay ahead of the curve but don’t advance so fast that you overwhelm yourself. Make sure you have a solid foundation first to support your future vision. Left-brain logical and sequential thinking usually has the edge on this one. Some creative people are always working in the future.

  7. Recognize where you’ve come from. Even as you move forward, also acknowledge how far you’ve come, and celebrate each step of the way. Recognizing past achievements and reflecting on your success helps keep your circuitous progress in perspective. Thomas Edison found his best learning was from his failures.

  8. Know thyself. Building a business is a journey accompanied by personal growth. Understand what makes you tick, and be willing to courageously move past your comfort zone. When you transform yourself, you transform your business. Success in business is often about knowing when and who to ask for help.

As you can see, it’s hard for most of us to be adequately right-brained and left-brained at the same time. Thus I always recommend that two heads are better than one, meaning seek a co-Founder who supplements your natural skills and tendencies. It’s hard to beat entrepreneur teams like Bill Gates (engineer) and Steve Ballmer (marketing) in the early days at Microsoft.

So my conclusion is that while the opportunities are growing for right-brain thinkers, the ideal entrepreneur is still a team that can work together to accomplish whole-brain thinking, and whole-team execution. Have you assessed the thinking-balance and the effectiveness of your team and yourself in your own business lately?

Marty Zwilling

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Friday, June 5, 2015

Angel Investors Are Still The Lifeblood Of Startups

angel-investor-paul-birch Entrepreneurs who require funding for their startup have long counted on self-accredited high net worth individuals (“angels”) to fill their needs, after friends and family, and before they qualify for institutional investments (“VCs”). New crowd funding platforms on the Internet, like Kickstarter and IndieGoGo, as well as the Jobs Act of 2012, are expected by many to ramp up regular people’s ability to fund new opportunities and kill the need for angel groups.

I just don’t see it happening any time soon. Neither does David S. Rose, according to his recent book, “Angel Investing.” David is one of the most active angel investors in New York, and also the CEO of Gust, which is an online platform for startup financing used by over 45,000 accredited angel investors, 1000 angel groups and venture capital funds, and 200,000 entrepreneurs.

According to Wikipedia, angel investors contribute over $20 billion annually to entrepreneurs in the US, while the latest figures on crowd funding show about $9.5 billion collected in 2014. Of course, both are impressive, but according to Rose, angel investing is as poised as crowd funding to take off due to the same online technology, and there is plenty of opportunity for both.

He does caution both entrepreneurs and investors to skip the hype and recognize the fundamental truths of the startup industry, before joining the crowd, or joining angels:

  1. Most startups fail. Small business statistics have long shown that the failure rate for startups within the first 5 years is higher than 50 percent. Running out of money, or not getting funded is often given as the cause, but it’s often more an excuse than a reason. Thus investing in startups should always be approached as a low odds game.

  2. No one knows which startups are not going to fail. Even David Rose, who has invested in over 90 startups, and proclaims real success, reminds everyone that there are too many exogenous factors affecting business outcomes for anyone to be able to pick only winners. Professional venture capitalists will tell you the same thing.

  3. Investing in startups is a numbers game. Most startup investors today will tell you to put the same amount of money consistently in at least 20 to 25 companies, if you hope to approach a target 20 to 25 percent overall return. This is called the “portfolio approach,” which counts on hitting only a couple of big winners, while the others return very little.

  4. What ends up, usually went down first. Because unsuccessful startups tend to fail early, and big successful exits tend to take a long time to develop, graphing growth follows the classic J-curve. This means that winning investors need to spread their investments across a long period of time, as well as across a large number of companies.

  5. All startups always need more money. It doesn’t seem to matter what the founders’ projections are, or how fast they believe they will turn profitable. They will need more money. Thus every serious investor reserves a certain amount of his investment capital for follow-on rounds, which allows them to stay to course to success, even with dilution.

  6. If you subscribe to truths one to five, startup investing can be lucrative. There is a rarified brand of successful investors who can show average IRRs of 25 percent or greater over the years. Investing can be satisfying, if not lucrative, for the rest of us, for keeping up with technology, as a give-back to entrepreneurs, and building a legacy.

It remains to be seen whether all the recent crowd funding enhancements, including the right to general solicitation (Jobs Act, Title II), and the still pending ability to crowd fund equity investments in startup (Jobs Act, Title III), will bring more value to entrepreneurs than burden. Compliance is definitely a regulatory burden, and could become a nightmare.

Angel investors have long been required to "certify through signature" that their net worth or income qualifies them to become accredited, so their burden and risk haven't changed yet. Some investors fear that this new general solicitation rule will lead to bank statement or tax return disclosures, increase their burden, and may cause qualified angels to back out of the process.

Angel groups fear the loss of members for the same reason. Here again, the entrepreneur will be the one hurt most, by having fewer funding sources to access. I predict that angel investors, who are generally early adopters, will actually be quick to adapt to the new requirements and online systems, and will operate side by side with the new influx of non-accredited investors.

After all, investors of all types who fund entrepreneurs, starting with friends and family, have always been all about creating win-win situations. The investor wins only when the startup wins, and today’s angels can only cover about 3 percent of funding requests. We have a long way to go, in this new era of the entrepreneur, before angel investors aren’t needed.

Marty Zwilling

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Monday, June 1, 2015

How Entrepreneurs Attract Friends, Family And Fools

Image via Flickr by Jupiter Labs
Many first-time entrepreneurs find themselves unable to bootstrap their startups, and also unable to find early funding at the venture capital level or even with angel investors. Their only recourse is that first tier of investors, fondly called Friends, Family and Fools. These are the only people likely to believe in newbies, with only minimal product evidence or business experience. 

Yet surprisingly, according to statistics on the Fundable crowdfunding site, friends and family are the major funding source for all entrepreneurs, investing over $60 billion in new ventures last year, almost triple the amount coming from venture capital sources. The average amount per startup was $23,000, usually in the form of a convertible loan, rather than an equity investment.

Of course, most startups ultimately need much more than this amount to scale the business, but some prior contribution from friends and family (as well as your own sweat equity) is normally expected as a qualification before professional investors will consider entering the game. Their logic is that if your family won’t invest in you, then why should they?

This is confirmation that the right people are always more important than the right product. Here are some key ways that you can be viewed as the right people, whether seeking an investment from friends and family, fools or even later from professional investors:
  1. Ask for a specific amount to meet a specific milestone. Shy introverts may be great technologists, but they won’t be entrepreneurs until they learn to nurture relationships with friends and family, practice their elevator pitch and respectfully ask for funding. Waiting for someone to give you a gift with no specific objective is likely to be a long wait. 

  2. Offer a formal agreement as well as a handshake. The vehicle of choice is most often a convertible note, which is really a loan with a specified duration and interest, with an option to convert it to equity when professional investors come in later. Hire an attorney to make sure the terms are fair. This shows respect and professionalism. 

  3. Let people see your own investment and commitment. Friends and family are quick to differentiate between a passionate hobby and a sincere effort to change the world. Show them that you have done your homework with industry experts and potential customers, and convince them you are not asking for charity or a donation. 

  4. Build a prototype first on your own time and money. We all know people who are good at talking, but never seem to risk anything or find time to get started on the implementation. Every good entrepreneur needs to invest skin in the game, to show credibility and leadership to others. Investors want to be followers, not the leaders. 

  5. Don’t ask for more than your friends or family can afford to lose. In other words, don’t be greedy, and remember that you have to live with these people even if your startup fails. Ask for the minimum amount you need to reach a significant milestone, with some buffer for the unknown, rather than the maximum amount you can possibly foresee. 

  6. Communicate the plan and the risks up front. Remember that no investment is a gift, and everyone who buys in deserves to hear what you plan to do with their investment, and expects regular updates from you along the way. Be honest with na├»ve friends and trusting family members, since more than 70 percent of startups fail in the first five years. 

  7. Focus on well-connected friends with relevant business experience. A wealthy uncle may seem like an easy mark, but a less wealthy friend who has connections and experience with startups in your domain can likely help you more than any amount of money. Remember that you are looking for success, not just money to spend. 

  8. Tie re-payments to revenue growth in the startup. Rather than set a fixed repayment schedule, tie investment payoffs to a percentage of new product revenue, or a plan to convert the debt to equity. Use the minimum viable product concept to get revenue early, and allow market and product pivots at minimal cost.
In any case, avoid the urge to think of friends and family as a last funding resort, when they should always be your first focus, and maybe the only one you will ever need. If you succeed, there is no joy like sharing the feeling and the money with people close to you. 

But make sure you do it right, per the above recommendations, or you may be the biggest fool.

Marty Zwilling 

*** First published on Entrepreneur.com on 5/22/2015 ***

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