Wednesday, August 31, 2016

6 Value Priorities That Attract All Serious Investors

Fuel-cell-vehicleYoung 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 and relate to. They 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, highlighting the mashup technology, which you derived from early online 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 your advantage to translate your message into values and priorities that the intended receiver can readily relate to and understand. Here are some key priorities that will resonate with every business leader I know:

  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 facilities 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 technology and distributed data, 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 hackers. You need to address these concerns early, by highlighting patents, encryption capability, or other features which 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 which 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

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Monday, August 29, 2016

The Right Way To Get Funding From Family And Friends

cash-in-handMost entrepreneurs I know are so passionate about their new idea that they are surprised when family and friends don’t line up to invest in their new venture. Yet they tend to ignore this problem, and move on quickly to professional investors. They don’t realize that most Angel investors and venture capitalists will also decline to be first, if you have no commitment from friends and family.

The reality is that investors, including myself, believe that the entrepreneur is more key to business success than the idea. Thus they look for evidence that people who know you well are willing to bet on you, even before your idea has a chance to show traction. Don’t let your lack of acumen with friends and family spiral your startup into the ground waiting for someone to go first.

On the positive side, friends and family probably won’t be as demanding on your financial projections as a professional investor, and they likely will be satisfied with an initial offer of a convertible note (loan with option to convert to equity later), so you don’t have to give away the store before you get started. But they do expect you to take them seriously, as follows:

  1. Proactively and sincerely engage each potential investor. Some entrepreneurs don’t want to put friends and family on the spot, so they keep all discussions very casual. I recommend making friends the first formal test of your elevator pitch, your investor slide deck, and your business plan, and earnestly ask for their advice (not money) early.

  2. Sell your idea in simple terms with both logic and passion. Vision alone rarely convinces people to invest. You need to convince family and friends, in terms they can relate to, that your idea makes logical business sense, and you have done your homework on real customers, competitors, and costs. Demos and prototypes are key.

  3. Demonstrate your own financial commitment and progress. Just like professional investors wait for friends and family to go first, friends will wait for you to show “skin in the game.” A startup founder that is not the “lead investor” in time and money should not expect anyone else to jump in front and lead the way. Talking loudly is not enough.

  4. Outline the financial options and ask for the close. Most new entrepreneurs are not surrounded by people who understand convertible notes, startup equity investing, and exit strategies. They don’t know what questions to ask, so they will likely wait for you to lay out the alternatives and respectfully ask for some financial help in that context.

  5. Carefully explain how you intend to use the funds requested. Asking for your dream budget, with no specifics on milestones, will likely remain a dream. Outline critical tasks, with a timetable, to cover the next few months. The idea is to gain credibility with initial investors by showing them results, before asking for new and larger investments.

  6. Document your commitments, as well as theirs. Loyal friends and family will want to know specifically what they are signing up for, even if negotiated informally, including the risks and contingencies. Non-specific and open-ended agreements are the quickest way to break up family and friend relationships when things get tough, and they will.

  7. Use friends and family as advocates to network to professional investors. Warm introductions from friends and family to existing investors is far more productive in fund-raising than email blasts, social media connections, or cold-calls to famous investors. You need all the help you can get to build your network before desperation mode sets in.

  8. Limit the role of family and friends in your actual business. Professional investors love to see contributed funds from all sources, but they are wary of startups operated by family and friends. The stress and skills required to build a startup break up too many prior relationships, so key roles should be limited to partners with skills and experience.

Overall, friends and family should never be treated as an entitlement, or as a last resort. They are a key source of investment for your startup, but if not handled professionally and sensitively, can be your worst nightmare. These situations can bring new meaning to the old adage about the first tier of startup investors as friends, family, and fools. Don’t let it happen to you.

Marty Zwilling

*** First published on Forbes on 08/22/2016 ***

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Sunday, August 28, 2016

6 Ways To Find A Fundable Startup Market Opportunity

Western_Galilee_Focus_GroupMany 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, and smart potential investors will walk away.

Every good business plan needs an early section which sizes the total market opportunity, and then breaks down that total into the most relevant segments for your focus. If ten 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 worldwide 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 market 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 issues having big opportunities, like alternative energy, global warming, and technology trends.

  5. Peruse company reports from your business domain. Competitor 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 which 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, often is 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

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Saturday, August 27, 2016

8 Keys To Attracting The Right Technical Co-Founder

Fortune Brainstorm TECH 2011Technology is so key to every business these days that experienced business-smart but non-tech entrepreneurs are feeling 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. Just 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 fathom.

  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, or 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 and they bring. 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, but 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 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 e-commerce 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, like Zappos sells shoes, 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

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Friday, August 26, 2016

Winning Companies Lead With A New Culture Mindset

Google_Mountain_View_campus_gardenWith today’s interactive social media and the real-time Internet, both customers and employees see inside your company easily, so you can’t hide your real company culture. At the same time relationship perceptions have become the biggest drivers to customer loyalty and employee engagement. Thus in every business, big or small, culture can make or break your success.

Examples of companies well known for their winning cultures inside and out include Apple and Google. In both cases, their products are not generally cheaper or unique, but the mindset behind how they do what they do, and think what they think, makes them stand out. Others, by most accounts including Blockbuster and JCPenney, lost their focus on culture, and paid a heavy price.

In fact, most entrepreneurs and executives today recognize the importance of building and maintaining the right culture, but many are not so clear on how to do it, or assessing where they stand in the process. To that end, I was impressed with the specifics provided in a new book, “Nimble, Focused, Feisty,” by Sara Roberts, a “go-to” expert on organizational transformation.

What I have seen in startups correlates well with Roberts’ evidence that there are three basic elements of a winning culture mindset today – fast is better than big, possibility over profitability, and being passionately outward-directed to customers and employees. I support her outline of several guiding principles for any company on how to achieve and maintain this mindset:

  1. Remain nimble and ready to pivot. Winning organizations have a culture of no expectation of always doing what they are currently doing. They know how rapidly things change, and that today’s positive reality may not carry them to where they ultimately want to go. They are always on the lookout for new opportunities and innovations.

  2. Structure for speed in making changes. Speed in any organization is largely a function of hierarchy, trust, and the ability to make decisions quickly across the organization. The primary key is establishing a culture that relies on values, rather than rules, to guide every action. Teams and individuals at all levels must be motivated to make decisions.

  3. Solve problems by co-creating and collaborating. Effective collaboration requires bringing together a variety of contributors who trust each other to get to the best solution. These days, that includes the initiative to bring up issues and tap the wisdom of “crowds” through social media, employee forums, and listening to industry influencers.

  4. Lead with purpose as a balance to profit. Increasingly, the landscape is shifting from an emphasis on “how” to an appreciation of “why,” both inside and outside the company. If executives don’t see social good or higher purpose as important to success, customers and employees will remind them – overtly by feedback, or passively by deserting them.

  5. Maintain a customer-centric focus. Businesses oriented primarily toward near-term shareholder value make themselves vulnerable in the long term. If you focus on what’s best for the customer, both near-term and long-term, you will see where customers are headed, and can plan change versus crisis reaction. Talk with real customers constantly.

  6. Find leaders who are courageous connectors. Courageous leaders acknowledge doubt and gaps, but still make decisions with confidence. Connector leaders enable their teams to navigate other organizations effectively, connect them with required resources, and expand their sense of possibilities and purpose. Set the culture by example.

  7. Build teams with people who get things done. A nimble organization needs doers and makers. Makers are not scared of taking action; in fact they’re biased toward action. They ask forgiveness rather than ask for permission, are motivated by results, and naturally collaborative. Leaders help most by not putting barriers in the way of their people.

  8. Winning cultures need consistent people practices. The best team cultures are built and maintained by systematic and deliberate hiring. Don’t hire only under duress, or settle for less than the best fit. Involve the team in selecting the best fit, culture matching, and getting “buy-in” from all the right players. Motivate with meaning, not just money.

For companies to remain successful in this new era, they need a culture that is proactive rather than defensive. It’s purposely designed, leveraged, and honed to be nimble in addressing change, customers, and integration of purpose with business value. How long has it been since you have reviewed your culture at the employee and customer level? Surprises are expensive.

Marty Zwilling

*** First published on Forbes on 08/19/2016 ***

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Wednesday, August 24, 2016

Are You Getting Your Fair Share Of Startup Equity?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Martin Zwilling

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Monday, August 22, 2016

It Pays To Maintain Trusted Relationships In Business

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

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

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

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

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

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

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

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

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

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

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

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

Marty Zwilling

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

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Sunday, August 21, 2016

How To Reduce Startup Risk Using Existing Technology

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

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

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

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

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

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

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

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

Martin Zwilling

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Saturday, August 20, 2016

7 Business Limits On That Million Dollar Invention

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

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

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

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

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

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

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

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

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

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

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

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

Marty Zwilling

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Friday, August 19, 2016

7 Startup Pitfalls Can Kill Your Business Growth

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

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

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

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

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

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

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

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

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

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

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

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

Marty Zwilling

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

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Wednesday, August 17, 2016

Startups Providing A Service Are Difficult To Scale

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

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

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

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

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

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

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

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

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

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

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

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

Marty Zwilling

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Monday, August 15, 2016

8 Insights For Millennials To Excel As Entrepreneurs

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

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

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

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

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

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

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

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

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

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

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

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

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

Marty Zwilling

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

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Sunday, August 14, 2016

10 Principles For Sustainable Innovation In Business

innovative-technology-gearsAs a startup investor in this age of the entrepreneur, I see many more startups, but innovation is still hard to find. The most common proposals I hear are for yet another social networking site (over 200 active), or another dating site (over 2500 in the US alone). Startups which display real innovation, such as alternative energy sources and new medical treatments, are still rare.

In my experience, finding real innovation in existing company environments is even tougher. Overall I like the principles in the classic book “Robert’s Rules of Innovation: A 10-Step Program for Corporate Survival,” by Robert F. Brands. He outlines the key steps which together spell INNOVATION, that I believe apply equally well to startups as well as corporate environments:

  1. Inspire. Whether we are talking about startups or corporations, innovation requires a leader who can inspire others to step into the unknown. Followers and linear thinkers need not apply. Inspiration requires a vision, and an ability to communicate it to others.

  2. No risk, no innovation. An entrepreneur looking for a sure thing will never innovate. Savvy investors tell me that startup founders who claim to have never failed are either lying or have never tried anything innovative. Failure is the best teacher.

  3. New product process. Innovation is not a random walk into the unknown. It starts with a vision, but benefits quickly from a structured process of idea generation, evaluation, prototyping, customer feedback, and success metrics. Set milestones and meet them.

  4. Ownership. A technical champion may drive a specific innovation, but the business leader has to own the result, in order to drive an appropriate business model, customer acquisition, support, and a growth strategy. Business risks are not just development risks.

  5. Value creation. Innovative technologies have no value until they are turned into solutions to real customer problems. Creating intellectual property, including patents, is the kay to long-term value and a sustainable competitive advantage.

  6. Accountability. Many innovations are jeopardized by team members and leaders who are hesitant to accept full accountability. This includes personal and team commitments to delivery schedules, quality assurance, manufacturing, and distribution requirements.

  7. Training and coaching. Proper hiring of people with a natural curiosity, open-mindedness, and ability to see the big picture is the way to create and enhance the right mind-set. Ongoing coaching from the top is essential to maintain the attitude and spirit.

  8. Idea management. Build and manage a pipeline of ideas. From time to time, include customers and sales members in ideation sessions. Make sure all team members have some connection with the product – has either used it, or sold it, or assembled it.

  9. Observe and measure. Tracking results are essential to optimal ROI. Product life cycles keep getting shorter and shorter, which mandates accelerated innovation cycles. Once a new product is launched, a key metric is the ratio of new product sales to overall sales.

  10. Net result and reward. Based on ROI, incentives should be developed for all participants. Reward your people. Frequently, the key motivator is less financial than it is recognition for a job well done. People are your best innovation resource.

Sustainable innovation is really the only sustainable competitive advantage. But innovation is hard, because people by nature resist change, and company cultures are most comfortable with status quo. Yet survival in today’s world of rapid business change requires that you keep one step ahead of your competition. Innovation is what gives life to your business initially, and keeps it alive in the long term. Make sure your business can spell it.

Marty Zwilling

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Saturday, August 13, 2016

How To Match Your Startup Stage To Investor Interest

funding-presentationTime is too precious to waste trying to close a deal with the wrong investors at the wrong time. Luckily, not all investors are looking for the same thing, so it pays to know what type of investors are most interested in what your startup brings to the table.

The key is understanding how potential investors see you, and especially how they view the maturity stage of your startup. For example, if you have a proven product, real revenue, a big potential market, and are ready to scale up the business, every investor will be interested. On the other hand, if you are a new entrepreneur, still in the idea stage, professional investors will only tell you to come back later when you have traction (customers and revenue).

Thus your startup maturity and growth stage is the primary key to success with potential funding sources. Different types of investors tend to specialize in capitalizing on businesses at different stages. Venture capital firms look for the most mature companies they can find, Angel investors typically deal a tier lower, while friends and family are most likely to help you get started.

It never hurts to start networking personally with all levels of investors early, but sending out teasers and business plans to every name you can find on the Internet is a waste of your time and theirs. It will be much more productive to categorize your startup in one of the following five stages, and limit your investor focus accordingly:

  • “I have a great idea and I need money to turn it into a business.” For investors, this is the idea stage, where you may have a great idea, but no plan, product, or customers, and probably no success record in this business domain. No professional investor will be interested at this point, so count only on yourself, friends, family, and fools for money.
  • “My invention and prototype works, but I need funding to continue.” Investors call this the seed stage, where money is required to build a market and a real product. Government grants and industry partners are you best bet here, but Angel investors might give you $250,000 to $1 million, if you have the right business case and credentials.
  • “The final product works great, and all the early users love it.” You are now entering the rollout stage, with money required for marketing, hiring a full-time team, and a production process. At this point, most Angel investors and a few early-stage VCs will be happy to talk, assuming you have the business model validated, and a large opportunity.
  • “It’s time to scale up and I need money to keep up with demand.” Congratulations! Every investor wants to be part of your growth stage, after your first $1 million in revenue. They call first investments at this stage the “A-round,” and often follow with a B-round through G-round. Growth stage investments from VCs are usually $5 million and up.
  • “The ride has been fun, but I need my money out to start the next big thing.” This is the exit stage for the entrepreneur, and for all earlier investors. The new investors you need at this stage are investment bankers, private equity, or competitors, to buy you out via merger or acquisition (M&A), or to go public with an Initial Public Offering (IPO).

Obviously, maturity and growth are a continuum, so the rules are never absolute. My message is that your startup will attract a different class of investors, as it passes through each stage, just as it has to supplement and tune the team, process, and product to keep up with the needs of a growing company and customer base. Tune your investor pitch and funding expectations accordingly.

Another good indicator of your real stage is the valuation you can set for your company at any given moment, to determine what portion of your equity an investor will expect of his money. Prior to the growth stage, your company valuation is limited to goodwill based on intellectual property and team experience, since you have no revenue. Future opportunity size doesn’t count in the early stages.

Contrary to popular opinion, all investor money is not the same. Friends and family believe in you, and only want to see you achieve success. Angel investors probably will know your business, and want to me mentors along the way. VCs normally come with the highest expectations of board seats, controlling votes, and milestones to meet.

Don’t sign up for one, expecting the other. If you want to avoid all these stage and investment considerations, you can always bootstrap the business (fund it yourself, and grow organically). Otherwise, be sensitive to first impression you leave on every investor, and the efficiency of your time spent on funding. You will enjoy the lifestyle a lot more when you find the right investor.

Marty Zwilling

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Friday, August 12, 2016

How To Move From An Entrepreneur To Manager Or Fail

Namira_Salim_Richard_BransonAs a business advisor, I have too often seen technical entrepreneurs get a product or service off the ground with ease, but then struggle mightily when their business reaches a couple of million in annual sales, or the employee count grows beyond a handful. It’s at this stage that the job changes from creative and tactical to managerial and strategic. Many don’t survive the change.

In fact, I believe the majority of true entrepreneurs are not interested in this new role, and jump ship quickly by hiring an experienced CEO or merging with another company, to start their next entrepreneurial effort. For example, entrepreneur Sir Richard Branson has started over 400 companies, from record labels to space travel, so for him the joy is clearly in the startup.

Bill Gates, on the other hand, spent most of his career building Microsoft to a multi-billion dollar company, so he made the transition from startup to growth company. Both he and Branson are billionaires, so there is no one right way for entrepreneurs to succeed. Management of a growing company is a learnable skill, and in my view it starts with a focus on the following key principles:

  1. Management is getting results through people and processes. That means your primary responsibly changes from building a solution, to building processes and directing other people. Effective communication is the key, both written and verbal, since the plan can’t exist just in your head. Everyone needs to know what they are responsible for.

  2. Strategic planning takes priority over tactical planning. True entrepreneurs love the tactical and problem solving challenges. Good managers are more interested in anticipating and preventing problems. That means making sure the right people are hired, trained, and in the right place at the right time. Spend more time on the future than today.

  3. Focus on volume growth and repeatability. With a startup, everything is an experiment. Now the experiments are over, and high productivity is the objective. Creativity and innovation are applied to increasing output and lowering costs rather than solution design and building a viable business model.

  4. Implement metrics and set objectives for every organization. You can’t manage what you don’t measure. Processes and organizations that have no objectives will produce less and less over time as they attempt to remove risk and potential problems. Every process needs a feedback mechanism to ensure continuous improvement.

  5. Practice leadership by example beyond your business entity. This requires spending visible influencer time on external initiatives and building relationships in your industry and your community. This is also the time for business development focus, related social causes, and exploring common ground (coopetition initiatives) with competitors.

  6. Spend real time on people development and succession planning. Long-term success requires planning for leader development in every organization, rotation of high-potential employees through key roles, and support for outside executive education programs. Growing the company means growing people through mentoring and training.

  7. Balance your own life for the long haul. The startup process is a sprint, and entrepreneurs tend to focus on it like there is an end in sight, forgoing personal relationships, healthy time off, and planning for retirement. Good executives and managers maintain a more balanced perspective, and plan for vacations and family.

Moving from startup mode to a sustainable business requires an overt effort on the part of an entrepreneur – it doesn’t happen automatically. The alternative is to lose the business or get pushed out by investors or Board of Directors, after a painful crisis or business growth failure.

Great entrepreneurs actually have much in common with great managers, including a focus on results and a focus on execution. In addition the best of both groups maintain a focus on customers, love to learn new things, and are always thinking. Anyone who can put all these attributes to work can survive and prosper in any environment. Just decide where you want to fit, and go for it.

Marty Zwilling

*** First published on Forbes on 08/05/2016 ***

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Wednesday, August 10, 2016

7 Ways That Startup Competitors Can Win By Partnering

competitors-partnersEntrepreneurs seem to have blinders on when looking at competitors. Generally they are so focused on killing competitors that they fail to see the positive potential of a strategic partnership or some other type of collaborative relationship. Sometimes you have to put aside the emotion and the passion, and just look at what is best for your business.

Strategic partnerships in this context can take the form of joint ventures, intellectual property licensing, outsourcing agreements, or even cooperative research. All of these offer the potential for a win-win relationship with a nominal competitor, rather than a win-lose deal, as long as both sides can remain humble and not try to dominate the relationship.

Always start with a formal proposal, limited in scope to a specific common objective or technology, for a limited amount of time, bounded by a two-way non-disclosure statement. With this agreement in place, there are a host of ways that both sides can win:

  1. Share common technology. Every startup has a core competency which should not be shared. Beyond that, there may be a large percentage of common technology where they both need to minimize cost to gain share from the big dinosaurs who already have this advantage.

  2. Expand the market for both. Typically, there are market opportunities that neither of your core competencies can win alone. A strategic evolution of your combined strengths may be able to open up a new segment that neither of you could do alone in the same timeframe or at the same cost.

  3. Up-sell related products or cross endorsement. If your customers would benefit by having products from both companies, you might negotiate the opportunity to include the other’s product as an add-on. Where your competitor isn't really competing with your direct market, you can refer business to each other without anyone losing customers.

  4. Benchmark your practices against a true peer. The best way to do this is to establish specific performance targets with incentive-based rewards for meeting and exceeding these targets. The information exchange from day-to-day interactions of engineers and marketers will drive you enhance your own processes to be more competitive.

  5. Expand core competency and solidify strengths. Both partners must not forget they are still competitors. By sharing and learning in non-competing areas, they can focus their limited resources on solidifying their core competencies, and expanding their unique segment of the market. Let market response dictate a later split, merger, or acquisition.

  6. Willing to learn from each other. Learning from each is part of the win-win equation. No entrepreneur has all the insights they need, and none should be so arrogant as to assume they hold all the cards. Of course, it’s important to start with a bounded agreement which clearly lays out expectations and areas that are off-limits.

  7. Think about the future. Once you have established your credibility and value, a strategic partnership may extend to a financial relationship. They may have the finances you need to invest in a business area they know, where you have the core competency. Longer term, when ready, it may be time for merger or acquisition.

While most entrepreneurs think of strategic partnerships as big company deals, it actually works better for small companies. In large corporate environments, competitor cultures may be so set that collaboration is difficult, while I find that small company peer competitors usually have no trouble at all getting along. The industry leader arrogance has not yet set in.

Even for small companies, it is critical that all employees be well-informed about what skills, technology and information can be shared with their partner and what is off-limits. This will offset the normal instinct to think of a competitor only as a threat. It is smarter to capitalize on the positive aspects of a competitive situation rather than killing each other so no one wins.

Marty Zwilling

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Monday, August 8, 2016

When Did Profit Become A Bad Word For Entrepreneurs?

profit-bad-businessAs a startup advisor and investor, I find that more and more entrepreneurs avoid using the term “profit” in pitching their new venture. They seem to feel it conveys a message of personal enrichment at the expense of others. My view is that the purpose of every business is to make a profit, as fuel for growth, sustainability, and social impact. Without profit there is no business.

By profit, I simply mean offering a product or service to customers for a price that exceeds the total costs associated with the solution, thus providing some basis for recovering sunk costs and generating a return for stakeholders. Of course, I understand and don’t condone bad actors who get greedy, and exploit ways to unjustly squeeze customers and employees.

Thus I was pleased and a bit surprised to see a new book, “The Purpose Is Profit,” by Ed “Skip” McLaughlin, an entrepreneur who has both succeeded and failed in starting multiple businesses. He lays out very plainly his own experiences on both sides of this equation, and I particularly enjoyed his summary startup roadmap of twenty-one steps to success, which add real content to the eight that I recommend to every entrepreneur:

  1. Select an idea you can clearly communicate in thirty seconds. Every entrepreneur needs a good “elevator pitch” which succinctly describes the idea, the customer value proposition, and business profit. Customers and investors are looking for specific solutions, not abstract ideas or complex technology concepts not yet materialized.

  2. Solve a painful problem for customers who have money to spend. Solutions that are “nice to have” or “improve usability” are easy to give away but hard to sell. The same is true for solutions to some social problems, like feeding the hungry, who don’t have any money. Remember you can’t sustain a business or social cause with no revenue or profit.

  3. Be able to differentiate your offering from competitors. The best differentiation is a patent or other intellectual property that also provides a barrier to entry. A commitment to work harder than competitors, or survive on lower margins, is not convincing. Customers typically won’t switch to a new vendor for less than a twenty percent cost advantage.

  4. Validate your business model on real customers. Giving free beta copies of your solution to customers to elicit testimonials does not validate a business model. Investors look for sales at full price, to people you don’t know, to validate demand, price, and margin. The best business models benefit social needs as well as business needs.

  5. Show an aggressive marketing and sales plan. With today’s rapid pace of change and information overload, word-of-mouth and social media alone is not a viable marketing plan. Every business requires spending money to make money. The smart ones identify and budget innovative approaches, and use metrics to tools to monitor effectiveness.

  6. Generate a 5-year financial forecast from opportunity data. If you don’t set some financial targets for your business, investors won’t be interested, and you won’t know if you are making progress toward profitability and sustainability. Commitment to a set of financial objectives is the point where an entrepreneurial dream becomes a business.

  7. Show that your team has the distinctive competence to win. The right people make all the difference in a winning business. This is why investors invest in the team, rather than the idea. Investors look for key leaders who have domain expertise and prior startup experience. Experience in other business areas and large corporations is not enough.

  8. Build a long-term growth strategy and exit plan. Successful entrepreneurs look beyond profitability to change the world and leave a lasting legacy. Investors look for an exit strategy to allow them to capture a return on their investment. Customers and employees want a business with staying power and constant innovation for longevity.

Pundits may argue that recent business successes through user growth, including Twitter and WhatsApp achieving unicorn status (billion dollar valuations), show revenue and profit are no longer needed. I will assert that these represent the exception, rather than the norm, and most sources agree that this is a fading anomaly, rather than a model for future business startups.

Therefore I recommend that profitability be carried as a key objective by every new entrepreneur, rather than an embarrassment. Social entrepreneurs need profits to supplement those unpredictable donations if they are to achieve sustainability and a lasting social impact. Certainly, profitably alone is not business success, but business success without profit is hard to imagine.

Marty Zwilling

*** First published on Forbes on 08/02/2016 ***

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Sunday, August 7, 2016

7 Painful Surprises When Taking Your Company Public

public-stock-offering-gambleDespite the fact that the number of IPOs (Initial Public Offerings) for startups have continued to decrease, I still hear it touted often as the preferred exit strategy. I suspect the exuberance for an IPO is still being driven by the highly visible successes of several companies a few years ago, including Facebook, Yelp, and Twitter. Everyone dreams of becoming a billionaire overnight.

In fact, IPOs are down again this year, with just 31 companies going public in the U.S. in the first five months. That’s down from 69 in the first five months of 2015, and 115 over the same five-month period in 2014, according to Barrons. The total proceeds raised in Q2 2016 from IPOs diminished by three-quarters compared to Q2 2015.

Concerns over valuations being reset to a new normal, and a soft exit market, are seen as key drivers. Yet I believe the trend will continue  down as entrepreneurs become more aware of other considerations that make the IPO route less and less attractive. These include the following:

  1. Taking a company public is an expensive process. It will take many months and require endless amounts of time, money, and energy. According to a dated but still relevant study by PricewaterhouseCoopers, companies average $3.7 million spent directly on their IPO, in addition to underwriter fees of 5 to 7 percent of proceeds. It takes real money to find money.

  2. Make sure you can effectively use a big cash infusion. There is a big difference between needing a million dollars versus $100 million, or even a billion. New stockholders will expect to see rapid growth. You better have lined up a major international expansion, some major acquisition candidates, or a wealth of unfilled orders.

  3. There are real ongoing costs of maintaining a public company. You will need an experienced CFO, and the best legal and accounting help to comply with the audit requirements of the Sarbanes-Oxley Act. PwC estimates that public companies incur an average of $1.5 million in annual recurring costs as a result of being public.

  4. Exposure to increased liability risk. Public company executives are at civil and even criminal risk for false or misleading statements in the registration statement. In addition, officers may face liability for misrepresentations or speaking out in public and SEC reports. Executives shoulder new risks for insider trading and employment practices.

  5. The public company corporate culture may not fit you and your startup. Public ownerships usually lends prestige and credibility to your sales, marketing, and acquisition efforts, but it may work counter to your vision of saving the world. Most startup founders voluntarily exit or are pushed out, and the fun is gone. Analysts want escalating profits.

  6. Public companies bring new expectations of benefits. If you want to give stock options, or have already been giving them, the employees will love the liquidity of their options, and the thought of selling shares for a profit. On the other hand, “competitive” salaries will likely go up, and health and retirement benefits will jump to a new level.

  7. Market volatility usually hits public companies first. Private companies can often fly under the radar in turbulent times like the recent recession. Public stockholders are more easily swayed by emotion and the activities of the crowd, rather than real market conditions, and all performance numbers are public. Shareholders can jump ship quickly.

Before you forge ahead to an IPO, I recommend a thorough readiness assessment, to quantify the need, as well as to identify potential gaps within processes, areas needing internal controls, and positions requiring enhanced technical accounting skills to operate as a publicly-traded company.

The costs of an aborted IPO are sizable, and may not be deferred to a later period or offering. Along with the time and effort required, this can severely cripple your company for an extended period, not to mention your entrepreneur lifestyle.

While the wins can be big, I still see the IPO option as one to be considered only under exceptional circumstances, rather than as the default exit option. Your odds of hitting the lottery may be better.

Marty Zwilling

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Saturday, August 6, 2016

7 Ways To Attract Customers Without Viral Marketing

contact-usContrary to popular opinion, viral marketing has not eliminated the need for old-fashioned lead generation to bring customers to a startup. Indeed, while the rules and technologies for lead generation have changed, Forrester and other experts still see it as the most effective way for businesses with limited budgets to maximize their return on marketing investment (ROMI).

One of these experts, David T. Scott, published a book a while back that I like, ”The New Rules of Lead Generation,” highlighting the changes wrought by the internet and social media. His professional background includes having held marketing-executive roles at big companies as well as startups.

Here is my summary of the seven most successful lead-generation vehicles he and I still recommend today, despite the popularity of viral marketing: 

  1. Search-engine marketing.  For new product startups, search engine marketing (SEM) is still one of the most cost-effective and scalable lead-generation approaches. It’s also one of the most accountable, with in-depth data provided by search engines about performance. You can start an SEM campaign with as little as $50 today and get results very quickly.

  2. Social-media advertising. Social-media advertising relies on popular social media sites (such as Facebook, LinkedIn and Twitter) to generate leads through pay-per-click ads and tweets on sites that target customers in specific demographics. You bid on the amount you are willing to pay for a click or promoted tweet (such as $2), and a daily budget (like $1,000).

  3. Display advertising. To use online display ads to generate leads, you post ads on websites frequented by your target audience or ones with content related to the ad. Display ads on mobile devices, including video and audio, also offer a new opportunity to reach target customers.

  4. Email marketing. This one has been around a long time but still works well if your target demographic is well defined and you do your homework to buy or rent a top-quality mailing list. New technology allows for psychographic targeting (such as finding people who like to travel) and geotargeting (specifying a certain neighborhood) for improved response and spam avoidance.

  5. Direct mail marketing. Some consider direct mail very expensive or dead as a lead-generation tool. Yet it is more alive than ever before. About $20.5 billion is being spent annually on direct mail, according to the U.S. Postal Service; the amount has been increasing each year. Compared with other methods, it does require the largest up-front investment, mostly for printing and shipping.

  6. Cold calling. This is still one of the best vehicles if your business has a small, well-defined purchasing audience as do government agencies or medical establishments. You need to first purchase or build a targeted list of clients from a trustworthy source, then refine it with some new tools, like LinkedIn and Gist, before contacting them with a good script.

  7. Trade shows. Such forums are still the best opportunity for you to meet face-to-face with people who should be interested in your products or services and to display your goods in person. Pick the right shows, start small and work hard ahead of time on your marketing materials, giveaway tchotchkes and booth staffing.

In all cases, it is crucial to set specific goals for each lead-generation campaign, keep track of the overall costs and measure the return on your marketing investment in terms of cost-per-action and cost-per-sale. Don’t hesitate to use small test projects to compare the results of multiple approaches.

Technology and consumer feedback have indeed changed the landscape. Telemarketing and robocalls, once a popular approach to lead generation, have been the subject of continuing legislation, which many believe will soon eliminate these options. The last thing a new business needs is to antagonize potential customers or become embroiled in controversy.

Plus lead-generation strategies can be updated by the flood of new technologies and software, including use of near-field and Bluetooth communications, QR codes, social check-in promotions, mobile search, mobile web, text, SMS, MMS and geolocation.

Whether you are an entrepreneur with a new startup, or even a more mature business charged with improving your growth and competitive posture, don’t fall into the trap of assuming that the new social media initiatives and focus on viral will mitigate your need to do proactive lead generation. How many of these lead generation techniques are funded in your business plan?

Marty Zwilling

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