Startups Need the ‘Why’ Before the ‘What’ to Build

All too many startups are founded simply on the basis of a new and exciting technology invented by an industrious technologist. This is the origin of the “solution looking for a problem” and “if we build it, they will come” syndromes, which result in surprise and frustration waiting for funding, and waiting for customers that don’t materialize.

The right approach is to start by solving a problem causing real pain to a large number of customers willing to pay real money for a solution. Develop the solution with your technology, and develop a strategy to maximize your impact in the marketplace. I’ve talked about the solution part several times, so this article will focus on the value of a strategy.

Here are five good reasons for setting the strategy early, as summarized by Mark Thompson and Brian Tracy in their recent book “Now, Build a Great Business!” They emphasize that before the “What” should come the “Why?” Although their book is written for businesses of all sizes, I believe the principles apply especially to startups as follows:

1. Increase return on equity invested. The first purpose of a strategy is to organize and reallocate your resources to increase return on the amount of money invested in your startup to-date. It is to earn more bottom-line profit-ability than a random walk.
   
   
2. Position yourself relative to your competitors. Business strategy allows you to change customer perceptions and responses to your product or service offerings. Don’t simply become a “me too” offering, but work on innovative approaches and changes in customer preferences that may not yet be covered by competitors.
   
   
3. Capitalize on strengths and opportunities. You must take advantage of those special team talents and product capabilities that make your startup superior to your competition, and do things that your competition cannot duplicate in the short term.
   
   
4. Form a basis for making better decisions. All strategic and business thinking must lead to immediate action to increase sales and profitability potential, relative to your competition. No strategy leads to no decisions or poor decisions.
   
   
5. Attract investors and financing. Look at your startup through the eyes of a potential lender or investor, and create a strategy and plans that make your company an attractive place to invest. The startups that typically receive the most dollars in first-time financings are ones that have at least four things going for them:
   
   
   • Experience in related fields. Investors highly prize gifted leaders who are business veterans with experience in similar ventures, who can move quickly and effectively.
     
     
   • Great business model. Your offering should open new, large markets in ways that are tough for competitors to copy quickly.
     
     
   • Scalability. Show that your business can build the necessary products and services rapidly and achieve economies of scale with minimum capital and labor.
     
     
   • Intellectual property (IP). Patent protection is no guarantee, but it does improve the chances of building businesses that have a sustainable competitive advantage.
     

Your business strategy starts with your value proposition and core competency. Most startups that find themselves struggling have a weak value proposition. This is why your value proposition is a critical piece of business strategy.

A successful startup, like chess, requires proper strategy, risk assessment, and effective decision making. Your focus on the end goal will dictate the choices you make, the ability to stave off threats, and lead to your success. Now it’s your move.

Marty Zwilling

Businesses Forget How to Listen to Customers

It seems like many business people are becoming so technology addicted to their iPhones and email that they forget to listen to what their customers want, or even forget to ask. Attention spans have compressed to seconds, and face-to-face conversations, with the hugely important body language, are avoided in favor of texting and anonymous Internet surveys.

It shouldn’t surprise you that a recent Harris survey found that a quarter of all Internet users think it’s okay to stay online during sex. Slightly more said it’s okay to be “plugged in” during their honeymoon, and eight percent think it’s alright to surf the web during religious services. I can’t imagine any of these people taking the time to listen to their customers.

In fact, really listening to customers happens so rarely these days that you can actually gain a competitive edge just by doing it. Here are some tips on how to do it effectively, for those people on your staff who may have forgotten how:

1. Don’t confuse customer needs with your needs. When you are selling, your entire focus should be on figuring out what your customers want, and giving it to them. Resist the urge to sell them on your way, just because it matches your offering, or you think it’s more supportable. Win the business, build the relationship, then talk about alternatives.

2. Meet or talk to your customers in person, and provide feedback. Instead of using the technology to avoid customer contact, use it to make personal contact via the phone or Skype, anywhere in the world. Impersonal email surveys and computer voice response units cannot convince your customers that you are listening.

3. Keep your pride and ego under control. Pride in your hot new product line may tempt you to tout it’s features, before you really listen to customer needs. When your ego talks, you will quickly be seen as disingenuous. If the customer isn’t contributing 60% or more of the conversation, not enough listening is going on.

4. Don’t ask questions that start with “why.’ This kind of question will usually make the customer immediately defensive, so neither party will be listening, and the relationship will suffer. Always ask open-ended questions that encourage a dialogue, rather than one-word answers.

5. Never ridicule or dismiss a response. Customers instinctively know when you can’t wait to give your view without truly reflecting on the message, and this is interpreted as not listening. You should always ask questions with a curious, inquiring and interested tone, and pause thoughtfully before answering or moving to the next question.

6. Good listeners respond to broad comments with probing questions. Preprinted customer feedback forms, or a fixed set of questions, are not the best way of getting customer needs. Good interviewers think on their feet and go where the discussion leads them, rather than stick to a script.

7. When you use social networks, keep a personal touch. Social networks on the Internet provide a great opportunity to convince customers you are listening, if you do it right. Post enough feedback to prove you are listening, on a timely basis, with a sense of humor, be authentic, and don’t shout down critics.

Listening has always been important in any relationship, and in business it’s more important than ever because customers have more options than ever. Outbound marketing statements are perceived as clutter, and too many are filled with doubletalk.

Also, with the technology today, whether you listen or not, customers will make themselves heard. If you don’t care, or can’t convince your customers that you listen, you can bet they will find a competitor who does.

Marty Zwilling

Entrepreneur Startup Share Depends on Contribution

One of the first tough decisions that startup founders have to make is how to allocate or split the equity among co-founders. The easy answer of splitting it equally among all co-founders, since there is minimal value at that point, is usually the worst possible answer, and often results in a later startup failure due to an obvious inequity.

Another common “failure to start” situation I see is one where the “idea person” insists that the idea is 90% of the value (and 90% of the equity). In the real world, the "idea" is a very small part of the overall equation. A startup is all about "execution" - meaning the equity should be allocated based on the value that each partner brings to the table in each of these dominant variables:

1. Experience running a startup business. Running a new business starts with building a solid and credible business plan, working the investor funding process, and building an organization from nothing, with minimal resources. Successful Fortune 500 executives need not apply, since most would have experience with any of these tasks.

2. Domain expertise and connections. If you are recognized as an expert in the business area of your startup, with a good reputation, and you know all the key vendors and customers, your value is huge. Building a product doesn’t get it distributed and sold. Expertise can be marketing, technical, financial, or sales.

3. Pre-existing intellectual property. Ideas are not intellectual property, until they have been converted into patents, trade secrets, trademarks, or copyrights. In many cases, one founder has started earlier and brings an important completed piece of work to the table, and that can have great value.

4. Sacrifice and time commitment. A part-time commitment, while holding down a “real” paying job, is obviously not the same as a full-time executive role, especially if the cash compensation is nonexistent, deferred, or at high risk.

5. Funding. Providing the major funding source for an early-stage startup is a totally different dimension, but it usually trumps all the items above in demanding some equity. For purposes of commitment and business decision making, I always recommend that execution partners retain control of at least 50% of the equity.

An arbitrary, but perhaps rational equity factoring approach would be to assign each of these five items as 20% of the total, and allocate equity based on each partner’s relative contribution to each. For example, if your rich uncle is providing all the initial funding, but has no active business role, it might be smart to offer him a 20% slice of the pie.

Equity allocation is usually the first point in a startup where outside help should be considered (legal counsel, potential investors, startup advisors), as they may be able to provide experience and more importantly, an unbiased view that the entire team can trust.

An important key is NOT to dodge the discussion up front, come to some agreement quickly, and write it down. If you and your potential partners can’t get through this discussion in a timely fashion and come to agreement, then it’s unlikely that your startup can ultimately survive anyway. Startup decisions only get harder later, never easier.

Even still, regardless of the initial equity split, you should seriously consider vesting your founders shares over at least two years. This means they will be metered out month-by-month, and a partner who changes his mind or defects early will not walk away with half the company.

The next big challenge for a multi-partner startup is the allocation of roles. Who will be the CEO, CFO, and CTO? The same variables apply, but here skills and experience are paramount. If you are an inventor and have the key patent in hand, that doesn’t mean you should be CEO. Of course, holding key assets and money always provide leverage to management rights as well as economic rights.

All partners should never forget that their allocated shares are only the beginning, and will be diluted proportionately when outside funding is later required from angels or venture capitalists. Investors will be quick to remind you that a small percentage of something is worth more than 100% of nothing. The same logic applies to splitting equity with co-founders.

Marty Zwilling

Today Startups Can Win Customers From Big Business

You can’t succeed in your new startup if you can’t win customers, and the new Internet-empowered customers are tough. They are in control, and they no longer care where or from whom they buy, so here is your chance to win. They do have a specific purchase progression with key milestone moments that determine your win or loss outcome in every transaction.

I agree with the premise in a recent book by the widely respected expert on business growth, Robert H. Bloom’s “The New Experts,” that today’s customers are armed with three lethal weapons – instant access to information about every potential purchase, immense choice, and real-time comparison of competitive prices.

They don’t care about customer loyalty, and all that matters is that you deliver what matters most to them, when it matters most. If you are a new entrepreneur, you business life depends on using the following four decisive moments in their buying process:

• Your now-or-never moment. This is your buyer’s all-too-brief first point of contact with your business. You have to create customer preference at this moment or the customer will vanish – probably forever. The key lesson here is to think like a buyer, not a seller. The first priority must be to get your prospect to know you and trust you.

• Your make-or-break moment. This refers to the often extended period of consideration, negotiation, and decision to purchase, during which far too many transactions fall through. You win here by remaining consistently engaged with real interaction and involvement, and by knowing their needs and values better than any competitor.

• Your keep-or-lose moment. This moment is the period whey your customer is actually using your products and services. Rather than a sigh of relief at the sale, you must redouble your efforts to improve the relationship while the customer is first using, consuming, enjoying, and relying on the product or service they purchased from you.

• Your multiplier moment. This moment is when you can convert a one-time customer into a repeat customer and an advocate and referral source for your company. These are the transactions that require far less investment and will create far more profitable revenue. You need a reliable system of metrics to measure your performance here.

While this is viewed by customers as a blessing, this buyer empowerment is seen my many businesses as a curse. Some won’t change, and they will die. As a startup, you at least don’t have to overcome the inertia of how things have always been done in your company, but you do have to recognize the new reality and use it to your competitive advantage.

The simple recommendation is that empowered customers have to be met by your empowered employees, using the same Internet technologies to keep up. After you embrace the new reality, the first thing you need to do is get the new requirements ingrained in your most innovative employees. Then you have to trust them.

Trust them to think and act independently on behalf of your startup and your brand. Clear a path for them, see what they come up with, provide resources, and support them. When they make mistakes, highlight the learning experience, pick them up and get them innovating again.

The other things that your whole team needs to do are to reduce complexity and deliver a consistent customer experience. This allows your startup to handle new input, resolve customer issues and move forward more swiftly. Entrepreneurs that recognize this empowerment and the importance of delivering a positive, consistent customer experience will gain and maintain the competitive advantage.

Because it’s a wide-open market, the latest technology often comes to consumers first. The old-style, top-down, “push” marketing, where you drive the process, isn't working anymore. You need to understand and capitalize on the decisive moments of empowered customers now-or-never.

Marty Zwilling

Pull Investors to Your Business Plan With a Summary

Modern investors love to first read a two-page summary of your business plan, formatted like a glossy marketing collateral sheet, with text well laid out in columns and sidebars, and a couple of relevant graphics. This one had better grab their attention, or they won’t look further.

You may have already found several articles, web pages, or books about writing the perfect executive summary. They all offer a list of requirements that might take 50 pages to address, but of course they ask you to write concisely. Take a look at my website for the Sample Executive Summary, which shows what can be done in one page (both sides).

Before you start, remember that the goal of the executive summary is to provide a printed version of your best elevator pitch, to provide a positive first impression to the reader. Think of it as a selling effort, not an attempt to fully describe your startup. Here are the key components:

1. The problem and your solution. These are your hooks, and they better be covered in the first paragraph. State your value proposition, and what specifically you are offering to whom. Skip the acronyms, history of the company, and the disruptive technology behind your solution.

2. Market size and growth opportunity. Investors are looking for a large and growing market. Spend a few sentences providing the basic market segmentation, size, growth and dynamics - how many people or companies, how many dollars, how fast the growth, and what is driving the segment. Skip the comment that you are conservatively estimating your penetration at 1%.

3. Your competitive advantage. Identify your sustainable competitive advantage, like unique benefits, cost savings, or industry ties. Don’t kill your credibility by saying you have no competition. At minimum, you compete with the way things get done currently. Most likely, the investor has already seen multiple plans with similar solutions.

4. Business model. Who is your customer, what is the price, and how much does it cost you to build one? Do you now have real customers, are just starting development. Outline your sales and marketing strategy (direct marketing, sales channel, viral marketing, and lead generation). Identify key quantities, such as customers, licenses, units, and margin.

5. Executive team. Remember that investors fund people, more than ideas. Why is your team uniquely qualified to win, and what have they done before? Explain why the background of each team member fits, by naming roles and names of relevant companies. Include outside advisors if they have relevant experience.

6. Financial projections and funding. You need to show your summary revenue and expense projections for three to five years. Investors need to know the amount of funding you are asking for now, and what they get. The request should generally be the minimum amount of cash you need to reach the next major milestone in your plan.

The above outline need not be applied rigidly or religiously. There is no magic that fits all startups, but make sure you touch in each key issue. You need to think through what points are most important in your particular case, and capitalize on your strengths. Key points skipped are red flags, and investor first impressions will go negative.

A final important element is not even in the executive summary, it is the paragraph you use in the email that introduces your company and has the executive summary attached. Less is more here, so include the grabber, show your passion and commitment, and be sure and ask for something (like a follow-on meeting or specific feedback). That’s your metric to see if you have their attention.

Marty Zwilling

7 Key Drivers to the Best Investor For Your Startup

If your startup desperately needs an investor, you may not care if the investor is a so-called “angel” investor, or a venture capitalist (VC). The money is the same color in either case. But I have found that making the right choice at the right time can have a major impact on your long-term valuation, and the decision process is complex.

The basics are simple. Angels are typically high net-worth individuals, investing their own money, interested more in early or “seed” financing of amounts starting as low as $25K. Venture capitalists are professionals, investing other people’s money from a fund, interested mostly in later rounds, in chunks of money from $2M up. Between these extremes is a large overlap.

But beyond the numbers, there are many factual and subjective issues that you should be aware of before you step into the game. These include the following:

1. Investment control. Angels typically have simpler term sheets, don’t squeeze so hard on valuations, and are more realistic on time-frames. VCs tend to exert more control over the team and assert financial control over the company, its strategy and exit plans. Ultimately a larger VC investment can also narrow exit options.

2. Type of startup. Venture capitalists seek to fund businesses with the potential to be enormous. In addition, most venture capitalists want startups that have clearly defined economies of scale (such as software companies) vs. ones that scale linearly with some factor (such as service companies). Angels are less type-focused.

3. Expected return rate. Most venture capitalists tell you that they look for 30% annual return, or 10 times initial investment in 3-5 years. Another rule of thumb is a target of 50% IRR (a discounted cashflow calculation). Angels will look at lesser opportunities, but both recognize that many ventures fail, meaning the targets are high to improve the average.

4. Total money needed. I already mentioned that if you are looking for a specific raise of less than $2M, you are in angel territory. But it goes further than that. If the total money you're looking to raise over the life of your company to be cash-flow positive is greater than $3M, or you will likely need money to scale, you need to work the VC territory.

5. Team experience. Successful serial entrepreneurs usually find it easier to raise money from venture capitalists. If you're a first-time entrepreneur, that doesn't mean you can't raise VC money, but you're going to find it more difficult getting VC traction.

6. Founder network. If you've never met a venture capitalist before and none of your colleagues have built companies with VC funds, you probably won’t get VC traction either. In contrast, if your best friend's father is the CEO of a Fortune 1000 company, you might readily find a valuable set of angels.

7. Value-add. This is the most debated, but most important item. The value-add of both angels and VCs is totally dependent on the individuals involved, but on average VCs are likely to add more value than angels. They focus on specific business areas, have multiple deals running concurrently, understand deal flow, and usually have more current insights, connections, and resources.

Personally, I think it all comes down to the investor fit and the stage of the start-up game you are in. It’s definitely better to have people who have built businesses on your side. If you plan to exit in the near future, it’s important to have investors who have backed high-growth businesses.

For all cases, relationship is the key ingredient to a successful deal. It is very important to be able to communicate with your investors openly and honestly. If they respect and trust you as a person and you respect and trust them, it will be much easier to weather the inevitable storms. It’s easy to take any money that’s green, but in the end it can be more costly than it’s worth.

Marty Zwilling

10 Sure Ways to Get Your Plan Trashed by Investors

After struggling to create your business plan for months, every entrepreneur likes to think that their document is inspirational and will reach someone who is smart enough to see the brilliance of the idea, intuitive enough to recognize their business acumen, and enthusiastic enough to offer the money required to make it happen.

Every serious investor, on the other hand, has a stack of these in their in-basket (email or real plastic) awaiting review, and is looking for the flaw or less-capable entrepreneur in each that predicts failure, allowing them to discard it like another piece of junk mail. Many VC firms and investment banks receive as many as ten plans per day, so it’s hard to get them salivating.

Thus, I think it’s helpful to know some of the most common turnoffs that investors encounter in plowing through this stack of requests for money. Here is what I hear from investors that you shouldn’t do, and can attest to from my own meager efforts:

1. Tease or spam the investor. Every investor is annoyed by persistent messages that say “Give me a call to hear about the most disruptive technology since the wheel.” You can bet that if he ever sees a real business plan from you, it will go to the bottom of the pile. Asking him to check out your website first and comment is equally bad.

2. Send the plan without a summary. An Executive Summary is a one page elevator pitch of the whole plan (may be separate from the plan), which gives an investor a net perspective on the key business parameters. Too many plans don’t have a summary section, or the summary is all you get. You lose in either case.

3. No plan in the Business Plan. Many plans investors see are really modified product specifications, which tell you more than you want to know about the internals of the product, but almost nothing about how and when you plan to sell it and make money.

4. Embarrass your English teacher. Obvious draft markings, handwritten, or unprofessional results, like misspellings and grammatical errors in the plan, will only convince investors that your business will be run the same unprofessional way. Remember, investors invest in people before ideas.

5. Fill the text with acronyms. Remember that the people reading your plan are smart, but not intimately steeped in the acronyms of your technology. They assume heavy use of acronyms in inconsiderate, lazy, or maybe an intentional obfuscation of facts. Stick to laymen’s terms.

6. The base plan is a book. Avoid being excessively wordy or redundant in your plan. The base plan should be in the 20-page range. Stick to the facts, state them clearly, and do not repeat them unnecessarily. At best, long plans make your business seem complex and more risky.

7. It’s all in an appendix. Investors don’t mind supporting documents with the base plan, but the base should make sense and be complete without jumping to an appendix. Making the total plan heavier, with ten appendices, or a hundred pages is not impressive.

8. Trash your competitors. Don’t say things about your competitors or customers that you wouldn’t be able to defend if they were in the room with you. I see lots of statements about poor usability, poor quality, fat and slow, all without even anecdotal data. Investors read these as unprofessional and even unethical, unless supported by third-party data.

9. Prototypes and demos attached. Remember that early prototypes and demos usually break or don’t work for unfamiliar users, and we can’t see all the work and love you have already put into them. Pictures and words leave a much better impression at this stage.

10. Letters from your friends. Introduction letters from friends of the investor are always appreciated, but letters of praise from your friends don’t carry the same weight. Customer testimonials and vendor contracts are much more impressive.

When you send a business plan to an investor, remember that the purpose is not to sell your product or service, but to sell you and your business model. You are looking for scarce investor financial resources, and your competition at this stage is your peers who may have more convincing and credible proposals. Maybe it's time to scan your plan one more time before you send it.

Marty Zwilling