Startups Need the Right Team Mindset to Survive

Since the days of Henry Ford, mass production has been the Holy Grail of business, rather than build-to-order. Too many businesses haven’t noticed that we have come full-circle, where mass customization is required now to win. Customers have come to expect immediate and tailor-made responses to their needs, and the businesses that fail to deliver quickly fall behind.

Changing the culture and mindset in an existing business is difficult and slow, so this becomes another “opportunity” for smart entrepreneurs and startups to excel. John M. Bernard does a great job outlining seven key steps to success today in his recent book, “Business at the Speed of Now.” They apply to any business, but every startup better lead with these:

1. Prepare your team to always say “yes”. This starts with always assigning people on the front line with the responsibility to solve problems, not just report them. Obviously, they must have the communication and system tools needed, and all the behind-the-scenes workers who never see a customer understand their role in delivering now.

2. Leverage the game changers to gain the speed you need. These game changes include using social media, to provide real-time two-way communication; cloud computing, which enables efficient, lower-risk automation of business processes; and the millennial mind-set, which does not tolerate anything that moves at a snail’s pace.

3. Make excellence through breakthroughs a habit. Breakthroughs are not just incremental improvements, but step-function changes in performance and capability brought about by deliberate planning and exquisite execution of skilled people. Top management has to set the expectation and provide the authority to make decisions now.

4. Close the execution gap through real-time transparency. Business transparency is making sure you whole team always sees and understands the real business challenges. Lies and misuse of accountability generate fear, and nothing paralyzes a team more than fear. Transparency highlights new behavior, new thinking, and new levels of maturity.

5. Equip everyone with core skills to solve problems now. Replace preventing people from doing the wrong thing to helping them figure out for themselves how to do the right thing. That means hiring help, rather than helpers, and providing the resources they need to stay current. It also means assigning responsibility and measuring accountability.

6. Enable the team by building trust and banishing fear. People want to do the right thing, but they quickly learn from negative consequences, real or imagined. Trust requires a clear vision from the top, line of sight to their role, resources to do the job, and full transparency to make people feel safe and confident.

7. Stop bossing and start teaching. You can get a lot more accomplished working with people rather than trying to get them to work for you. Today, every business needs everyone to learn something new every day, and everyone to teach, with humility. Teachers make mistakes, and when they do, they must admit it.

In summary, all of these steps are really about rethinking the definition of “employee engagement.” Today it’s not about people feeling all warm and fuzzy; it is about people possessing the knowledge, skills, and authority to act swiftly and skillfully without waiting for permission.

According to the Gallup Organization and numerous other respected analysts, 49 percent of current American employees admit to not being engaged, meaning they just show up, follow orders, and keep their mouths and their brains shut. Another 18 percent actively sabotage the company’s performance. These perspectives evolved through the age of mass production.

Entrepreneurs and startups today have a clear opportunity, and a clear survival requirement in the new economy of mass customization, to avoid the customer satisfaction and productivity penalties implicit in poor engagement. The good news is that the steps to change, as outlined above, are not rocket science. Just don’t wait for your competitors to get there first.

Marty Zwilling

Entrepreneurs Can’t Win By Pushing Their Startup

True leaders realize that, by definition, the word "leader" places the leader at the front, and not the rear. Yet many, many executives try to lead through fear and intimidation. This isn’t really leading at all. It’s pushing. In startups, leading from the front means that you are not afraid to get your hands dirty, pitching in to get the job done.

True entrepreneur leaders see the big picture and recognize that their startup is only a small piece of a much bigger community. They lead their own small community to pull together in a way that galvanizes the entire ecosystem of the market into a win for both sides.

For maximum leverage, every leader has to learn how to delegate. Delegation is a great skill to have, but you also have to lead effectively to earn the right to use it. Intimidating or berating other team members from a position of power isn’t delegation or leadership.

In every startup, people are expected to wear multiple hats, each and every day. An effective leader that wears many hats easily creates loyalty. This is a quality that cannot be bought or bullied. Loyalty must be earned, and startup executives who earn it generally do the following:

• Communicate and demonstrate a clear sense of purpose
• Provide great coaching, mentoring, and tutoring
• Encourage, recognize, and reward achievement
• Ensure credit is given where credit is due
• Be consistently dependable and knowledgeable
• Demonstrate accessibility to everyone
• Treat people fairly
• Listen well
• Show patience and humility
• Helpful and quick to expedite important matters
• Prove loyalty by standing up for the team, defending them to other constituents, and when necessary, to customers

Funny thing about loyal team members - they respond very well to being led from the front. Your team’s level of motivation and attention to detail is always going to have a fairly direct correlation to your ability to keep things moving forward, despite the cyclone spinning around you.

People will make mistakes, so accept it now - certain tasks, even critical ones, can get lost in the noise. The 100% solution is never attainable - so forget about. Strive for 90% and try to get that part right. The rest will come in time.

Communicate effectively and constantly with your team. No news is not good news in times of crisis. Tell the truth even when it hurts. Don’t be caught stuck to your chair while the storm is swirling around you. You must stay on top of everything and everyone. And guess what, you will miss things, too. Get over it.

Unfortunately, a crisis often drives leaders to retreat behind closed doors instead of advancing to the source of the problem. They withdraw to their desk, get inundated with data, overwhelmed by numbers and lose the connection with their people. If one of your executives fits this mold, you need to get rid of them. Otherwise they will kill you in the end, one way or another.

Leadership is about being visible and setting the right example out front on the firing line, in good times, as well as times of crisis. There is no place for the bully, who fails to take the feelings of others into account and insists on his or her way, and no place for the tyrant, who feels superior and needs to rule the roost.

Now is the opportunity for real leadership, with all the economic challenges around the world, and continuing human suffering. There is a saying in the military that generals who lead troops from the safety of the rear, should have to take it in the rear. That’s not a comfortable position for anyone.

Marty Zwilling

Build Entrepreneur Credentials Early and Wisely

Many believe that entrepreneurs are born, not made. While I agree that successful company builders usually have a natural inclination to be entrepreneurs, a good education helps polish that apple. There are people who are natural musicians, but that doesn't mean we don't try to teach them music.

Of course, there's no law saying you have to go to college to start a business. We can all point to examples of successful entrepreneurs who dropped out of college, but still went on to make a big impact. Current young adults have grown up hearing about Mark Zuckerberg (Facebook), who dropped out of Harvard, as the paragon of success. Why not try to follow in his footsteps?

The entrepreneurial wunderkinds who find success without higher education "are exceptions to the rule," says Robert Litan, Vice President of Research and Policy at the Kauffman Foundation. The most successful entrepreneurs are those with multiple real-life experiences, who have personal exposure to markets where opportunities are being left on the table.

Academic research supports that this experience pays off. It also shows that survival prospects are higher if the owner has at least four years of college, like Sergey Brin and Larry Page of Google, and Andrew Mason of Groupon. The bigger question, then, for an entrepreneur, is not "Should I go to college?" but, instead, "What should I do while I'm there?"

• Study entrepreneurship, but major in something else. Many colleges offer courses on entrepreneurship, to help you think like one. But a depth of knowledge in a specific discipline, like computer science or engineering, allows you to understand that business as well as run it.

• An MBA is helpful, but not required. More important are standard business, finance, and economics courses. If offered at your college, don’t forget the practical business skills like “Critical Thinking”, “Business Writing” and even “Dress for Success.”

• Supplement course work with practical experience. Look for that summer internship job in the field of your interest, or even just part-time work during the school year. Too many startups fail simply by missing the practical elements of money management, time management, and setting priorities.

• Take advantage of inside and outside advisers at school. Some college faculty members have great practical experience. Find the ones with experience, and the ones who are willing to share, and tap into it for free. Most universities also bring in outside advisors to mentor budding entrepreneurs. It's a huge opportunity to learn early.

• Build a business plan early on. Pick an idea, any idea. There is nothing like writing and pitching a business plan that makes you realize what you don’t know. Most schools have business plan competitions, and even give out seed money to winners. Once you graduate, you can’t take that course you need, and even the advisors are gone.

• Business networking is key. These days, every student has his social network of peers. But these won’t help you much finding investors, key executive hires, and pitfalls to avoid in the real world. Plug yourself into a new network of business people. You'll be amazed at what you can learn by listening to experienced entrepreneurs.

• Just do it. You will learn more by struggling through the process of setting up a company and making it work, than all the other items above put together. If possible, team up with someone who has been there before and is willing to provide some mentoring. Don’t try to “bet the farm” on your first company. It’s the learning that counts.

Once you are out into the real world of running a startup, your academic credentials mean very little to anyone, and practical experience in invaluable. And don’t forget that the hardest part of dropping out of Harvard to start a business, for most aspiring entrepreneurs, is that first you have to have the credentials to get in.

Marty Zwilling

Seed and Later Investments for Startups are Booming

The number of startups getting seed funding in 2012 jumped by 65% over the previous year to a total of 1749, according to a recent report by CB Insights. “Seed investments” are early stage financings (typically less than $1.5 million) made by either Angels or venture capitalists, or both. This is great evidence that the recession drag on funding new startups is behind us.

In another report more specifically on Venture Capital Activity for 2012, CB Insights noted relatively flat but still healthy funding levels, compared to the previous year (down in total dollars by 7.5%, but up in total deals by 7%). Thus the venture capital industry isn’t dead yet, despite all the rumors, and more startups are getting money, even at Series A and later levels.

Of course, there are still qualms, cautions, and risks highlighted by these reports that every entrepreneur needs to understand, to optimize their own chances of getting the funding they want:

• A “Series A Crunch” could orphan 1000+ startups. The explosion in seed funding, without a corresponding explosion in investors willing to lead the next round (Series A), may mean that you can’t get a second round and will be “orphaned” or die. The pundits are now debating the impact and potential alternatives for startups. Stay alert.

• Seeded companies will take longer to raise a next round. As soon as you get seed money, it’s time to start working on the next round. The current average is slightly more than 13 months to raise follow-on financing. As the leverage increasingly looks like it is shifting towards investors, the time required may go up, so plan ahead.

• Only 40% of seeded companies get follow-on financing. This is nothing new. The death of startups and the loss of investment dollars is part of the process of separating the best companies and investors from the rest. To prepare yourself, make sure you have enough runway, be prepared to make drastic cuts, and have a Plan B for organic growth.

• The Internet sector is tops for seed deals. Not surprisingly, the Internet sector is still the primary destination for seed investing. Interestingly, follow-on financing rates to the computer hardware and services sector is the highest of all tech sectors. Healthcare is not far behind.

• California and NY dominate for number of seed deals. California is the clear #1 for seed investment activity followed by strong #2 New York. Massachusetts is a distant #3 but in terms of the rate of follow-on financing, Massachusetts has the highest rate. Texas is still struggling to hold the next position.

Make no mistake, even with these caveats, 2012 has been a banner year for startup funding, and the cost of entry has never been lower. Investment amounts and deals were near 10-year highs, and all indications are that this year will be just as good. Of course, it always helps to be in the right business sector, in the right part of the country, and know the best players:

• Top business sectors for venture capital. The Internet sector continues to lead the pack (information technology and software), followed by Healthcare (medical devices and equipment), then Mobile (CRM) & Telecom (wireless). Green Tech is still in a slump, with renewables leading the way. Yet these comprise much fertile territory for entrepreneurs.

• Top five states for venture capital. California (Silicon Valley), Massachusetts (Boston), NY, Washington, and Texas held as the top 5 states for venture capital in 2012, but overall, 38 states got in on the action. As is typical, funding and deals remain concentrated in venture’s big markets. Be there, even if you have to move.

• Most active venture capital firm. New Enterprise Associates, in Silicon Valley, leads all VCs as most active in 2012, putting some of its $2.5 billion fund to work. By activity, the other four of the top five firms were Kleiner Perkins, Google Ventures, Andreessen Horowitz and First Round Capital. It helps if you know someone in one of these.

Of course, every entrepreneur needs to remember that even if you are in the right sector and the right location, there is no entitlement to venture funding, much less success. Most sources agree that less than 1 out of 100 who apply get the funding they want. Of those who get funded, only about 1 in 10 succeed. But who amongst us doesn’t love a challenge? Now is the time.

Marty Zwilling

7 Startup High Risk Factors That Scare Investors

We all know that every startup is risky. No risk means no reward. Yet every investor has his own “rules of thumb” on what makes a specific startup too high a risk for his investment taste. You need to know these guidelines to set your expectations on funding.

Of course, if you intend to fund the business yourself, or have a rich uncle, external investment funding concerns are not a problem. Yet, it’s still worthwhile to understand the issues so you can minimize your own risk of failure. Here is a summary of the “big picture” high risk considerations:

1. Inexperienced team. I’ve said many times that investors fund people, not ideas. They look for people with real experience in the business domain of the startup, and people with real experience running a startup. An expert in software is considered high risk in manufacturing, and a Fortune 100 executive running a startup is high risk.

2. Historically high failure rate category. Certain business sectors have historical high failure rates and are routinely avoided by investors. These include food service, retail, consulting, work at home, and telemarketing. On the Internet, I would add new social networking sites, and new matchmaking sites.

3. Dependent on government regulations. If your business model is dependent on government approvals, that can take a long time, or require political connections. All new medicines, for example, require expensive and extensive testing for side effects before FDA approval. Of course, successful approvals may also mean high returns.

4. Large initial investment required. If your startup involves new electronic chips, that may require a huge investment (more than $1B) to ramp-up manufacturing. By definition, all but the largest investors will pass, and it becomes high-risk to all investors. New drugs often fall in this category, due to long clinical trials and FDA approvals required.

5. Businesses with small return potential. Businesses with a low growth rate or a small opportunity (less than $1B) are considered high risk by investors, who get measured on portfolio return over time. That eliminates from consideration family businesses, small niches, and business areas with declining growth.

6. Poor public image businesses. Most investors like to maintain a squeaky clean image, so would consider it high risk to invest in businesses on the margin of legality or social acceptability. Don’t expect investor enthusiasm for your gambling site, porn site, gaming, or debt collection business.

7. Operations in another country. Investors in one country are generally reluctant to invest in a company outside their realm of operational knowledge. We all know that the success “rules” in Russia are different from the USA, so cross-boundary investments are considered high risk, even if you have operating experience there.

These rules of thumb should not be viewed as barriers, but just another factor that needs to be addressed specifically in your business case and investor presentation. It’s better to be proactive on these, rather than hope your investor is too naïve to notice. Your challenge, if your interest is in one of these areas, is to point out quickly why the high risk is mitigated in your case.

In summary, it pays to have some insight into how investors will likely see you, since this allows you to prepare the best case, both for your own decisions, and for approaching an investor. It’s never smart to switch your plans to a “less risky” business that you know nothing about, because your lack of experience there simply moves that alternative to the high risk category.

If you can’t handle risk, don’t do a startup. But even if the risk energizes you, do it with your eyes wide open. Even the best adventurers do their homework before starting down a new path. Known obstacles are a lot easier to overcome than surprises. Enjoy the challenge.

Marty Zwilling

10 Tests of Your Modern Entrepreneur Lingo Savvy

Many entrepreneurs I know don’t realize that the language they learned in the corporate world, or even their recent MBA class, won’t get them ahead in the startup world today. Even if you have heard some of the new terms, but can’t explain how, when, and why they are relevant to your startup, you may be in jeopardy. As a reality check, try this quick test of your entrepreneur savvy.

See how many of the following “new” entrepreneur concepts you recognize, and can explain in terms of impact and value to your startup. See how many you have personally experienced already, or are currently mentioned in your business plan:

1. Crowd-sourcing equity. This is a term indicating the use of “crowd appeal” to get money from interested people on the Internet for a share of your company. Sites like KickStarter have for years offered rewards and pre-sales for crowd investments, but real equity won’t be legalized until sometime this year for people other than accredited investors.

2. Super-angels. Super-angel investors are a new category of investors (like Mike Maples Jr.), closer to venture capitalists, who are perceived to be more sophisticated, insightful, or well-connected in the startup community, particularly with respect to technology companies in Silicon Valley and other technology centers (also called micro-VCs).

3. Minimum Viable Product (MVP). For startup new product development, this is a strategy used for fast and quantitative market testing of a product or product feature, popularized first by Eric Ries for web applications. It suggests the minimum features to allow the product to be deployed and get feedback, and no more.

4. Startup accelerator. As opposed to a startup incubator, which typically deals with startups barely hatched, an accelerator focuses on a later stage startup, with an existing product and proven business model, looking for rapid growth. This usually involves more attention to organizational, operational, and strategic challenges.

5. Osmosis marketing. This concept promotes the idea that any brand's image -- and resulting success -- is achieved more effectively through the osmosis of pervasive blog buzz and tweet-trending than traditional marketing methods. Osmosis marketing is the hot new term for word-of-mouth advertising.

6. Social mobile web. Responsive web technology that re-sizes text and images to fit any screen is the norm with new websites. As tablets are replacing magazines on your coffee table, and smart-phones are replacing portable computers, you need to make sure that your content is able to be viewed, shared, and bought on the new mobile devices.

7. Gamification. This is the use of game-thinking and game mechanics in business applications for marketing, to enhance user engagement, accelerate revenue flow, and expedite application learning. Rewards include becoming the “mayor” of an entertainment location via FourSquare, to winning badges via a Badgeville campaign.

8. Startup pivot. A pivot is a quick change of direction or strategic correction by a startup, based on customer feedback or changes in technology and the marketplace. Over time, this pivoting may lead an entrepreneur away from their original vision, but not away from the common principles that drive any business.

9. Ramen-profitable. This is a startup that proclaims to be cash-flow positive, but actually makes just enough money to cover basic living expenses, such as toilet paper, running water and instant ramen noodles for survival (no salary for the founders). This buys you time and credibility with investors, until the big bet really starts to pay off.

10. Gen-Z. This is the youngest demographic, people born after 1995, who are sought-after by all new businesses. Gen-Z members have grown up in an un-tethered world of smart-phones, tablets and WIFI, and their perspective is both multi-cultural and global. They have never seen a world without the Internet, and they now have real spending power.

Just for fun, I’ve come up with a scoring system based on my own non-scientific survey to help you rate yourself on your level of entrepreneur business acumen. How many of the terms defined above have you personally used or explained in the context of your startup?

• 8 to 10 – Excellent startup savvy (or a Gen-Y)
• 5 to 7 – Average, keeping up with the crowd
• 2 to 4 – Wanna-be entrepreneur, struggling to catch up
• 0 or 1 – Wake up, the entrepreneur world has passed you by

The new entrepreneurial age is here – there is no going back. It’s probably the biggest source of change and innovation in business today. As entrepreneurs and business people, it behooves us all to understand and adopt changes which can improve our competitiveness and impact. Are you leading the pack or barely hanging on?

Marty Zwilling

Startups are the Place to Find and Use Baby Boomers

The buzz from startup executives, especially high-tech ones, has long been that startups are no place for Baby-Boomers (1946-1964) – you must have the high energy and crazy determination to work 20-hour days to succeed. Only the under-35 age group need apply.

I will argue that times have changed, and you better take another look. First of all, the Boomer demographic is currently the single largest, mainstream pool of experienced talent in the market today (76 million people strong). They have worked with high technology and computers for at least 20 years, are highly educated, and highly motivated. Last year, nearly 40% of the total workforce was Boomers.

Most surprisingly, according to a report from the Kauffman Foundation, the highest rate of entrepreneurship in America shifted about three years ago to the 55–64 age group, with people over 55 almost twice as likely to found successful companies than those between 20 and 34.

In addition to being startup founders, like Richard Branson, founder of more than 400 companies and still going strong, there are several other key roles that I see Boomers taking more often these days to drive successful startups:

1. Advisory Board. How can you beat finding someone who has been there and done that, able to mentor Gen-Y, has lots of connections to people in your industry, and is often willing to work for equity alone? Most actually have the time and inclination to help you, rather than compete with you.

2. Angel investor. Almost all angel investors are “high net worth” individuals who made their money running a successful business in your domain, and they will mentor your team as well as demand the discipline you need to make your business work. Boomer angels won’t squeeze you for every dollar; they want to see your joy in success.

3. Interim executive. Startups can rarely afford or even attract the young superstar C-level executives they covet – these people want big salaries, big staffs, and big budgets – who are also known to push founders out of the way. What you need is an experienced executive, who is willing to work for equity, and will happily step aside in a couple of years when your revenues exceed $20M.

4. Customer service. Who better to run your customer service than an experienced professional with a little gray hair, who is firm but calm, soft-spoken, and credible around your customers? They know how to arbitrate immature tantrums, and lead by example.

5. Executive Assistant (aka Secretary). Here you want someone who knows the ropes, never gets ruffled, always shows up on time (no kids to drop off at school), and knows that their retirement depends on doing this job well. They have the maturity and sophistication to deal with your demanding executives and partners.

Of course, there are other positions were Boomers are sometimes not the best fit:

• Leading-edge technology architects, designers, consultants, and engineers.
• High-travel sales and buyer positions.
• Retail sales to Gen-X and Gen-Y.
• Construction and heavy labor jobs.

With the current difficult economic times, when companies fold, merge or cut back, more workers of all ages find themselves in search of new jobs. While everyone around you is snapping up the younger workers, my recommendation is that you think carefully about the job requirements in your startup before you follow the crowd.

In my view, there is an obvious opportunity here for a win-win situation by bringing together the best of Boomers with the high energy and crazy determination of the under-35 crowd. The crowd of Boomers won’t be going away any time soon, and more and more of them are finding that taking another bite of the apple is a healthy step for them. Join them today.

Marty Zwilling

Will Your Startup Get Venture Capital or IPO in 2013?

Based on the final report for 2012 from Thomson Reuters and the National Venture Capital Association (NVCA), it may appear that IPOs are back as a viable startup exit strategy. For the full year 2012, venture-backed initial public offerings raised $21.5 billion from 49 listings, and represented the strongest annual period for IPOs since 2000.

Yet 2013 is still projected by The Fiscal Times as a difficult IPO opportunity for startups, due to choppy markets, continuing fiscal uncertainty, and the Facebook fiasco. The dot.com heydays of free flowing venture capital and supercharged IPOs are not back. The market and venture capitalists are looking for business, but with a continuing focus on proven business models.

Sure, there will always some seed funding (10% of overall deal flow), but you can bet that this money goes to entrepreneurs who have been there before and won. Angels are also moving up-stage, leaving a bigger and bigger black hole for new startups. Your friends and family are really the only answer until you have a significant revenue stream.

So what can entrepreneurs do to get to the head of the venture capital investment queue and position their startup for a winning IPO? Here are some key action items that may give your business some visibility:

• Start with an investment-grade business plan. This means build a plan that hits all the hot buttons; problem/solution, executive team, competition, business model, reasonable financial projections, and what’s in it for the investor. Follow with a killer executive summary, investor presentation, and financial model.

• Line up a winning team. You have probably heard me say this too many times, but investors look harder at the people than they do the idea (bet on the jockey rather than the horse). They want founders who have been there and done that before, in the same business domain. Both operating executives and top advisors count.

• Timing is critical. Remember you only have one chance for a good first impression. Don’t try to talk your way to a deal before you have the documentation. Practice every step, including the elevator pitch to get the first meeting. Use friends, family, and angels, if possible, to get a product, revenue, and customers first before the VC connection.

• Identify the right people in the right venture firms. Mass mailing your business plan to every VC in the book won’t get you any credibility or traction. Investment firms specialize by business sectors, and each partner within the firm has a specialty. If you are in “energy,” do your homework to build a list of the top players in this segment.

• Make a personal connection, directly or indirectly. If you don’t personally know anyone on this list, talk to every professional friend you have to see who they know. Get introduced via one of the social networks, or a professional organization, before you approach a VC with a business proposal.

Overall, remember what VCs are looking for big numbers, in relation to Angels or other potential investors. They are looking for products (not services) that will be "must haves" for customers, not "nice to haves," and they are looking to multiply their money by five to ten times in five years.

That means the target market must be large (at least $500M), proven and growing, with revenue potential of at least $50M within five years. Initial investment targets are usually larger than $2M, sometimes up to $25M or $50M. To make this work, you will need an initial valuation of at least $5M.

According to the latest NVCA industry stats, most venture capitalists predict investment increases in Business IT, Healthcare IT, and to a lesser extent Consumer IT, the latter being the sector of greatest expectations last year. Most VCs see decreases in clean technology investment, medical devices and biopharmaceuticals, so tune your expectations accordingly.

Current market conditions should certainly convince you to be totally thorough, thoughtful and aggressive in your approach and presentations. But now is the time to get started, and remember to work friends, family, and Angels before you tackle the big boys and set your sights on a windfall IPO.

Marty Zwilling