10 Key Risk Factors to Minimize for Startup Success

You have probably heard plenty of times that being an entrepreneur is a risky business, and investors talk all the time about reducing the risk. Yet everyone seems to have their own view of key risk drivers for startups, and I’m no exception. I don’t agree, for example, that the first priority is to avoid startups with a high attrition rate, like trendy restaurants and entertainment.

Here is my own priority list of key risk drivers that every entrepreneur and every investor should evaluate and minimize in starting a business:

1. Team experience and depth risk. Here I’m talking about both the experience and track record of the founders in starting a business, as well as their experience and knowledge of the business domain. Like most professionals, when I get a business plan, I flip first to the founders section to see if it is a balanced team who has been there and done that.

2. Market and opportunity risk. There is always less risk with a well-defined problem in a large and growing market. All the people in China is a large and growing market, but all the people with cancer is much more well-defined. It’s hard to make money in a shrinking market, or with a solution that is “nice to have” versus painfully needed.

3. Competitive risk. Think seriously about the number and clout of your competitors. Having none is a red flag (may mean no market), but having more than a couple of large ones may mean this is a crowded space. Even in an open space, you need intellectual property, like patents, to keep potential competitors from overrunning you.

4. Financial risk. Very few businesses can be started without money. You as the founder will be expected to put your own “skin in the game.” The business plan should be realistic about how much cash will be required to break-even, and how big the return will be for investors in the first five-year timeframe.

5. Market entry strategy risk. The selection of an inappropriate pricing, marketing, or distribution strategy is a large potential risk. For example, many new social websites proclaim that they will offer a free service, and live on ad revenues (not likely in the first year without a huge marketing investment).

6. Political and economic risk. Sometimes founders are just in the wrong place at the wrong time. Recessions are a tough time to sell luxury goods. Under-developed countries may have a strong need for your product, but are often unstable and dangerous. Four specifics include tax rates, tariffs, expropriation of assets, and repatriation of profits.

7. Technology risk. New technologies, especially those characterized as “paradigm shifts” or “disruptive” may have long and costly acceptance cycles, or may run into unpredictable performance or manufacturing problems. Medical technologies have costly legal testing requirements, approval processes, and insurance validation.

8. Businesses with high attrition rate risk. Certain business sectors have historical high failure rates and are routinely avoided by investors and many founders. 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.

9. Operational risk. Some businesses require huge support or administrative infrastructures. For example, vehicle fuel improvements require service stations and maintenance shops nationwide, before they are viable. Even small operations can have breakdowns of specialized equipment and complex support processes.

10. Environmental risk. A nuclear reactor built on an earthquake fault line is a huge risk. Evaluate your business and location for sensitivity to floods, hurricanes, and catastrophic pollution problems, like an oil spill in the Gulf of Mexico.

The biggest risk of all is starting a company, any company, for the wrong reasons. See my related article “10 Perspective Checks on Your Startup Aspirations” for a good start in this category. If your startup is clean on both of these lists, you will most likely build a successful business, get the funding you need, and have fun at the same time. What more could a budding entrepreneur want?

Marty Zwilling

Do You Have What it Takes to Attract Investors?

I’ve noticed that some entrepreneurs seem to have no trouble attracting investors, while others with a great business plan struggle with it. The reality is that angel investors are humans, and personal traits often make or break the relationship, even before the investment is considered.

On the top line, angel investors look to invest in entrepreneurs that have an almost unwavering passion and sense of urgency. In the business, this is commonly called “fire in the belly.” If you don’t have it, you probably won’t succeed, even with funding.

Of course, this has to be in concert with a variety of visible characteristics that indicate that you as the entrepreneur have the attitude and practical skills to make it happen. Here are some key ones they look for:

1. Talks and writes well. Can concisely explain the unique, compelling value of the proposed venture in written terms and in oral presentations (elevator pitch), recognizing that some investors rely more on one than the other. Listens before answering questions.

2. Networked and connected. Successful entrepreneurs already have a visible network of trusted suppliers, potential customers, partners, and even investors. These are critical to any venture. A successful track record with previous investors is a home run.

3. Full disclosure attitude. Clearly willing to provide details of weaknesses as well as strengths of the proposed venture, and the challenges ahead You must be willing to welcome the participation of the angel investor in the company, at least at the advisory level.

4. Values intellectual property. Convincingly presents a patent, trademark, or other “secret sauce” that can create equity value, not just current cash flow for the owners. This has value now, and is critical for maximum value in a merger or acquisition.

5. Not in a heated rush. Calm and self-assured, rather than desperate. Can show milestones achieved, as well as planned, which indicate rational expectations. Allows sufficient time to find capital, including due diligence time for investors.

6. Realist. The best entrepreneurs recognize and accept things as they are, and react accordingly. They are quick to change their direction when they see that change will improve their prospects for achieving their goals.

7. Domain experience and expertise. Investors realize that passion is no substitute for knowledge and experience, and every business is more complex that it might look on the surface. They will pay a premium for someone who has been there and done that.

At the stage during which the angel is normally investing, the entrepreneur may be all the angel has to go by to decide whether the deal is worth pursuing. The technology or product may be at an embryonic stage. There may not be any customers to talk to in order to evaluate the market need.

The investor, in order to eventually be successful, has to spot not only winning technologies but winning people, and all investors have a slightly different view of what a winner looks like. So, of course, they try to guess the internal traits, like honesty, dedication, vision, intelligence, and leadership based on external traits listed above.

If you think you want to be your own boss and run your own business, look in the mirror to see if you have the right traits to be an entrepreneur in your domain of interest. Better yet, ask a real friend, who won’t just tell you what you want to hear. We can’t change you, but you can change yourself, if the current pain level or the future reward is high enough.

Marty Zwilling

7 Entrepreneur Attributes Imply Execution Ability

After the idea, it’s all about execution. In fact, it’s not clear that even the idea is all that important. Most investors tell me that an A entrepreneur with a B idea is much more fundable than a B entrepreneur with an A idea. It’s great to be a visionary, inventor, thinker, or a dreamer, but none of these matter in the business world if you are not also a do-er.

According to Professor Sean Wise, who claims to have worked with more than 15,000 entrepreneurs (including many with the popular TV shows Shark Tank and Dragon’s Den), no matter how great the idea and the opportunity, in the end it is only the execution that creates change and generates wealth.

His book, “HOT or NOT: How to know if your Business Idea will Fly or Fail,” focuses not only on the elements of a good idea and a good pitch, but also on the key attributes that we both look for in identifying the entrepreneur who can deliver, versus the fast-talking idea person:

1. Never fails to be an evangelist. This entrepreneur gets out there and actively looks for people who can help make an idea into a business, including potential customers, suppliers, employees, investors, friends and peers. No secret discussions about the great idea, or paranoia that someone else will steal it.

2. Willing to listen, and will address skeptical views. Good executors always ask the hard questions, and don’t let people get away with saying just what they want to hear. They dig deep, and keep asking questions until they understand what you don’t like or won’t work, and even offer do some homework before getting back with a better answer.

3. Proactively sets metrics and track goals. There are more things in a business to keep track of than any single human being can accomplish without a serious project management mindset. Good implementers find a way to translate long-term goals into daily action items, and make sure everyone is “singing from the same song book.”

4. Tie rewards to performance results. Effective business people work hard to align everyone in the organization toward key metrics. They don’t hire friends, or just pay people for showing up and looking busy. A properly designed rewards structure is the most powerful tool for mobilizing the team to meet business success objectives.

5. Tie organizational structure to strategy. The entrepreneur who can execute quickly identifies strategic value chain activities and can quickly communicate who’s in charge of each one, so these key activities don’t fall between the cracks. This doesn’t require that all traditional titles be filled, to impress investors, or due to a lack of imagination.

6. Willing to question assumptions and adapt. Most successful startups make several major pivots early in their business lives. The chances of your first business plan being correct are very low, so great entrepreneurs take ownership of their plan and make it a living document. Others commit to stay the blind course, and will probably fail.

7. Entrepreneur a personal role model. Not only does an entrepreneur breathe life into the company, but they also instill their values, passion, and work ethic. If they can’t make and keep commitments, neither will the company. Investors recognize difficult personalities and large egos as high risk for effective execution.

Of course, entrepreneur evaluation, as well as opportunity evaluation, is a highly subjective process. We all have biases that can trick us into making bad decisions on people, as well as ideas. Thus the best entrepreneurs, and the best investors, spend more time trying to find information that refutes their beliefs, rather than more data which might support a bias.

Certainly, successful implementation requires an understanding of the "big picture," but the devil is in the details. Yet leading for execution is definitely not about micro-managing people or doing it all yourself. It is about “owning” the process, leading others by example, with no excuses.

We have all heard lots of entrepreneurs proclaiming that their idea is the “best you will ever see!” But every investor and advisor I know has to think a long time before they can talk about the best execution they have ever seen. How many do you know?

Marty Zwilling

Business 2013 - Optimism, But Check Your Strategy

Even though it has been a long haul, it’s nice to see some optimism surfacing in 2013. Earlier this year, a new study “2013 Business Outlook Survey: A New Reality Of Cautious Optimism” was published by EKS&H. It shows a return to cautious optimism despite growth lower than expected in 2012, and much improved perspective from the record-high pessimism of the last few years.

According to earlier studies from Forbes Insights, many entrepreneurs not only feel the lessons learned during the past few years have helped them survive, but the recession also exposed flaws in their business strategies that were previously not apparent, and they could fix. Here are some financial planning areas of emphasis derived from multiple studies:

• Better cash flow controls. Obviously, falling income over the past years put additional pressure on small business cash flow. Some companies turned to cutbacks over boosting financial reserves. Others focused on reducing overhead and expenses, but they needed a balanced strategy, along with new lines of credit and financing.

• More focus on strategic planning. Small business owners now recognize the importance of planning amid the new economic environment and want to spend more time doing it. Only 44% indicated they had a strategy in place during the recession, or to guide growth during the coming recovery period. More work needed.

• Increased business role in US economic recovery. Small businesses now believe they have played a key role in the U.S. economic recovery, but in spite of, rather than assisted by, support from the federal government. Still, they are fighting for action, particularly for even higher Small Business Administration (SBA) loan limits.

• Increase operating efficiencies. A majority of small business leaders intend to be more aggressive in 2013 by implementing a range of actions to advance their businesses. Respondents cited a greater focus on cost cutting and efficiency as the number two step to achieving growth in 2013, only slightly behind increasing sales.

• Add new revenue streams, and more aggressive marketing. At the same time, 71% plan to spend more on digital marketing in 2013, and pursuing new revenue streams is seen as a top priority for transforming bottom line profits. Another approach is to diversify and broaden the product lines and services.

• Grab market share from competitors. A large majority of respondents acknowledged that the old way of doing business will no longer work and that they need to find new ways to take advantage of market opportunities. Many are planning to be more aggressive in grabbing market share from competitors.

These initiatives, in concert with current findings, support economists’ forecast that the U.S. economy is transitioning to a self-sustaining economic expansion in 2013-2014 that will not be derailed by the sequester, Europe’s sovereign debt problems, or the still looming U.S. fiscal cliff.

The NFIB Index of Small Business Optimism increased 1.9 points in February, to 90.8. While a nice improvement over the last several reports, the Index still remains on par with the 2008 average and below earlier troughs. The direction of February’s change is positive, but still not indicative of a real surge in confidence among small-business owners.

My take on all this is that entrepreneurs see some light at the end of the tunnel, and the light is no longer a freight train heading straight at them. We always learn more when times are tough, and we should come away with more strength and determination, as well as real results. Soak up the optimism, do some real financial planning, and push the limits on all business fronts.

Marty Zwilling

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

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

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

How to Set a Growth Culture in Your Startup Early

One of the big advantages of being an entrepreneur and starting your company from scratch is that you get to set the culture, which is much easier than changing the culture of an existing business. The challenge is how to do it, and how to do it right. Why not learn what you can from companies like Apple, who are leading the way with great growth and a great culture?

Jim Stengel, in “Grow: How Ideals Power Growth and Profit” chronicles a ten-year study of the world’s fifty best businesses, including Apple, and concludes that those who centered their businesses on a culture of improving people’s lives had a growth rate triple that of competitors in their categories.

Here are ten culture building principles, adapted for startups from this study, that I believe have the same potential for tripling the growth and survival potential of your entrepreneurial efforts:

1. Communicate your dream and operationalize it. Mission statements tend to be narrow, business oriented statements such as “Be the leader in customer satisfaction.” Your dream and your company culture needs to be outward focused with a higher good, extending beyond the company’s financial interests.

2. Be clear about what you stand for, inside and outside your company. Your personal priorities, values, and principles set the culture. The best way to be clear about them is to regularly engage team members, customers, and suppliers. People follow what you do, not what you say.

3. Design your organization for what it needs to win. This includes the specific work your startup must do, the capabilities you need to build for a competitive advantage, and the career path for team members to bring this to life. “Traditional” marketing, sales, and product management organizations often lead to mediocrity.

4. Get your team right and do it quickly. For startups, this means knowing where you need help and where you need helpers, and hiring carefully. For help, hire people who are smarter than you in the domain they know, while helpers give you arms and legs, but need you to dictate the tasks and make all the decisions. Quickly handle hiring mistakes.

5. Champion innovation of all kinds. You must visibly champion a portfolio approach to innovation, emanating from dreams, not desperation. The portfolio should be much more than just product improvements, and should include better business models, customer service improvements, as well as continuous process improvements.

6. Set your standards very high. You tell people every day what meets your standards when you agree or disagree with recommendations from your team. If you believe in your team, you set high standards and stick to them. A good team will step up to the challenge, and your customers will notice and respond to the culture of excellence.

7. Train all the time. This is simply a mind-set shift. Every interaction every day is a training event, and you can capitalize on it or not. Training is coaching, rather than criticizing, to improve the outcome next time. Training all the time is a hallmark of great leaders and great companies.

8. Do a few symbolic things to create excitement about what is important. Focus on one or two symbolic events a year, major actions that will be meaningful to your team and other stakeholders, and make them fun as well as directional. Pick your heroes carefully, both customers and team members.

9. Think like a winner, act like a winner. Customers can sense how motivated a business’s people are just from seeing the product and how it’s presented to them. Customers want to buy into a winner, so make sure your people never apologize for price or quality, and never back away from an opportunity to delight a customer.

10. Live your desired legacy. If you don’t know your ultimate goal, you will never get there. If you team doesn’t know the ultimate goal of your business, they can’t get it there either. Be like Steve Jobs, who lived a legacy and left a legacy at Apple, of radical or even magical products and experiences. He did it in one of the world’s largest companies.

The right business culture doesn’t require a cult atmosphere, but it does require a disdain for concepts like conventional wisdom and status quo. It does have to be built around ideals, employee permission to be creative, and something other than just making profit. How many of these principles do you practice in your startup?

Marty Zwilling

Great Startups Sell Around Gartner Hype Predictions

The Hype Cycle was a concept put forward by Gartner, Inc. back in 1995 meant to apply to technology product evolution and acceptance. As I was reading about it a while back, it occurred to me that the concept relates directly to how investors see startup opportunities and potential success as well, at least those with technology in their offerings.

For those of you unfamiliar with the concept, the Gartner Hype Cycle characterizes the over-enthusiasm or "hype" and subsequent disappointment that typically occurs with the introduction of new technologies. Hype curves then show how and when technologies move beyond the hype, offer practical benefits and become widely accepted. A hype cycle in Gartner's interpretation always comprises five phases:

1. Technology trigger. The first phase of a hype cycle is the technology trigger or breakthrough, product launch or other event that generates significant press and interest. This is the “truly disruptive technology” that startups often claim.

2. Peak of inflated expectations. In the next phase, a frenzy of publicity typically generates over-enthusiasm and unrealistic expectations. There may be some successful applications and startups using the technology, but there are typically more failures.

3. Trough of disillusionment. Technologies and related startups enter the trough of disillusionment because they fail to meet expectations and quickly become unfashionable. Consequently, the press usually abandons the topic.

4. Slope of enlightenment. Although the press may have stopped covering the technology, some businesses continue through the slope of enlightenment and experiment to understand the benefits and practical application of the technology.

5. Plateau of productivity. A technology reaches the plateau of productivity as the benefits of it become widely demonstrated and accepted. The technology becomes increasingly stable and evolves in second and third generations. Startups can now truly define a problem, and position their solution for rapid growth. Investors love this stage.

For the latest info, Gartner recently released their Hype Cycle Special Report for 2012, detailing some of the biggest trends in technology this year. This report evaluates the maturity of more than 1,900 technologies and trends in 92 areas. New this year is big data, the Internet of Things, in-memory computing and strategic business capabilities. It’s definitely worth a look.

According to this latest report, HTML5, 3D printing, gamification, social analytics, and augmented reality are now at the peak of inflated expectations. The trough of disillusionment includes NFC for mobile payments, cloud computing, gesture control, virtual worlds, and more. Media tablets, biometric authentication, and speech recognition are on the slope of enlightenment, and predictive analytics is now in the plateau of productivity. Others say Software Defined Networking (SDN) is still on the rise.

There have been numerous criticisms of the hype cycle, one of which is that it is not a cycle, and that all technologies don’t really have the same outcome. Another criticism is that the shape of the line has not altered or accelerated in ten years, even though all the evidence suggests that the half-life of new technologies is getting shorter, and the number of competing technologies is increasing.

So, of course you have the option of ignoring hype cycle predictions, and pushing forward with your latest technology startup. Just don’t be surprised if you get investor pushback while early in the cycle, and be prepared with counter arguments. Great startups know the hype, then set out to beat it.

Marty Zwilling

Gen-Y Should Thank Gen-X For Social Media Today

What happened to Generation X? They are generally defined as anyone born between 1965 and 1980, sandwiched between 80 million Baby Boomers and 78 million Gen-Y (Millennials). Gen-X has just 46 million members, but they continue to lead the way and set the standards in the startup world.

Gen-X is the group that will bridge the two larger generations of Boomers and Gen-Y. I guess the bridge isn’t as exciting as what has happened on one side or what might happen on the other, so they are often referred to as the “forgotten” generation, or the lost child demographic.

I spotted a book a while back which humorously characterizes the issues, titled “X Saves the World: How Generation X Got the Shaft but Can Still Keep Everything from Sucking ”, by Jeff Gordinier. He has a big generational chip on his shoulder, and his tongue-in-cheek rhetoric is inspiring age-based debates in offices across the country.

What are the legacies that Gen-Y inherited from Gen-X? Aren't Gen-X creations like YouTube and MySpace largely responsible for Gen-Y narcissism? Didn't punk rock begat Rock Band? Gordinier says in his book "We've created all these great websites that now Millennials waste their lives on."

In fact, one could argue that Gen-X actually created the Internet. The Internet then gave each person the ability to voice their own ideas and concerns, leading to new levels of group collaboration. Here are some additional characteristics often associated with Gen-X:

• Individualistic. Gen-X came of age in an era of two-income families, rising divorce rates and a faltering economy. Because they were the first “latch-key” children, Gen-X is independent, resourceful and self-sufficient. In the workplace, Gen-X values real responsibility and freedom.

• Technologically adept. The shift from a manufacturing economy to a service economy occurred during their watch. They were the first generation to grow up with PDAs, cellphones, e-mail, laptops, Blackberrys, and technology woven into their lives.

• Flexible. Many Gen-X’ers lived through tough economic times in the 1980s and saw their workaholic parents lose hard-earned positions. Thus, Gen-X is less committed to one employer. They adapt well to change and are tolerant of alternative lifestyles.

• Value work/life balance. Unlike previous generations, members of Gen-X work to live rather than live to work. They appreciate fun in the workplace and espouse a work hard/play hard mentality. Gen-X managers now sometimes incorporate games and humor into team work activities.

Gen-X is rife with entrepreneurs. In fact, they will likely make or break our country’s ability to transition to the new social Internet society. They have drive and independence. And they have a lot they can teach both the boomers and Gen-Y.

In fact, they currently make up 42% of the American workforce, compared to 32% Boomers (because some have already retired) and 26% Gen-Y (the rest are still at home or in school).

This generation felt the freedom to go into business for themselves, such as the many dot-com companies that emerged during the 90s. They were not as concerned with security, often returning to their parents' home after experiencing college and work for the first time.

For at least the next few years, Gen-X will be the major facilitators of change. They are now or will be soon running your company. Indeed, in these times we really can’t afford to forget this particular group. Show your respect today.

Marty Zwilling

10 Entrepreneur Comments That Kill Investor Deals

Lack of confidence in your self, your product, and your startup is a surefire recipe for disaster. At the other extreme, too much confidence or arrogance can kill you just as fast. It’s always painful when a startup fails, but as a mentor to founders, I would hope that you can learn from these failings and not stumble on the same issues. I’ve written about these before, but since I see them so often, I thought it might be worth reiterating:

1. “Business plans are for dummies.” Some startups think business plans are only for investors. In reality, you should do a business plan primarily for yourself, as it forces you to think through all the elements. If it’s not written down, you can’t measure it, and thus you can’t manage it. Also written plans are much more effective communication to your employees, lawyers, accountants, and other key players in your rollout.

2. “If we build it, they will come.” The hot term these days is “viral marketing”, meaning we won’t do any marketing, but our product is so great that everyone will know about us anyway by word of mouth and through Internet social networks. In most cases, viral marketing only begins to work after you prime the pump with several million in real marketing over a couple of years.

3. “We have no competitors.” VCs and angel investors hear this one all the time. The investor view is that if you can’t find any competitors, either you are not being honest, or you haven’t looked, or there isn’t any market for your product. Your funding request will likely go into the circular file.

4. “More features than anyone.” Just because you included all the features of Facebook, Twitter, Pinterest, and LinkedIn in your new social networking product, doesn’t mean everyone will love it. In fact, quite the opposite usually happens, due to complexity and work to switch. Investors like laser focus on a market-need causing real pain.

5. “Microsoft is too big/slow to be a threat.” Usually the reason the big companies are no threat is that the market is too small. Competing with IBM, Microsoft, and other large companies is a very difficult task. Entrepreneurs who utter this line are kidding themselves. They may think it's bravado, but investors think it's stupidity.

6. “We have the first-mover advantage.” That’s probably the soft way of saying, we don’t have a patent or any “secret sauce” for a competitive advantage. Unfortunately, a startup with no brand name and no intellectual property is a sitting duck for the big slow company, as soon as they see you gaining a bit of traction. Sleeping giants do wake up.

7. “No need to risk my own funds.” This is usually seen as the difference between involved and committed. Investors expect the founder and other principals to have “skin in the game,” over and above “sweat equity.” If you and your friends are trying to play Donald Trump, don’t expect other mere mortals to carry the risk load for you.

8. “We’re funded, now we can relax.” Quite the opposite is really true. Now the real work starts to build a sustainable business. Now you have to manage to budgets and timelines, and avoid the temptation to splurge a bit on office space or too many new employees.

9. “It’s the market, stupid.” It’s great to have a passion about a favorite new toy you invented, but just because you love it doesn’t mean the whole world will love it. Another variation on this theme is the person who creates a “solution” from technology, and then makes up a “problem” that it will solve. There is no substitute for understanding the market, and sizing the opportunity, before you climb out on a limb.

10. “Me, myself, and I.” I recently watched a promising startup I know wither and die for lack of funds because the founder refused to consider stepping aside as CEO in favor of a more experienced candidate, as a condition of a $1M VC investment. I reminded him that he could easily “kick himself up to Chairman”, but he wanted it all, and let ego take precedence over good business sense.

You probably think these are so obvious that they are clichés. I wish that were true, but I still see them happening every day. The most successful startup founders are never too busy to listen to the market, listen to their advisors, stifle their ego, and enjoy the ride. It’s a lot more fun than the alternative.

Marty Zwilling