Monday, November 25, 2013

Your Venture Is All About You, Not Your Invention

intellectual-venturesIf you expect to succeed in the thrill-a-minute, roller coaster ride of a startup, let me assure you it takes more than a good idea, a rich uncle, and luck. In fact, the idea is often the least important part of the equation. Most investors tell me that they look at the people first, the business plan second, and only then at the idea.

If you want some tips to beat the insurmountable odds, take a look at the following concepts, adapted from Richard C. Levy’s book, “The Complete Idiot’s Guide to Cashing in On Your Inventions.” He was talking about inventions, but I think his concepts apply perfectly to any entrepreneur starting a business:

  1. Don’t take yourself too seriously. Don’t take your idea too seriously, either. The world will probably survive without your idea. You may need it to survive, but no one else does. But there is no excuse not to love and laugh at what you are doing. I’m convinced that people who love their work are more innovative, as well as happier.

  2. The race is not always for the swift, but for those who keep running. It’s a mistake to think anything is made overnight other than baked goods and newspapers. You win some, you lose some, and some are rained out, but always suit up for the game and stick with it. It’s not speed that separates winners from losers; it’s perseverance.

  3. You can’t do it all by yourself. Entrepreneurial success is almost always the result of unselfish, highly talented, and creative partners and associates willing to face with you the frustrations, rejections, and seemingly open-ended time frames inherent to any business startup.

  4. Keep your ego under control. Creative and inventive people, according to profile, hate to be rejected or criticized for any reason. An out-of-control ego kills more opportunities than anything else. While entrepreneurs need a healthy ego for body armor, it can quickly get out of hand and become arrogance if not tempered.

  5. You will always miss 100 percent of the shots you don’t take. Don’t be afraid to make mistakes. If you don’t put forth the effort, you won’t fail, but you won’t succeed, either. Inaction will keep opportunities from coming your way.

  6. Don’t start a company just for the financial rewards. We all want to make money. That’s only natural. But you should be motivated by the opportunity to “make meaning” as well. People who do things just for the money usually come up shortchanged.

  7. If you bite the bullet, be prepared to taste gunpowder. Not every idea or decision works. For every action, there is always a criticism. Odds are, you’ll encounter far more criticism than acceptance. Learn from your mistakes, and don’t blame someone else.

  8. Learn to take rejection. Don’t be turned off by the word “No,” because you’ll hear it often. Rejection can be positive if it’s turned into constructive growth. My experience is that ideas get better the more times they are presented. “No” means “not yet.”

  9. Believe in yourself. One of the first steps toward success is learning to detect and follow that gleam of light Emerson says flashes across the mind from within. It’s critical that you learn to abide by your own spontaneous impression. Allow nothing to affect the integrity of your mind.

  10. Sell yourself before you sell your ideas. Be concerned about how you are perceived. You may be capable of dreaming up ideas, but if you cannot command the respect and attention of associates and investors, your proposal will never get off the mark, and you may not be invited back for an encore

As with all the other “principles of success” articles I have seen, you should take these tenets with a grain of salt. Yet I’m betting that every entrepreneur out there can relate to these principles and practices, and most of the long aspiring and unhappy entrepreneurs have broken one or more of them. Maybe it’s time to learn from your mistakes, forget the past, and go for the trophy.

Marty Zwilling

Tuesday, November 19, 2013

Investors Do Not Fund Research And Development

research-and-developmentI still get business plans, looking for an investor, that say all too clearly that the primary “use of funds” will be to do research and development (R&D) on some promising new technology, like superconductivity or cancer cures. Entrepreneurs forget that investors are looking for commercial products to make money, rather than R&D sunk costs, so investment hopes are sunk as well.

In fact, the term ‘research and development’ covers a continuum of activities, so you need to use a more precise term to maximize your funding likelihood. There are opportunities all along the continuum, and they need to be mapped to the right academic environments and public- and private-sector development organizations before a funding source can be determined.

Let’s consider the six stages normally associated with R&D, and the boundaries and project-specific activities interwoven therein:

  1. Basic technology research. The first stage is basic research on a technology that shows a potential for solving a difficult or expensive problem. Look only for grants, universities, and enterprise sponsors at this stage. Real products are only speculation at this stage, and mentioning a large list of them won’t help get outside investors.

  2. Technology development. This stage is the transition to pilot-scale research on the technology. It may entail a number of false starts, but no products. A successful result is a one-of-a-kind technology that shows enough promise both technically and economically to warrant demonstration. Funding sources are still the same as stage one.

  3. Prototype development. Now we are ready for demonstration tests conducted on first-time or early-stage products. The demonstration stage usually implies substantial redesign and debugging until final robustness can be established. Angel investors are definitely interested at this stage, but VCs usually wait until stage five or six.

  4. Verification. Verification is testing and publicly reporting the performance of a commercial-ready technology using specific standards (EPA, FDA, etc.). Results, if positive, are used for marketing a product directly to customers. If these required tests are common and low risk, VCs may jump in at this stage.

  5. Commercialization. The fifth stage includes preparing for, financing, and implementing full-scale manufacturing and marketing activities. The technology can be reliably replicated and produced. This includes entering into partnerships, arranging for manufacturing facilities, and developing channels for distribution. All is definitely fundable now.

  6. Diversification. At this point the technology is ready for implementation with a full-scale marketing plan for an array of products, including interfacing with appropriate partners, and commercialization. The term research and development should never be mentioned, even though ongoing efforts for the next product are always required.

While I certainly applaud basic research, I try to remember that people buy solutions and products, rather than buying technology or a new platform. There is even a small group of customers, called ‘early adopters’ who seek out new technology solutions. However, we all need to remember that the mass market tends to wait for the product image to supersede the technology.

So investors, looking for a near-term large and growing market, see technology development as a big red flag. They defer to others, like government agencies, universities, and large corporations to take that risk. You can participate, of course, with private funds and grants, but don’t expect venture money to be thrown your way just yet. Get used to the message, “We love your proposal, so come back when you have a real product and a real customer!”

Marty Zwilling

Tuesday, November 12, 2013

7 Strategies For Beating The Failure Odds Online

beat-the-oddsIt seems like everyone has an Internet startup these days. The cost of entry is so low – you can create a web site for almost nothing - and you are on your way to riches with e-commerce, your latest invention, or personal services. But the low cost also means that your competition will also be there in force. Mashable claims there are 150,000 new web sites created per day.

In addition, every business has operating costs, like customer acquisition, fulfillment, inventory, and customer service. Without a sustainable strategy, these challenges lead to the terrifying statistic that nine out of ten online businesses will fail, and lead to the current ratio of Internet failures to millionaires being thousands to one.

So what are the key strategies that can improve the success odds for your online startup? In the latest book by business guru Joe Wozny, “The Digital Dollar: Sustainable Strategies for Online Success,” I found a good summary of some great strategies, with some practical advice on how to implement them:

  1. Understand what’s in a name on the Internet. In the online world, you need a solid connection between your domain name and your product, brand, or business. In addition, you must reserve consistent names in key online channels like Twitter, Facebook, and others. Failure can stall business strategies, and bring digital momentum to a halt.

  2. Content is king of the road. Having a web site is necessary, but not sufficient. The site must have more and better content (information presented) than your competitor. Digital content includes text, graphics, sound, and video, with presentation style, currency, and appeal. The best content gets attention and keeps momentum growing.

  3. Beware of no-cost and low-cost marketing. Marketing requires content, and nothing is “free.” Social media activities require professional effort and time, so beware the hidden costs. No-cost efforts usually have no value. Content that does not change loses its value quickly. Assess cost versus value with analytics and measurement tools.

  4. You have to be found and favored by search engines. Search engines like Google are still the primary method for finding information on the Internet. If your web site is not optimized for search engines (SEO), all your online content and marketing efforts are wasted. “Paid search” will mitigate this to some extent, but is not a sustainable strategy.

  5. Engage your audience with social media. Social media is more than the “Big 4” of Facebook, YouTube, LinkedIn, and Twitter. It’s sharing features built into your web site content like social bookmarking, emailing, or auto posting and interactive features like comments and voting. It is integrated features for smart phones and tablets. Do them all.

  6. There is still a place for paid advertising. Online advertising is the promotion of your site and content on other sites such as pay-per-click contextual ads, banner ads, rich media ads, and ads in newsletters. Key measurements should always include return on investment, and visibility to the targeted audience.

  7. The route to success is not a random walk. From a strategic perspective, all the above should start with an overall digital roadmap, where you define your goals, outline the steps required, and articulate your success measurements. Plan to update this roadmap at least once a month, based on results, new information, and competition.

For sustainability against competitors, every startup needs to practice strategic business decision making, rather than managing the crisis and the opportunity of the moment. That means continual focus and change based on the existing customer base and existing competitors, as well as new opportunities for growth.

“Pivoting” is another name for a strategic change decision, or for changing your strategy, your business model, target customers, or direction, and this is an integral part of evolving a company. According to Steve Blank, research has shown that a typical successful Internet startup experiences up to three pivots in their evolution. If four or more pivots occur (or none), then the chance of success goes down.

So while the cost in dollars of entry to an online business is low, that doesn’t prevent a failure from hurting badly. Don’t let the low entry cost lure you into a false sense of security, or convince you that you don’t need to make strategic plans to be sustainable. How many of these key strategies are in your plan, or already implemented?

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.

Monday, November 11, 2013

10 Common Startup Flaws Leading To An Early Demise

failing-bar-chartBased on my experience as a mentor and an entrepreneur, if you fail on your first startup, you are about average. That’s not bad, but who wants to be average? Every young entrepreneur knows implicitly that startup success is a long hard road. Statistics show that the failure rate for new startups within the first 5 years is higher than 50 percent. How can you improve your odds?

Of course, a real entrepreneur always takes a failure as a milestone on the road to success. They count on learning from their mistakes, and use the experience to move to the next idea. But why not learn as well from the mistakes of others, without suffering their cost, time, and pain? In that context, I offer you my list of ten top startup failure causes, seen over and over again:

  1. No written plan. Don’t believe the old urban legend that a business plan isn’t worth the effort. The discipline of writing down a plan is the best way to make sure you actually understand how to transform your idea into a business. Take heed of the words of an old country song, “if you don’t where you’re going, you might end up somewhere else.”

  2. Business model doesn’t make money. Even a non-profit has to generate revenue (or donations) to offset operating costs. If your product is free, or you lose money on every one, it’s hard to make it up in volume. You may have the solution to the world hunger problem, but if your customers have no money, your business won’t last long.

  3. Idea has limited business opportunity. Not every good idea is a good business. Just because you passionately believe that your technology is great, and everyone needs it, doesn’t mean that everyone will buy it. There is no substitute for market research, written by domain experts, to supplement your informal poll of friends and family.

  4. Execution skills are weak. When young entrepreneurs come to me with that “million dollar idea,” I have to tell them that an idea alone is really worth nothing. It’s all about the execution. If you are not comfortable making hard decisions, taking risk, and taking full responsibility, you won’t do well in this role. Remember, the buck always stops with you.

  5. The space is too crowded already. Having no competitors is a red flag (may mean no market), but finding ten or more with a simple Google search means this may be a crowded space. Remember that sleeping giants do wake up if you show traction, so don’t assume that Microsoft or Proctor & Gamble are too big and slow for you to worry about.

  6. No intellectual property. If you expect to seek investors, or you expect to have a sustainable competitive advantage against sleeping giants, you need to register all your patents, trademarks, copyrights, and trade secrets early. Intellectual property is also often the largest element of early-stage company valuations for professional investors.

  7. Inexperienced team. In reality, 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. If this is your first time around, find a partner who has “been there and done that” to balance your passion and bring experience to the team.

  8. Resource requirements not understood. A major resource is cash funding, but other resources, such as industry contacts and access to marketing channels may be more important for certain products. Having too much cash, not managed wisely, can be just as devastating as too little cash. Don’t quit your day job until new revenue is flowing.

  9. Too little focus on marketing. Viral marketing and word-of-mouth are not enough these days to make your product and brand visible in the relentless onslaught of new media out there today. Even viral marketing costs real money and time. Without effective and innovative marketing across the range of media, you won’t have a business.

  10. Give up too easily or early. In my experience, the most common cause of startup failure is the entrepreneur just gets tired, gives up, and shuts down the company. Many successful entrepreneurs, like Steve Jobs and Thomas Edison, kept slugging away on their vision, despite setbacks, until they found the success they knew was possible.

Note that the lack of a university degree or MBA is not even in the list of common failure causes. In fact, we can all point to examples of successful entrepreneurs who dropped out of college, like Mark Zuckerberg and Bill Gates, but still went on to be way above average. The most important thing you can learn in school is how to learn.

The best entrepreneurs value “street smarts,” in addition to “book smarts,” to temper their passion with reality principles, like the ones listed here, to stay ahead of the crowd. It’s good to say you never make the same mistake twice, but success is even sweeter the first time around with no mistakes. Go for it.

Marty Zwilling

Monday, November 4, 2013

When A Startup Chooses IPO Most Founders Are Out

Many entrepreneurs still dream of “going public,” making billions of dollars, and playing with the big boys. They don’t realize that this option would likely be their worst nightmare, since it costs millions for the road show, usually dilutes your equity to a tiny fraction, and takes away all your entrepreneurial control. Consider the recent example of Facebook and Mark Zuckerberg.

Even though the Initial Public Offering (IPO) alternative for a successful startup seems to be coming back, it is relatively rare. After a record low of 39 U.S. IPOs in 2008, the market was up to a still trivial 128 in 2012 (compared to 675 in 1996). Even in most of these cases, the original startup founders were pushed out, or heavily supplemented, with “experienced” executives.

Sure, there are examples of Founders who have survived and prospered, such as Bill Gates and Larry Page, but these guys are the exception, not the rule. More importantly, you should never even start down this path unless you can really use a large infusion of $150 million in cash or more, and have $3 million in the bank and up to 18 months to dedicate to the effort.

I reviewed a good summary of the advantages and disadvantages of an IPO exit strategy for startups in a widely-used textbook “Entrepreneurship,” by Robert Hisrich, Michael Peters, and Dean Shepherd. Their synopsis of the key risks should make you look hard for an alternate exit strategy:

  • Increased risk of liability. With Sarbanes-Oxley, the CEO, CFO, and the Board of Directors are all assumed to have full knowledge of all government standards of compliance and reporting. All are charged with personal responsibility and liability for reporting and public disclosures, backed by huge penalties, fines, and prison terms.
  • Higher administrative expenses. Most estimates of the expense for compliance and accounting procedures of a public company are at least double, or maybe quadruple those of a private company. Expensive new IT systems, consultants, and investment bankers are usually required.
  • Increasing government regulations. Just to keep track of new regulations and changing compliance requirements, many companies have added a new bureaucratic tier and a chief compliance officer, as well as more expensive lawyers. Annual reporting and audit requirements continue to increase.
  • Disclosures of information. With public shareholders and high liability risks, every public company must disclose and answer to shareholders and the press on all material information regarding the company, its operations, and its management.
  • Pressures to maintain growth pattern. Opening your company to the public will change the way you do business, from reinvesting returns for the future, to maximizing growth each quarter. The pressures to maintain growth patterns and meet the expectations of the investment community are typically real and intense.
  • Loss of control. When shares are sold to the public, the company starts to lose control of decision making, which can even result in the venture being acquired through an unfriendly tender offer. With the more popular Merger & Acquisition (M&A) exit strategy, the control stays with the new entity.

On the other hand, if you are looking for major financing to expand manufacturing capacity, or need major marketing efforts to build your brand, an IPO may be the only way to get you there. Of course, IPO funds can be used to finance a big development effort, but the delay in payback will likely cause a quick stock price decline, which invokes the challenge of continuous growth mentioned above.

In any case, an entrepreneur in one who likes to build new products or services, and works ON their company, while a public business executive works IN the company. Once the new startup is “proven,” most entrepreneurs are happy to exit, before being forced out or burned out, to start again with a new and even bigger vision. Don’t be driven by greed to the wrong alternative.

Marty Zwilling