Monday, December 30, 2013

7 Questions Test Entrepreneur Focus Before Funding

snail-moneyThe first question most people seem to ask when contemplating a new startup is where they will get investor money. That’s certainly a valid question, but all the money in the world won’t make your business work if you don’t have a plan to use it, or hate what you are doing. I suggest that there are several important questions before assuming that funding is the gate to your success.

In reality, the best way to assure the success of your startup is to do something you love, as opposed to something that you think will make you a lot of money. Of course, all these things and many more are critical, so it’s important that you keep your priorities straight. Here are some key questions to ask yourself, before asking others for money:

  1. Do you really need investor funding to make this work? From your plan, calculate the absolute minimum amount you need to make your plan work, and then buffer it by 25%. Consider the non-cash alternatives, like offering team members equity instead of cash and bartering for services. Fundraising is stressful and difficult, which is why 90% of successful entrepreneurs do bootstrapping.

  2. Do you have a viable plan? If you haven’t yet written down a business plan, you probably have no idea how much money you really need, or even if the opportunity is real. I believe the process of writing the plan is more valuable than the result, because it forces you to think through all the elements, and make sure they fit together and fit you.

  3. What level of experience and training do you have for this business? Be wary of stepping into an unknown business area, just because it looks easy or promises a big return. The real secrets of any business are not in textbooks, and you can’t believe everything you read on the Internet. Experience is the best teacher.

  4. Do you have real self-confidence and self-discipline? Starting a business is hard work and will require sacrifices. You will be operating independently, making all the decisions, and shouldering all the responsibility. Will you be able to persevere and build your new venture into a success?

  5. Do you have passion for this idea and this business opportunity? There is no joy in starting a business, if you can’t stand the people, business climate, or the day-to-day responsibilities of the job. Some people relate to service businesses, while others are more comfortable with manufacturing or construction.

  6. Do you really understand and aspire to entrepreneur lifestyle? Being a startup founder is not a job, but a lifestyle, like getting married versus staying single. In fact, it’s more like being single, since founders usually have no one to lean on, no one to make decisions for them, no one to blame, and no vision to follow but their own.

  7. What type of business startup best fits your mentality? Beyond the traditional new product or service model, you can always buy an existing business, purchase a franchise, join a multi-level marketing (MLM) company, or simply go out on your own as a consultant. Each of these has their unique challenges and payback. Ask around.

If you have made it this far, it’s fair to now start asking people where and when you can find the money you need (if any). Professionals will tell you that the sequence is friends and family first, angel investors second, and only then venture capital. Each of these has a cost in time an effort.

The process for all of these is networking (not email blasts or cold-calling investors). Start with the local Chamber of Commerce, industry associations, or investor seminars. Just attending doesn't work. Use your entrepreneurial spirit to start some exchanges and relationships that can lead to your next step.

Starting a business is a marathon, so do your preparation and training before you ask for that bottle of water. Finding money is tough, but it’s not the hardest part. The hardest part is to do it all while enjoying the journey. Start slow like a snail, and make sure you enjoy the walk before you start running after money.

Marty Zwilling

Sunday, December 29, 2013

You Can’t Run A Startup And Fear Speaking In Public

stage-fright-public-speakingAs a mentor for aspiring and early-stage entrepreneurs, I talk to a fair number who may have a great vision and a strong engineering background, but have a negative interest in the role of public speaking in business. In fact, they often claim to be part of the survey group that fears public speaking more than death, but I’m not sure how anyone could validate that survey.

Beyond the fear, many really don’t get the value of being willing and able to communicate effectively with team members, investors, customers, and a myriad of other support people, both one-on-one and one-to-many. I’m not suggesting that all have to be on the professional speaker circuit to succeed, but let me assure you that public speaking is a required business skill.

Thus, if you are like me, with no real background or experience in public speaking, I encourage you to start early with some traditional training, like a Dale Carnegie course, or read a good book on the subject, like a recent one by successful businesswoman and speaker Jan Yager, Ph.D., “The Fast Track Guide to Speaking in Public.” After that it’s practice, practice, practice.

Dr. Yager outlines in her book just a few of the reasons why an entrepreneur needs to overcome the fear, and master the art of speaking in public, and I’ve taken the liberty of adding a few occasions from my own business experience:

  1. You need funding, and have to address a group of investors. As an investor, I sometimes see CEOs who negotiate to send their VP of Marketing to talk. Those requests will always be rejected, since investors invest in people, rather than ideas, and want to look the top decision maker in the eye and gauge their ability and conviction.

  2. You have the opportunity to appear on a panel of experts. As a startup, you as the entrepreneur are the brand, the brand builder, and the major lead generator. You can’t afford to turn down the honor of being visible and showing your expertise, no matter how small the forum or indirect the role.

  3. You are asked to explain your vision in a television interview. Believe me, talking in front of TV cameras requires all the skills of public speaking, and more. The implications to you and your company are also large, so be prepared. In her book, Jan devotes a whole chapter to speaking to the media, as a key aspect of public speaking.

  4. As your company grows, you have to host customer seminars. You may think it’s too early to worry about this requirement, or you can hire professionals for customer user group meetings, but even meeting with your first potential customer will likely have a better outcome if you handle yourself like a professional public speaker.

  5. You will be the key speaker at employee update and reward meetings. In a small startup, it may be cool to have a CEO who wears a hoodie and communicates via text messages. But it won’t be long before employees expect to hear and see their executives exercising the sensitivity and communication skills of other industry leaders.

  6. Need to represent your company at industry association events. How you speak in public is even more important outside your company than inside. Your skills will be implicitly critiqued by industry analysts, potential strategic partners, your competitors, and the media. Their perception will determine the reality of your company and your career.

Dr. Yager asserts that being able to speak in public is one of the five key business skills that can make or break your company, whether you are a new startup or an entrepreneur who's been around for many years. The other four are: new product development, writing, time management, and sales/marketing. Many would argue that Steve Jobs impact at Apple came more from his public speaking ability than the other four skills put together.

Fortunately, the ability to be an effective speaker is based on communication skills that can be taught. And with practice, you may find you are not just a good, but a terrific speaker. If you used to fear speaking, you may find yourself not just tolerating it but enjoying the experience as you understand the source of your fears and how to overcome those fears.

You can’t win as an entrepreneur working alone, and without speaking in public, just like you can’t build a business from your invention without good business skills. The good news is that both are learnable, so the earlier you start, the better prepared you will be when you need them most. For an entrepreneur, the need arises as soon as you have your initial idea. Are you there yet?

Marty Zwilling

Monday, December 23, 2013

The Smartest Entrepreneurs Bootstrap Their Startup

bootstrapThere is so much written these days about how to attract investors that most entrepreneurs “assume” they need funding, and don’t even consider a plan for “bootstrapping,” or self-financing their startup. Yet, according to many sources, over 90 percent of all businesses are started and grown with no equity financing, and many others would have been better off without it.

According to the book, “Small Business, Big Vision,” by self-made entrepreneurs Adam and Matthew Toren, it’s really a question of need versus want. We all want to have our vision realized sooner rather than later, but it can be a big mistake to bring in investors rather than patiently building your business at a slow, steady pace (organic growth).

In fact, most of the rich entrepreneurs you know actively turned away early equity proposals. Too many founders are convinced they “need” equity financing, for the wrong reasons, as outlined in the book and supplemented with a bit of my own experience:

  • Need employees and professional services. Of course, every company needs these, in due time. In today’s Internet world, enterprising entrepreneurs have found that they can find out and do almost anything they need, from incorporating the company to filing patents, without expensive consultants, or the cost to hiring and firing employees.
  • Need expensive resources up front. Many people think that having a proper office and equipment somehow legitimizes their business, but unless your business requires a storefront, everything else can be done in someone’s home office, or a local coffee shop, on used or borrowed equipment. Consider all the alternatives, like lease versus buy.
  • Need to spread the risk. Some entrepreneurs seem to get solace and implied prestige from convincing friends, Angels, and venture capitalists to put money into their endeavor. If nothing else, these make good excuses for failure – no freedom, wrong guidance, etc.

On the other hand, there are clearly situations where your needs call for investors. Even in these cases, all other options should be explored first:

  • Sales are strong – too strong. If you are not able to keep up with demand due to lack of funds for production, and your company is too young for banks to be interested, you will find that investors love these odds, and are quick to go for a chunk of the action.
  • Your company has outgrown you. Some entrepreneurs are quick with creative ideas, and even excellent at managing the chaos of initial implementation. That’s not the same as instilling discipline in a larger organization, where most the challenge is people.
  • You need a prototype. When you have invented a new technology, you need expensive models and testing, including samples for potential customers. If you don’t have the personal funds to make these happen, investors might be your only option.
  • You need specialized equipment. If your solution depends on high-tech chips, injection molding, or medical devices, and you can’t get financing from suppliers, giving up a portion of the company to investors is a rational approach.
  • General startup expenses are beyond your means. Investors are not interested in covering overhead, unless they are convinced that you have already put all your “skin in the game” (not just sweat equity), and have real contributions from friends and family.

When deciding whether and how an investor can help you, remember that finding outside investors requires a huge amount of time and work, perhaps impacting your rollout more than working with alternate approaches and slower growth. Perhaps you really need an advisor rather than an investor.

Even under the best of circumstances, working with an investor requires give and take. More likely, you now have a new boss – which may be counter to why you chose the entrepreneur route in the first place. Maybe that’s why bootstrapped startups are the norm, rather than externally funded ones. You alone get to make the big decisions on your big vision.

Marty Zwilling

Tuesday, December 17, 2013

10 Metrics To Drive Your Annual Business Review

Visa Business_December InfographicEntrepreneurs have no trouble focusing on how to build a product, and the good ones know how to find and nurture those first critical customers. Many, however, don’t know how to take their small business to the next level. What I’m talking about here is a level of discipline and skill necessary to collect and analyze the relevant business data, known as metrics.

As the end of the year approaches, it’s a good time for every startup to assess the metrics, technology, and platforms they’re using to manage the business. Maybe it’s time for an upgrade to get you to the next level. For starters, here is my selection of some key metrics that every six-sigma joint like GE tracks without thinking, but that too many small businesses haven’t yet formalized:

  1. Sales revenue. Sales is simply defined as income from customer purchases of goods and services, minus the cost associated with things like returned or undeliverable merchandise. Of course, everyone is happy when the numbers keep going up, but the data needs to be mined constantly for deeper meanings and trends.

    Sales data needs to be correlated to advertising campaigns, price changes, seasonal forces, competitive actions, and other costs of sales. More sophisticated metrics in this domain, like the Asset Turnover Ratio, Return on Sales, and Return on Assets, can tell you how your company’s performance stacks up against others in the same industry, or same geography. In the long run, these tell you whether you will live or die.

  2. Customer loyalty and retention. Customer loyalty is all about attracting the right customer, then getting them to buy, buy often, buy in higher quantities and bring you even more customers. You build customer loyalty by treating people how they want to be treated.

    There are three common methods for measuring customer loyalty and retention: 1) customer surveys, 2) direct feedback at point of purchase, and 3) purchase analysis. All of these require a systematic and regular process, rather than ad hoc implementation. According to Fred Reichheld and other experts, a 5% improvement in customer retention will yield between a 20 to 100% increase in profits across a wide range of industries.

  3. Cost of customer acquisition. This metric is a measure of the total cost associated with acquiring a new customer, including all aspects of marketing and sales. Customer acquisition cost is calculated by dividing total acquisition expenses by total new customers over a given period.

    This tells you whether your marketing and advertising investments are paying for themselves. Over time, you cost of acquisition should go down as growth and your brand image go up. Again, be sure to check industry norms for your type of business to see if you are competitive.

  4. Operating productivity. Obviously, measuring staff productivity is important, and the reasons why are obvious. If you do not know how your staff is doing, how can you truly know the inner workings of your own company? Staff discontent can put your company in serious jeopardy, while on the other hand, high staff productivity can be your best company asset.

    Productivity ratios can be applied to almost any aspect of your business. For example, sales productivity is simply actual revenue divided by the number of sales people. Compare your productivity to industry norms by consulting industry statistics, or check yourself for continuous improvement by accumulating your statistics over time. The process works the same for manufacturing productivity, marketing productivity, or support productivity.

  5. Size of gross margin. The gross margin is calculated as a company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and enjoy as profits.

    Tracking margins is important for growing companies, since increased volumes should improve efficiency and lower the cost per unit (increase the margin). Improving productivity requires effort and innovation, and many companies charge ahead, not realizing that margins are going the wrong way. What you don’t measure probably won’t happen.

  6. Monthly profit or loss. Profit is not simply the difference between the costs of the product or service and the price being charged for it. The calculation must include the fixed and variable costs of operation that are paid regularly each month no matter what. These include such items as rent or mortgage payments, utilities, insurance, taxes, and the salary that you and your partners are not taking just yet.

    Beyond reducing your cost of operation, the biggest lever on profit is usually the price you can charge for your product or service. This amount you charge, over the base cost of an item, is called “the markup,” and the difference between cost and price is the “margin.” Investors realize that small companies with margins below 60% will likely have a tough time growing.

  7. Overhead costs. In economics, overhead costs are fixed costs that are not dependent on the level of goods or services produced by the business, such as salaries or rents being paid per month. In any growing business, these can creep up and out of control if not tracked carefully.

    By tracking them on a monthly basis, you will be able to see more clearly where spending occurs in your business. Use this information when updating your business plan or when preparing yearly budgets. Because overhead costs are not influenced by how much your business earns or grows, you need to track them separately and diligently. Moving to a location that is less expensive or switching utility suppliers are ways to reduce the fixed costs of running a business.

  8. Variable cost percentage. By definition, variable costs are expenses that change in proportion to the activity of a business. Fixed costs and variable costs make up the two components of total cost. These include the "cost of goods sold" and other items that increase with each sale, such as the cost of raw materials, labor, shipping and other expenses directly connected to producing and delivering your goods or services.

    The value of tracking these as a metric is to assure that they are decreasing as your volume is growing, and assure that they are consistent with industry norms and competitive offerings. If your variable costs go up, your business won’t grow, even if sales are up and the number of customers increases.

  9. Inventory size. Inventory is the raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.

    For growing companies, this is an important area to manage. You will find that you either have too much inventory (cash tied up, high storage costs, obsolescence, and spoilage costs), or not enough (lost sales, lower market share). The challenges include forecasting inventory requirements, buying in cost-effective lot sizes, and just-in-time delivery systems.

  10. Hours worked per process. Beyond ratios, you need to keep metrics on total labor hours expended for various functions. Labor is likely to be your most important and most expensive raw input, especially in manufacturing, assembly, and support operations. The one constant in small business is change, so the excuse of “we have always done it that way” is not one that a growing company should ever want to hear or use.

    These days, most labor-intensive operations can be replaced with automation, and as you grow the business, you need to recognize when the cost of automation is justified. At some point, the return on investment (ROI) of more computer systems, and automated manufacturing operations, is well worth the cost and time to change.

Leveraging the latest data can uncover new opportunities and help you measure the results of your efforts. I believe every small business owner should monitor these metrics constantly, and take time to chart, review and carefully examine them at least once a month.

Tracking key business metrics is important for a bunch of reasons, but probably the most important reason is cultural. It leads to a culture of success when you see the key business metrics moving in the right direction. Don’t miss the opportunity to celebrate your successes as you reach new milestones.

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, December 16, 2013

8 Key Questions To Expect In Investor Due Diligence

startup-employee-due-diligenceIf you really want to impress a startup founder as a potential employee, or you want to be a smart investor, you need to know the right questions to ask. These are the questions that get past the hype of a founder “vision to change the world,” and into the realm of real business strengths, weaknesses, and current health.

Some founders try to deflect these questions by talking incessantly, so you often need to be calm, patient, and persistent to get the answers. My advice to founders out there is to not volunteer too much, but be open and honest in the face of direct questions like the following:

  1. What is your burn rate and runway today? These are investor slang terms referring to how fast money is being spent, with an implicit question of how long the startup can survive before breakeven or another cash infusion is required. You need to know this as a future employee, since it probably gates how long your new job will last. If the runway is less than six months, with no new source signed, both you and the startup are at risk.

  2. How much “skin” is already in the game? The intent of this question is to determine the level of commitment of founders, both cash and “sweat equity,” and how much others have already invested into this plan. Implicit in the analysis of the answers is how much progress has been made for the investment, and how stable the business is now.

  3. What’s the total history of this company? Gaps in the history of a startup are big red flags, just like gaps in your resume. If the company was incorporated five years ago, and is still in early stages, with the same founding team, chances are slim that it will suddenly get back on track with you as an employee, or you as an investor.

  4. How well do the founders get along with each other, and with the team? The smartest people are often the most eccentric, so some conflict in the ranks is normal. Excessive conflict, lack of communication, or lack of mutual respect is indicative of a dysfunctional team, and eventual failure of the startup. You won’t get this answer from the founder, but it’s not hard to get it by talking to other team members.

  5. What’s in this deal for me? Investing in a startup, or joining a startup, is always a very big risk, so the potential return better be large. As an employee, you salary will likely be low, your job security low, so the job title better be large, and the stock options better be large. As an investor, look for an ROI that is 10x your initial investment, based on something more than a dream from the founder. What traction can be measured today?

  6. Who do you have as outside board members? The only true outside board or advisory members are not family members, not current investors, but are experienced entrepreneurs with deep knowledge and connections in the relevant business area. They should be asking to speak to you if you are a potential investor or a superstar hire. If you talk to them, they better know the answers to the previous questions.

  7. Who is a real customer that I can talk to? Real customers are ones who have paid full price for the product, have it installed and in use, and are still satisfied. Free trials don’t count, betas don’t count, and “excited about the potential” doesn’t count. If there are no customers yet, when will the product ship, and how many times has the date been set?

  8. How solid is the intellectual property? Provisional patents, or lawsuits pending, don’t add up to a strong sustainable competitive advantage. You need to know these things before you put your money on the table, or bet your career and your family’s future on this startup.

Again, I’m not suggesting that you go on the attack to get answers to these questions. But don’t let management divert you with comments on your failure to understand “the vision and the big picture.” If you are a potential employee, it probably makes sense to get the job offer first before you tackle some of these, always staying calm and assertive.

In the parlance of an investor, asking these questions and getting answers is the heart of that mysterious “due diligence” process. Now you know. If you are a potential employee, you need to do the same due diligence before you sign on. Every good founder will have done the same on you, before they make you an offer.

Marty Zwilling

Monday, December 9, 2013

Corporate Perks Will Doom Your Entrepreneur Dreams

business-jet-laptopI hear many executives and professionals in large corporations talking about their dream of jumping ship, and starting their own company. What they don’t realize is that the longer they wait, the more big-company habits they are acquiring, which will make their eventual decision harder and entrepreneurial efforts less and less likely to succeed.

Certainly, the longer they wait, the greater the variety of excuses they will find for why now is not the time. Common examples include; need to work on my resume, broaden my experience, enhance my skills, save my income, and maintain a stable family life until my children are gone. Most will then NEVER make the step, and remain unsatisfied through much of their career.

The reasons for waiting have merit, but they need to be balanced against the non-entrepreneurial habits that every professional picks up in a large corporation. These include:

  • Managers delegate real work. Executives in an enterprise usually don’t write their own memos, contracts, and certainly don’t schedule their own meetings. It’s easy to grow accustomed to having your staff do the “real work” (my assistant will call your assistant to work out the details). In a startup, that luxury isn’t possible, so the work suffers.
  • Executives have perks. By the time many big-company executives are ready to go out on their own as an entrepreneur, they have forgotten what it’s like to fly in coach class, buy their own health insurance, or having to deal with running out of money. The result is a startup with an exorbitant burn rate, and a very unhappy entrepreneur.
  • Manage a team rather than work with a team. There is a difference. In a startup you have to be an integral contributor to your small team, taking your share of the workload, and leading by example. That’s a whole different mindset and skill set from your experience and training in an enterprise.
  • Highly specialized focus. In a big company, you get used to having an IT team around configure your computer, a personnel specialist for hiring and firing, and a marketing team for strategy. You forget or even disdain any ability to be that jack-of-all-trades a new startup requires.
  • Training courses are required. Before stepping into a new role, you count on the company providing you with in-house or contracted training courses for the basics, like project management or people management. In a startup, these don’t exist, and you have forgotten about how to self-learn, and there are no in-house experts to lean on.
  • Count on getting paid for your efforts. Big-company professionals get in the habit of expecting near-term remuneration for today’s work. The average startup founder takes no salary for the first couple of years, with a high risk of never getting any return. After too many years, that’s an unfathomable step down for most people.

So when is the best time to make the leap from a big corporation to a startup? My scan of the literature and talking to investors would indicate a few years of experience in a large organization (zero to 5 years) is a good thing, while 20 or more years before founding your own venture will stack the cards against you.

Unless you are really young at heart, if you haven’t made the leap by the time you are in your early 40s, those habits you have picked up with your experience in a big company will be evident to your team and to investors. Not to mention the fact that if you are accustomed to a big-company culture and lifestyle, you will likely not be happy or satisfied with the startup lifestyle.

So if you really want to be an entrepreneur, there is no time like the present. Old habits die hard, so the longer you wait, the harder it will be to make the jump, and your odds of success go down. Going the other way is a lot easier.

Marty Zwilling

Thursday, December 5, 2013

7 Benefits For Startups Joining The B-Corp Movement

b-the-changeMore entrepreneurs want to be socially responsible these days, but fear a negative impact on profits, growth, and the ability to find an investor. In the short run, there are real costs associated with the “triple bottom line” of maximizing profit, people (social), and planet (environment). But very quickly, it is becoming obvious to startups that the value and satisfaction exceeds the costs.

To legally facilitate startups who want to give top priority to socially conscious solutions, seventeen states, starting with Maryland in 2010, have passed legislation allowing incorporation as a Benefit Corporation (B-Corp). The B-Corp status is meant to reduce investor suits, and gives consumers an easy way to spot genuine social commitment, without assuming it is a non-profit.

I believe this option will spread quickly to other companies, states and countries. Last year, Etsy in New York announced that it had joined the ranks of the now more than 865 companies nationwide as a Certified B Corporation, keeping good company with Patagonia in California and Seventh Generation in Vermont.

Even without B-Corp status, entrepreneurs are speaking out more on the positives to support business models that benefit not just shareholders, but customers, workforce, the environment, and the greater community. Several good discussions take a whole chapter in a recent book “Mind Your Business: Thoughts for Entrepreneurs,” by international entrepreneur Toine Knipping:

  1. Investors favor startups that integrate social responsibility. Investors believe these startups demonstrate more integrity and less risk, as well as being better positioned to deliver long-term, sustainable value to their stakeholders. Of course, investors still require a profitable business model, and the potential for high returns.

  2. Startups can use social responsibility as a competitive advantage. Some customers and stakeholders don’t just prefer that an organization is socially responsible, but insist on dealing only with these startups. That’s a real competitive edge that you can use in your marketing and positioning.

  3. Socially responsible products typically sell at a premium price. The anecdotal evidence is growing that consumers are willing to pay a premium for sustainability, and have started to demand a discount for ‘un-sustainability.’ More startups are using this strategy to improve their profitability, and reduce financial risk.

  4. Social responsibility opens the door to a broader customer base. By adding to perceived value, it can attract more sophisticated and demanding customers less expensively and more quickly. More and more customers choose a company based on their perceptions about the good that they do, as well as the price and service.

  5. Customer loyalty is highest for socially conscious startups. Even way back in the recession, the Edelman Good Purpose study found that 68 percent of global consumers would remain loyal to a brand if the organization practiced social responsibility. We all know the cost of retaining customers is far less than the cost of new customers.

  6. Being socially responsible improves organizational performance. Doing business is a human process. Team members interact on a daily basis with the stakeholders of the startup and the way they feel about the organization has a major and direct impact on how they perform their tasks and do their job at the end of the day.

  7. It is easier to recruit and retain human capital. Employees tend to stay longer with the organization, reducing the costs of recruitment and retraining. This leads to better performance as employees become specialized in their tasks and experienced, but they are also more motivated to give back to the organization and ultimately, more productive.

More and more, the goodwill of the relevant customer community, in large measure, contributes to the success of any product and any company. For some business opportunities, like Facebook and Twitter, the community is the value.

Unfortunately, balancing social and environmental impact against making money for survival and investor return isn’t an easy equation. In the long-run, what your business actually does is what counts. Are you ready for the challenge ahead?

Marty Zwilling

Monday, December 2, 2013

6 Tips For Entrepreneurs Who Think They Can Dance

so-you-think-you-can-danceI’m not much of a television person, but my family loves one of the popular “reality” shows, called “So You Think You Can Dance,” so I’m sort of forced to watch it every week. Over time, I’ve concluded that even startup entrepreneurs can learn a few things from this one. Of course, you must ignore the pomp and circumstance of the TV staging.

I’m on the selection committee of our local Angels group, so I know that every CEO approaching our group for funding goes through ten minutes of creative “dancing,” to give us a basis for selecting startups that are most qualified and “ready” to proceed to the next level. If selected, they go through it again in the real meeting of 40-60 investors. It’s tough and not fun for either side.

The business “dance” obviously has different particulars than TV dancing, but there is serious business and artistry involved in both cases. Here are some observations I can offer to startup founders looking for funding, analogous to the aspiring dancers on the show, hoping to move to the next level:

  1. Judges evaluate the person first. Investors want to look the CEO in the eye, and be convinced that he or she can lead the company to success – it’s more important than the creative idea. On the TV show, I’m sure you all see contenders that have lost before they start, just because they lack the enthusiasm, presence, and confidence of a winner.

  2. You only get a few minutes to make the case. In fact, your case is usually won or lost in the first couple of minutes. In business, as on the show, wins can turn to a loss if you bungle or skip relevant basics in the short time allotted. Everyone wants a longer time or second chance to win you back, but it would rarely ever change anything.

  3. Skip the bravado, but don’t be immobilized with fear. I subscribe to a quote from another TV show too old to mention, where the hero said “He who is not afraid – he’s a fool.” Let your adrenalin help you deliver an outstanding performance, but trying to wow investors with jokes or stories of unending success will not move you up a level.

  4. Play to the audience in front of you, and adapt your message. If the panel is looking for value and return for the investor, skip the technology pitch, or customer sales pitch. Some entrepreneurs give the same talk, no matter what the audience. If you have only one dance, don’t be surprised if it wears thin quickly with the judges.

  5. Dress appropriately and professionally. Under-dressed may impress on TV, but it’s better to be over-dressed in the business world. Business casual is the standard for investor presentations. Remember that most investors are from a generation where faded and torn jeans were on the wrong side of success in business.

  6. Practice, practice, practice. Even if you are an experienced dancer, you practice your craft with renewed determination before a big show. Business entrepreneurs need to do the same thing, maybe in “presidential debate” style with their team of critics, until they master the timing and can handle every unanticipated slip or challenge.

Even though I’m certainly no expert on dancing (I’ve taken Beginning Ballroom Dancing three times now), most of the reviews I have seen call the TV show realistic, with the panel of judges giving reasonable critical and technical feedback. That’s a welcome relief from Donald Trump's pompous calls on "Celebrity Apprentice."

Depending on one's perspective, this economic surge is either the perfect time or an awful one to start a business. So, if you plan to face a business version of the dancing challenge soon, watch the show and check the recommendations above. Show some energy and enthusiasm, and don’t let the technical steps required overshadow your creativity. Break a leg!

Marty Zwilling

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

Tuesday, October 29, 2013

8 Tips On How Much Money To Ask For From Investors

investment-amountStartups ask me “How much money should I ask for?” The simple answer is the absolute minimum amount you need to make your plan work. Some entrepreneurs try to start with a huge number, hoping they can negotiate and close on a smaller one, while others understate their requirements, in hopes of getting their foot in the door with an investor.

Neither of these strategies is a good one, as both are likely to damage your credibility with potential investors, even before they look hard at your plan. Here are the parameters you should use in sizing your request, and be able to explain in justifying your request to investors:

  1. Consider implied ownership cost. If your company is early stage and has a valuation under $1M, don’t ask for a $5M investment. The investor would be buying your company five times over, and he doesn’t want it. If your valuation is around $1M, you can validly ask for $200K-$300K, and offer 20%-30% of your company in exchange.

  2. Type of investor. Angel investment groups usually won’t consider a request over $1M, while venture capitalists won’t look at anything under $2M. Amounts of $100K or less, are usually relegated to “friends and family.” Approaching any one of these groups with a funding request outside their range is a waste of your time and theirs.

  3. Company stage. If your company is still in the “idea” stage, you have no valuation, so size your investment request on the basis of “goodwill” that you have with your rich uncle, and your business track record. Angels might be interested during “early stage” if you have a prototype, but VCs won’t bite until you have a product, customers, and revenue.

  4. Calculate what you need, and add a buffer. Do your financial model first with the volume, cost, and pricing parameters you want. See where your cashflow bottoms out. If it bottoms out at minus $400K, add a 25% buffer, and ask for $500K funding. The request size must tie into your financials to be credible.

  5. Investment terms. The most common case is an equity investment, but there are many terms that can impact what request size is credible. I’m talking about things like anti-dilution clauses, preferred versus common stock, valuation tied to later round, warrants, and bridge loan options. More restrictive terms reduce the credible investment amount.

  6. Single or staged delivery. In many cases, a single investment request may be scheduled for delivery in stages, or tranches (often misspelled as traunchs or traunches), based on milestone achievement. Obviously, this reduces investor risk and allows a larger commitment, since they can limit their loss if you fail to meet key objectives.

  7. Use of funds. Investors expect to see a “use of funds” list, and they expect the uses to apply only to your core mission. In other words, don’t tell investors that you intend to buy a fancy office building or executive cars with your funding. Even executive salaries should be minimal at this stage.

  8. Projected return on investment. Most entrepreneurs skip this step, but it helps your credibility to include it. Estimate a return on investment (ROI) by projecting company valuation at exit, to show the investor who has 20% what he will get back for that initial investment. He’s looking for a 10x return, since he assumes only one in ten survive.

Obviously, determining the proper size of your investment request is a non-trivial exercise, but it’s one of the most critical factors for investors in making a decision to invest or not to invest in your company. You need to get it defensibly right the first time, because changing your request under pressure definitely will kill your credibility.

The days are gone, if they ever existed, when you could present an idea and a vision, and have investors throw money at you. Now you have to do your homework. Get busy, and have fun.

Marty Zwilling

Wednesday, October 23, 2013

Investors Look First At The Founder, Then The Idea

James_H__ClarkInvestors are people too. They evaluate you like you should assess a possible co-founder or first employee. What are your credentials? What have you done that would convince me that my money is safe in your hands? Only after they see you as fundable, do they want to assess your plan for fundability, not the other way around.

Even with great credentials, it is all too possible for an entrepreneur to come across as a high risk investment. Here are some “rules of thumb” that indicate a marketable and experienced entrepreneur:

  • Highlights team strengths, more than his own. Some entrepreneurs seem to never stop talking about themselves, and all their accomplishments. The best ones talk more about how they have assembled a well-rounded team, and will continue to fill in the gaps.

  • Talks about the implementation plan, not the idea. Most entrepreneurs are great at envisioning their business idea, but the implementation is fuzzy. Experienced entrepreneurs talk about their implementation and rollout plan, with real milestones and quantifiable results.

  • Customer needs and benefits first, then product features. The best entrepreneurs show that their market domain knowledge is as strong as their product technology knowledge. They are able to weave their solution into the market, the opportunity, and customers, in a way that sounds like a natural fit, rather than a product sales pitch.

  • Focus is clear, not all over the map. Success means the entrepreneur must be laser focused on driving the business, passionate about a product, and passionate about a specific set of customers. If the business plan reads like a smorgasbord of offerings, there are probably not enough resources to do any well, and customers will be confused.

  • Rational business model, with prices and volumes. Unless the business is a non-profit, the entrepreneur needs to show how he will make money. The days are gone when investors want only to see a large market share or growth in eyeballs. Are revenues and costs reasonable and projected for five years?

As an entrepreneur, don’t let your ego get in the way, or believe you can take the world on by yourself. If you want to attract investors, you must be willing to listen and work with others, as well as share your ideas or your knowledge. Loner entrepreneurs won’t get their foot in the door with any investor I know.

If you are young or inexperienced, and don’t have business credentials yet, don’t hide this fact. I recommend a proactive approach, to highlight the accomplishments you have, the power of other team members, and show some humility in admitting a search for the rest of the team.

So you might ask, how do first-time entrepreneurs ever get the funding they need to prove that they can perform at the next level? The best answer is to team yourself with someone who has “been there and done that.” After a team success, you’ll find all members are “promoted” to the next level.

Another common approach is to bootstrap your first startup to success, possibly with some help from friends and family. As I said in the beginning, investors are people too, so get out there and make them your respected business friends before you try to sell your idea. Business networking is not the same as cold calling with a hard sell.

Every investor knows a few good entrepreneurs, like Marc Andreessen of Mosaic and Netscape fame, who could get millions of dollars of funding for just about any idea. He needed Jim Clark to help him get a first investment, yet now Marc is a major VC in his own right.

In fact, I don’t know one investor who has funded a “million dollar idea” without regard to the person and the plan behind it. Think about that the next time you pitch your idea, and never mention the people.

Marty Zwilling

Friday, October 18, 2013

Start Business Planning Now For The Holiday Season

holiday-planningIn the US, the holiday season of Thanksgiving and Christmas is fast approaching. But no matter where you live in the world, you should use the holidays to give thanks for the positives in your life and your business. Yet you can never forget the seasonal business cash flow and activity demands that are approaching, so to be prepared – you need to start the planning now.

Even though these last few years have not been great financially for entrepreneurs, it always helps to look at the cup as half full, rather than half empty. We often forget that one person’s loss is a gain for others. Here are a few of the many things that entrepreneurs should be thankful for this holiday season, to keep the challenges in perspective:

  1. The economy continues to rebound. The stock market reached a new all-time high in 2013, and is finally providing some liquidity relief to concerned investors and startups alike. Home prices are slowly coming back, and consumer spending reached a new high of almost $11 billion in May 2013.

  2. Venture capital investments are returning to startups. Venture capital firms raised $4.1 billion for 35 funds during the first quarter of 2013, an increase of 22 percent compared to the level of dollar commitments during the fourth quarter of 2012, according to a report from Thomson Reuters and the National Venture Capital Association (NVCA).

  3. New focus on a sustainable planet. The continuing rise in the price of fuel, combined with the ongoing evidence of global warming, has highlighted the need for alternative energy sources, and green products. Startups are springing up all over to capitalize on these opportunities.

  4. Incentive to do something you love. Lots of people tell me they are sick of the corporate grind, and they long for the opportunity to take their favorite activity or hobby, and make a business of it. Now many of them are doing it. Some are finding something more exciting after being laid off dead-end jobs.

  5. Holidays mean more time for the family. Keeping a sense of balance between work and family is always a challenge. With the workload reductions, some of you now have had the time to re-introduce yourself to your family and friends.

But remember, nothing happens in your business unless you make it happen. In all businesses, especially startups, cash-flow is king. Here are some key tips to optimize your cash flow in anticipation of these busy holiday periods:

  • Start with re-sizing per-unit profitability. Margin is everything. Unless your volumes are in the millions or higher, the difference between manufacturing cost and customer price better be 50% or greater. That should be true even if your customer is really a distributor. Otherwise, sales, marketing, and operational costs will kill you.
  • Next comes sales volume by channel. Here is where you need a “bottoms-up” estimate from the people in your organization who have to deliver. This forecast is really their commitment. It’s tempting here to simply calculate one percent market share, and assume anyone can do at least that much. It’s not credible and won’t happen.
  • Don’t forget that pesky overhead. Even with a slow economy, it’s amazing how fast office space costs add up, in conjunction with insurance, utilities, and administrative help. Then there are computer costs, trade shows, inventory, and special holiday promotions. Check industry average statistics to make sure you are in the right range.
  • Holiday sales fluctuations eat cash. Sales surges means more inventory is required to cover the ups-and-downs. Every dollar in inventory is a dollar less in cash available, maybe even two dollars less if your gross margin is 50%. If you try to vary the number of employees to match, that costs even more cash for hiring, and later resizing.

As I suggested in the beginning, the business year has been a good one so far, and the coming holiday season has the potential to make it even better. Don’t let the demands of seasonal fluctuations spoil the party. Do your planning now, and drive your business to new highs, rather than letting the demands drag you down. How prepared are you to make this season a success?

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.

Tuesday, October 15, 2013

How and Why To Do Your Own Business Financial Model

Start-up ExpertMost entrepreneurs tend to avoid this area of the business, and as a result are badly surprised by cost realities, and investor expectations. They seem to think that financial projections are simply invented numbers for investors, and not useful. In reality, it’s like jumping in your car for a long hard drive with no destination in mind. Chances are, you won’t enjoy success from the trip.

What is a business financial model, really? In most cases, it is merely a Microsoft Excel spread sheet loaded with your cost and revenue projections for your startup, starting now in time and extending at five years into the future. For more value, a few variables can be added, like product volume growth rate, and number of salesmen, for “what if” analyses.

Why? For you to make decisions and manage the business - because we are all mere mortals and can’t possibly keep all these numbers and calculations in our head – to decide whether and when the business is going to be profitable given rational projections of costs and income (these assumptions are referred to as your business model). Secondarily, it will be required by potential investors to validate how much money you need to get started, and how much return they can expect on their investment.

When? The financial model should be running even before you incorporate the business and build prototype products (would you start driving your car on a long trip before you knew where you were going?). If you can’t make that objective, then at least don’t approach potential investors until your model is working – investors have little tolerance for startups with no financial plan.

How? Start with a “sample” business model, available in generic form or customized for specific industries, from many sources on the Internet. Another alternative is to download from my website a free sample model that I built for a specific startup, with elements suggested by Angel investors and venture capitalists, ready to be customized to your business.

If you are not computer literate in Microsoft Excel, your first task is to find someone who has the time and expertise to convert your base set of costs and revenues into projection formulas, cash flow summaries, and a profit and loss statement.

Do your own, if you can, because you know the numbers. In fact, this is the easy part. More challenging is ‘defining’ the business model (assembling all the real variables of your projected business, pricing assumptions, staffing requirements, marketing costs, sales costs, and revenue flows).

This business model can then be used for many purposes, such as risk and profit assessment, projecting the values of assumptions that are made based on existing market conditions, calculating the margins that are needed to avoid adverse situations, and various forms of sensitivity analysis. These are necessary to estimate capital investment requirements, plan capital allocation, and measure financial performance.

Creating financial projections allows you to see areas of strength and weakness in your proposed business model, enabling you to make critical changes that will allow your business to run more successfully.

While people start businesses for many reasons, making money is usually important. Even a non-profit can’t afford to lose money. You won't know if you can meet these expectations until you build a financial model with reasonable financial projections.

It’s a great learning experience, and you can do it yourself, but don’t hesitate to ask for help from a professional if you need it. You will be amazed at how clear the relationship becomes between pricing, cost, and volume. When you lose money on every item, it’s hard to make it up in volume.

Marty Zwilling

Monday, October 7, 2013

Real Entrepreneurs Need to Accentuate The Positive

Trevor-BlakeEntrepreneurs need to listen to constructive criticism, but ignore negative vibes and complainers at all costs. If you are a complainer, and you are thinking of becoming an entrepreneur, think again. The world of an entrepreneur is tough, unpredictable, and fraught with risk. Most importantly, the buck stops with you, so there is no room for excuses and negativity.

Even listening often to negative team members and partners will reinforce negative thinking and behavior, and turn your normally positive perspective toxic. I’ve seen it too often in real life, and it was reinforced to me a while back in a book by Trevor Blake, “Three Simple Steps: A Map to Success in Business and Life.”

Trevor is a highly successful serial entrepreneur and success coach who has studied this phenomenon for many years, including the latest findings in neuroscience. Reviewing dozens of autobiographies of great entrepreneurs, including Steve Jobs, Henry Ford, and Andrew Carnegie, it seems that all had an unshakable belief in their ability to control their lives, with no excuses.

Here he offers, with some startup adaptation from me, ways that every entrepreneur needs to defend themselves against negativity – yours and others – so you can rewire your brain and boost the occurrence of positive thoughts and behaviors:

  1. Become self-aware. When you feel an excuse coming on, no matter how trivial, stop yourself. You can’t delete the thought, but you can revise it before saying it aloud. So instead of saying, “I’ll never get the funding I need in this economy,” you might say, “Let’s try this new crowdfunding approach, since our solution value is so easy to understand.”

  2. Redirect the conversation. When you participate in negative dialog with a complainer, you’ll walk away feeling depleted. If he says, “I hate demanding customers,” counter his negative thoughts with a positive image: “At least we have customers – how many of our competitors wish they had the backlog that we do?”

  3. Smother a negative thought with a positive image. If a negative thought pops into your mind, immediately input a different image. This is the process of “neurogenesis” – creating new pathways in your brain that lead to positive behaviors. So if you think “I’m working late again,” replace this with a pleasant image of the restful weekend ahead.

  4. Don’t try too hard to convert others. When trapped in a blatant complaint session with members of your team, simply choose silence. Let their words bounce off you while you think of something pleasant. If you try to stop them, you may end up alienating yourself and becoming a target. Let your positive results do the work in time.

  5. Distance yourself when possible. When you hear insiders criticizing your startup, excuse yourself and take a break somewhere quiet. Think of something pleasant before returning. You have to take this seriously, because negative people can and will pull you into the quicksand.

  6. Wear an invisible “mentality shield.” Imagine that an invisible shield like a glass cloak made of positive energy lightly covers your whole body. You can see perfectly well through it but it protects you from others’ negative words and emotions. This technique is used by professional athletes to deflect the negative energy of a hostile crowd.

  7. Create a private retreat. When you are stuck with a cohort who is spewing vitriol, you should mentally retreat to a private, special place where you plan to enjoy the successful fruits of your entrepreneurial labor. Concentrate on your vision of making the world a better place.

  8. Transfer responsibility. On occasions when you’re pressed against a wall while someone rants about all the injustices in their role, throw the responsibility back at them by saying, “So what do you intend to do about it?” If they just want to vent rather than find a solution, this tactic will stop them in their tracks.

  9. Forgive your lapses. Everyone complains sometimes. Your computer crashes. Deadlines pile up. It’s human to vent once in a while. Be kind to yourself and start afresh. The less frequently you complain, the more time will pass between lapses into negativity. This is how rewiring the brain works.

Trying to live with complainers in your startup is not only unpleasant, but it’s bad for your own well-being, and bad for everyone’s performance. New research shows that if they keep hearing negative messages, your team behavior will change to fit these new perceptions, and not in a good way. You can’t survive with that kind of help in today’s competitive environment.

Marty Zwilling

Monday, September 30, 2013

10 Entrepreneur Milestones That Make Funding Easy

cash_countingEvery investor expects to see some business traction, both before and after a funding event. If you have been working 20 hours a day, and spent your last dollar, but have no results to show, investors will be sympathetic, but will probably tell you that your dream doesn’t have wheels. Traction means forward progress.

I hear a lot of entrepreneurs contemplating their great “idea” for several years with little discernable progress, and looking for money to start. Talk and time are cheap, but they need to understand that investors judge past results as a good indicator of future expectations. Here are some tips which will signal traction and fundability to investors, as well as to your team:

  1. Document your business plan. It’s hard to build a business without a plan, just like it’s hard to build a house without a blueprint. If you have a product description, that’s necessary, but not sufficient. If you have neither, and choose to approach an investor, you will get no attention, and probably never again get a shot at funding with that investor.

    Forcing yourself to write down a plan is actually the only way to make sure you actually have a plan. Make sure your plan answers every relevant question that you could possibly imagine from your business partners, spouse, and potential investors. That means skip the jargon and include explanations and examples.

  2. Set realistic milestones and achieve some. You can’t measure results if you don’t have a yardstick. On the other hand, if your objectives are off the chart, you look bad when you set them, and you look even worse when you miss them. Only written milestones are credible.

    Traction means that you have achieved one or more significant milestones, which will give you credibility with investors. Don’t expect them to believe your $100M revenue projection, if you are still waiting for the first revenue dollar. Only real results count.

  3. Attract a well-rounded team. A great business often starts with one person, but it doesn’t end there. If you are strong enough to surround yourself with a strong team, that’s great progress toward success.

    A CEO who has “been there and done that” is traction, especially if teamed with a financial lead (CFO) and a product lead (CTO). A team of friends and family that work for free on weekends is not likely to impress investors, unless they ARE your investors.

  4. Build qualified advisory board. If you can convince a couple of domain experts, or a couple of experienced executives to join your board and be your advocate, that’s traction. Investors love to have smart and experienced people in the boat.

    Investors are likely to make a few phone calls, so make sure these people really have taken the time and commitment to work with you, and know your business. Ideally, they will have links to distributors you need, or even be investors in your company as well.

  5. Ship a minimum product now. For a true scientist, the product is never good enough, so it’s never done. For a business, you must define the absolute minimum features you need to satisfy the customer problem, and test it in the market. It will be wrong, so count on iterating, but you learn something each time, and that is traction.

    By using a laser focused approach for the first iteration, you may actually produce something and get a customer without funding. Now investors will pay attention, since scale-up funding is less risky and has a time frame.

  6. Get a real customer and real revenue. If you give away your product or service to the first 10 customers, that’s a good learning experience, but it’s not real traction. It doesn’t prove your business model of pricing, distribution, and support. Sell one.

    Real customers give you real feedback, rather than just tell you what you want to hear. Funding for pre-revenue startups used to be the domain of angel investors, but they have moved up-stage. Without revenue, your investors are largely limited to friends, family and fools.

  7. Register some intellectual property. File a provisional patent, register a trademark, and reserve your company domain names. These are things that can cost very little money, but go a long ways in convincing someone that you are making progress.

    Intellectual property is a large element of most early-stage company valuations, and this value determines what percent of the company an investor will expect to get for his money. It’s also the keystone to convincing investors that you have a “sustainable competitive advantage.”

  8. Letters of intent or endorsement. If it’s too early for real customers, a Letter of Intent (LOI) or a written endorsement from a potential big customer is good traction to show potential investors. These show you have the ability to make the connections you need.

    Of course, a real contract or purchase order from a big customer is even better. If you have neither, you better have a prospect pipeline, connections to distributors, or partner relationship with a known company to bolster your credibility.

  9. Show personal investment. Investors like to see that you have committed personal funds as well as “sweat equity,” and they like to see real progress at this level. If you haven’t risked anything or used funds effectively, investors won’t let you risk theirs.

    A related issue is your apparent commitment to the project. If your startup is an evening hobby for you and some friends, and they all have a full-time day job elsewhere, don’t expect investors to get excited.

  10. Become a visible expert. If your business is a new job site for boomers, you need to establish yourself as the expert on this subject in the press, on social networks, and join related organizations. This is traction that will impress investors, and get you customers.

    Other ways to be visible include writing a blog, speaking at local groups, and issuing press releases which are related to the market need rather than the product you are producing. These efforts should be started well before you are ready for funding.

Your objective is to build a business that marches with power and purpose past its goals and objectives. Both your team and potential investors are watching, and if all they see and feel is words and work without progress, it’s easy to conclude that your startup is still a dream and a prayer.

Marty Zwilling