The Right Way To Get Funding From Family And Friends

Most entrepreneurs I know are so passionate about their new idea that they are surprised when family and friends don’t line up to invest in their new venture. Yet they tend to ignore this problem, and move on quickly to professional investors. They don’t realize that most Angel investors and venture capitalists will also decline to be first, if you have no commitment from friends and family.

The reality is that investors, including myself, believe that the entrepreneur is more key to business success than the idea. Thus they look for evidence that people who know you well are willing to bet on you, even before your idea has a chance to show traction. Don’t let your lack of acumen with friends and family spiral your startup into the ground waiting for someone to go first.

On the positive side, friends and family probably won’t be as demanding on your financial projections as a professional investor, and they likely will be satisfied with an initial offer of a convertible note (loan with option to convert to equity later), so you don’t have to give away the store before you get started. But they do expect you to take them seriously, as follows:

1. Proactively and sincerely engage each potential investor. Some entrepreneurs don’t want to put friends and family on the spot, so they keep all discussions very casual. I recommend making friends the first formal test of your elevator pitch, your investor slide deck, and your business plan, and earnestly ask for their advice (not money) early.

2. Sell your idea in simple terms with both logic and passion. Vision alone rarely convinces people to invest. You need to convince family and friends, in terms they can relate to, that your idea makes logical business sense, and you have done your homework on real customers, competitors, and costs. Demos and prototypes are key.

3. Demonstrate your own financial commitment and progress. Just like professional investors wait for friends and family to go first, friends will wait for you to show “skin in the game.” A startup founder that is not the “lead investor” in time and money should not expect anyone else to jump in front and lead the way. Talking loudly is not enough.

4. Outline the financial options and ask for the close. Most new entrepreneurs are not surrounded by people who understand convertible notes, startup equity investing, and exit strategies. They don’t know what questions to ask, so they will likely wait for you to lay out the alternatives and respectfully ask for some financial help in that context.

5. Carefully explain how you intend to use the funds requested. Asking for your dream budget, with no specifics on milestones, will likely remain a dream. Outline critical tasks, with a timetable, to cover the next few months. The idea is to gain credibility with initial investors by showing them results, before asking for new and larger investments.

6. Document your commitments, as well as theirs. Loyal friends and family will want to know specifically what they are signing up for, even if negotiated informally, including the risks and contingencies. Non-specific and open-ended agreements are the quickest way to break up family and friend relationships when things get tough, and they will.

7. Use friends and family as advocates to network to professional investors. Warm introductions from friends and family to existing investors is far more productive in fund-raising than email blasts, social media connections, or cold-calls to famous investors. You need all the help you can get to build your network before desperation mode sets in.

8. Limit the role of family and friends in your actual business. Professional investors love to see contributed funds from all sources, but they are wary of startups operated by family and friends. The stress and skills required to build a startup break up too many prior relationships, so key roles should be limited to partners with skills and experience.

Overall, friends and family should never be treated as an entitlement, or as a last resort. They are a key source of investment for your startup, but if not handled professionally and sensitively, can be your worst nightmare. These situations can bring new meaning to the old adage about the first tier of startup investors as friends, family, and fools. Don’t let it happen to you.

Marty Zwilling

*** First published on Forbes on 08/22/2016 ***

7 Startup Pitfalls Can Kill Your Business Growth

In my role as an advisory board member for several startups, I’m always excited to see that initial surge of revenue from a great rollout campaign. Unfortunately, many passionate entrepreneurs read this initial surge as success, and charge ahead with more of the same passion, leading to a series of potential pitfalls that can quickly jeopardize the health of the entire business.

For example, early social media startup Friendster was so enamored with their early acceptance that they turned down a $30 million offer from Google, then quickly ran into money woes and tough competition. Napster created the free music sharing craze back in the nineties and found great acceptance, and ignored the legal pushback by content owners, only to lose it all in the end.

Early success is great, but it’s only the beginning of your hard work. In addition to the visible failures mentioned above, there are many less fatal, but critical pitfalls I see all too often that every entrepreneur can avoid with some careful planning of ongoing attention:

1. Separating profitability from cash flow and managing both. An initial revenue surge, or a major cash advance from investors often leads to a mentality of building a large customer base at any cost. It’s easy to forget how quickly cash can be burned and how hard it is to find the next round. Keep your focus on business health through profitability.

2. Assuming you can keep all relevant financial data in your head. At the startup entry level, most entrepreneurs find little need for Profit and Loss statements and Income statements – they know all the key transactions. As the business grows, it pays to learn how to use automated financial tools, and review the key financial metrics daily.

3. Watch for margin erosion as real operating growth costs kick in. As the business grows, new overhead costs, including health and liability insurance, office administration, and payroll taxes. On the other end of the transaction, customer support, returns, and transportation can add up. Prices need to be reviewed to cover total costs and margin.

4. Failure to follow-up on customer receivables delays. Most businesses expect payment in 15 to 30 days, but some customers will assume they can extend this period to 45 days or more, or until they receive a late payment prompt from you. Revenue does not flow into your business based on invoices sent, but only on checks received and cleared.

5. Too busy to focus on hiring, training, and managing employees. Hiring the wrong people, or not training them, will destroy your business faster than running out of cash. Since first-time entrepreneurs rarely have experience in this area, I recommend extra training for all executives, and the use of an outside advisor to focus on this requirement.

6. Delegating cash flow management to your accountants. With the crush of new business, many startup founders delegate cash transaction management to their assistant or accountant, while they focus on finding and satisfying customers. Well-meaning and diligent assistants can kill your business by over-ordering and early paying.

7. Continue to operate without documented and repeatable processes. As any business grows, you need help to make it happen, and new employees don’t have the background knowledge, training, or the problem-solving ability you have developed. They need written processes and measurements to get the job done right.

A great vision, and the creativity to develop an innovative solution, are necessary but not sufficient to build a great business. When the first wave of customers finds you, and the revenue starts flowing, a whole new set of disciplines must kick in to keep the momentum going. With new disciples come the new pitfalls listed above, which can undo all the initial market acceptance.

My recommendation is to bring in some experienced business professionals at this point, who understand the challenges and realities of sales, marketing, personnel, finances, and operations. As an entrepreneur, you need their help in managing people, processes, and finances, and they need your vision and direction to change the world. That’s a win-win combination for everyone.

Marty Zwilling

*** First published on Forbes on 08/13/2016 ***

8 Insights For Millennials To Excel As Entrepreneurs

As an advisor to startups and an angel investor, I encounter many Millennials as entrepreneurs who are leaders and great role-models for the rest of us in business. Unfortunately there are still others who have great ideas and passion, but seem to have a very naïve understanding or acceptance of what it takes to get ahead of the crowd and succeed in business.

The reality is that Millennials (also known as Gen-Y) are here to stay, and will soon be taking over the majority of our businesses, new and old. There are over 75 million of them in the U.S., now surpassing the number of Baby Boomers, and nearly two-thirds of them are already in the work place. It’s definitely to everyone’s advantage to make them winners, or we will all be the losers.

In the spirit of making us all winners, I offer the following collection of lessons and insights from my own experience and other business executives and investors I know on how to get there as entrepreneurs faster and more effectively:

1. Embrace possible failure as one of the best learning vehicles. Unfortunately, many Millennials were raised by well-intentioned parents who never let them fail, and gave them awards for merely showing up. Most great entrepreneurs, including Steve Jobs, Bill Gates, and Michael Dell, have talked about their failures as the key to later success.

2. Actively solicit mentoring from people with more experience. Most successful executives are more than willing to share what they have learned, if sought out, asked respectfully, and sense active listening. There is no need to be intimidated by tenure or title. Real experience reveals insights never found in a classroom or abstract logic.

3. Remain intensely curious and seek out different points of view. It’s a given that Millennials understand the interests of other Millennials. But don’t always assume that everyone else will like and buy the same things. The best work hard to broaden their knowledge, and are not hesitant to challenge their own understanding of the market.

4. Prove you can do the job before asking for the title. No one is entitled to a better job position or entrepreneur funding, no matter how passionate, educated, or articulate. Real leaders are evident by their actions, not by any appointment. I’m a strong proponent of letting your results do all the talking. Don’t fool yourself with your own over-confidence.

5. Broaden yourself by taking roles outside your comfort zone. Smart entrepreneurs know what they don’t know, and work hard to fill the gaps. They are not afraid to ask questions, learn new tools, and seek opportunities to gather experience in every business role possible. In a startup, you can’t afford to outsource too many functions.

6. Don’t burn your bridges with peers and current employers. Good working relationships are hard to build, and easy to destroy. In a startup, you can’t predict when you will need help from a past connection, advisor, or investor, so it pays to maintain old relationships rather than ignore them or lose them through petty disagreements or ego.

7. Integrate social causes into a healthy business model. Many young entrepreneurs are naïve in assuming that doing good for society obviates the need to make money, and will motivate customers to pay premium prices. Smart startups, including Whole Foods, Etsy, and Patagonia, have figured out how to do both for long-term impact and success.

8. Learn to balance personal and business priorities. Some aspiring entrepreneurs work themselves to frustration and loss of health, while others prioritize their social life above all else. Neither extreme is conducive to long-term credibility or success. Investors and employees look for leaders who can balance priorities and display a positive outlook.

The good news in the latest survey from Deloitte is that Millennials are holding on to their strong values, and continue to be steered by these values at all stages of their careers. The new news is that they are expressing a more positive view of the business role in society and have softened their negative perceptions of business profit motivations and ethics compared to prior surveys.

I love working with Millennials as aspiring entrepreneurs, with their unbridled enthusiasm, innovative thinking, and fresh perspective on market opportunities. With a few additional insights as outlined here, I believe we can all work together more effectively and look forward to new markets and world changes that we never even dreamed of.

Marty Zwilling

*** First published on Forbes on 08/09/2016 ***

When Did Profit Become A Bad Word For Entrepreneurs?

As a startup advisor and investor, I find that more and more entrepreneurs avoid using the term “profit” in pitching their new venture. They seem to feel it conveys a message of personal enrichment at the expense of others. My view is that the purpose of every business is to make a profit, as fuel for growth, sustainability, and social impact. Without profit there is no business.

By profit, I simply mean offering a product or service to customers for a price that exceeds the total costs associated with the solution, thus providing some basis for recovering sunk costs and generating a return for stakeholders. Of course, I understand and don’t condone bad actors who get greedy, and exploit ways to unjustly squeeze customers and employees.

Thus I was pleased and a bit surprised to see a new book, “The Purpose Is Profit,” by Ed “Skip” McLaughlin, an entrepreneur who has both succeeded and failed in starting multiple businesses. He lays out very plainly his own experiences on both sides of this equation, and I particularly enjoyed his summary startup roadmap of twenty-one steps to success, which add real content to the eight that I recommend to every entrepreneur:

1. Select an idea you can clearly communicate in thirty seconds. Every entrepreneur needs a good “elevator pitch” which succinctly describes the idea, the customer value proposition, and business profit. Customers and investors are looking for specific solutions, not abstract ideas or complex technology concepts not yet materialized.

2. Solve a painful problem for customers who have money to spend. Solutions that are “nice to have” or “improve usability” are easy to give away but hard to sell. The same is true for solutions to some social problems, like feeding the hungry, who don’t have any money. Remember you can’t sustain a business or social cause with no revenue or profit.

3. Be able to differentiate your offering from competitors. The best differentiation is a patent or other intellectual property that also provides a barrier to entry. A commitment to work harder than competitors, or survive on lower margins, is not convincing. Customers typically won’t switch to a new vendor for less than a twenty percent cost advantage.

4. Validate your business model on real customers. Giving free beta copies of your solution to customers to elicit testimonials does not validate a business model. Investors look for sales at full price, to people you don’t know, to validate demand, price, and margin. The best business models benefit social needs as well as business needs.

5. Show an aggressive marketing and sales plan. With today’s rapid pace of change and information overload, word-of-mouth and social media alone is not a viable marketing plan. Every business requires spending money to make money. The smart ones identify and budget innovative approaches, and use metrics to tools to monitor effectiveness.

6. Generate a 5-year financial forecast from opportunity data. If you don’t set some financial targets for your business, investors won’t be interested, and you won’t know if you are making progress toward profitability and sustainability. Commitment to a set of financial objectives is the point where an entrepreneurial dream becomes a business.

7. Show that your team has the distinctive competence to win. The right people make all the difference in a winning business. This is why investors invest in the team, rather than the idea. Investors look for key leaders who have domain expertise and prior startup experience. Experience in other business areas and large corporations is not enough.

8. Build a long-term growth strategy and exit plan. Successful entrepreneurs look beyond profitability to change the world and leave a lasting legacy. Investors look for an exit strategy to allow them to capture a return on their investment. Customers and employees want a business with staying power and constant innovation for longevity.

Pundits may argue that recent business successes through user growth, including Twitter and WhatsApp achieving unicorn status (billion dollar valuations), show revenue and profit are no longer needed. I will assert that these represent the exception, rather than the norm, and most sources agree that this is a fading anomaly, rather than a model for future business startups.

Therefore I recommend that profitability be carried as a key objective by every new entrepreneur, rather than an embarrassment. Social entrepreneurs need profits to supplement those unpredictable donations if they are to achieve sustainability and a lasting social impact. Certainly, profitably alone is not business success, but business success without profit is hard to imagine.

Marty Zwilling

*** First published on Forbes on 08/02/2016 ***

How To Embrace Disruptive Technologies And Succeed

All too often as a startup investor, I hear the term “disruptive technology” from an entrepreneur, played like a trump card that should override any other potential business qualms. In fact, most investors avoid disruptive technologies as extremely risky, with long waits for a payback. They can point to the many examples of innovative technologies that have failed in the marketplace.

Even the best investors, when they hear the words disruptive technology, always look harder and deeper at all the other elements of the business model. While struggling to net out what they are looking for, I found help in a new book, “Wicked Strategies,” by John C. Camillus, who has studied this challenge for years at Harvard and with several Fortune 500 companies.

He outlines a set of guidelines which resonate with me as having a high potential to transmute disruption and chaos into cash flow in an investor’s lifetime. With the key ones paraphrased here, a new startup has a great chance to complement a disruptive technology with an innovative business model, to gain a real competitive advantage and add new economic value:

1. Define extraordinarily ambitious goals. Real breakthroughs in business, as well as in technology, usually start with BHAGs (Big Hairy Audacious Goals). Achieving stretch business goals requires more than a disruptive technology. These normally require an innovative new business model, non-linear thinking for marketing, sales, and distribution.

2. Build an entrepreneurial, risk-taking culture. Disruptive technologies sound so good on paper that they often attract risk-limiting managers and professionals rather than a culture of visionary leadership and thinking outside the box on all business elements. In mature companies, no one wants to risk the existing market share or sunk costs.

3. Relate emphatically to the customer. Advances in technology don’t always translate directly to customer problems. Yet business success requires solutions which satisfy customer needs. Engineers relate best to the technology, while the rest of the business has to find customer value propositions. Investors want to see quantified customer value.

4. Integrate social responsibility into the business model. These days, prioritizing sustainability and social responsibility is an effective way to bridge from technology to customers and employees. It’s the best way to uncover new markets driven by culture changes, underserved geographies, and new economic realities around the world.

5. Utilize design thinking and data analytics. Design thinking seeks to build empathy with the client or customer and stimulate creative responses to the customer’s needs. With big data and analysis, businesses now are able to derive powerful insights about the customer that can support innovative value propositions from disruptive technologies.

6. Find disruptive opportunities along the entire value chain. Innovation across the entire value chain can be promoted by engaging other stakeholders in the creation of value to access untapped markets and strengthen competitive advantage. Key players in the value chain include suppliers, business partners, distributors, and sales channels.

7. Add dynamically to the range of competencies in the venture. Eastman Kodak had a deep competency in film technology, but they were slow to expand their knowledge of digital imaging, displays, computing, and medicine. Their technologists never found a market. Market experts tend to find breakthrough technologies, not the other way around.

In his book, Camillus argues that with these principles, disruptive technologies can be integrated into new and innovative business models to conquer the “wicked” challenges of increased complexity and global competition present in every market today. I would challenge every entrepreneur, and every business executive, to build wicked strategies to win these challenges.

Marty Zwilling

*** First published on Forbes on 07/30/2016 ***