8 Ways To Nurture New Venture Stock Into A Goldmine

I’ll never forget that great sense of excitement I felt when I incorporated my first business, and realized that I was now the proud owner of 10 million shares of common stock. Of course, initially these founder’s shares were worth essentially nothing, but it doesn’t take much of an imagination to grasp the possibilities. It’s great motivation for every entrepreneur to get that value up quickly.

Unfortunately, in my years since as a small business advisor, I have seen too many founders squander this asset through a lack of understanding of some basic legal and operational issues, or by handing out nominally “free” stock to the wrong people at the wrong time. Now is the time to talk to a qualified attorney, and get some discipline in place for the following strategies:

1. Manage founder’s shares like gold with partners. Even though initial stock has no market value today, it is extremely valuable in dividing equity ownership between co-founders, investors, and early partners. Make sure you make allocations commensurate with commitments and contributions. Don’t allow personal assumptions or verbal offers to go undocumented. These will be back to bite you later when you achieve unicorn status.

2. Register your stock early with the IRS to minimize taxes. Waiting to incorporate until you have investors gives your founder’s shares immediate value, and the IRS will want to collect on that value when you can least afford it. Every entrepreneur should incorporate well before this time and file an 83(b) election within 30 days of incorporation.

3. Always specify a vesting period for new partners. Where possible, pay out committed shares over time as they are earned, as opposed to all up front. Typically, vesting in startups occurs monthly over four years, starting with the first 25 percent vesting only after a participant has satisfied commitments for at least 12 months (one year cliff).

4. Reserve the right of first refusal to buy shares back. To retain control of your business, you need to reclaim stock shares from anyone leaving the startup for any reason. Otherwise, later stock value growth may be lost or used against you before you can capitalize on it. Buying back stock on the open market may cost a huge premium.

5. Manage dilution with proper use of new investment terms. When new equity investors purchase a share of your company, the re-allocation of existing shares should be based on a formula that maximizes the number of your remaining founder shares. Some reduction is ownership percentage should be expected with every new investor.

6. Maximize your own vesting if the business is acquired early. If you are pushed out by an acquisition due to unusual success or strategy conflict before the normal vesting schedule comes to a close, only an accelerated vesting clause can save your original percentage. Here is another case where work up front is required to make this happen.

7. Negotiate an upgrade from common shares to preferred stock. Investors typically demand preferred stock to give them more control and first payouts, but these advantages can be at least partially offset (up to 20 percent) if you plan ahead. The acceptance of this option is now common, even though introduced only a few years ago.

8. Set maximum board seats and select criteria in bylaws. Typically, every new investor expects a board seat, which can lead to an operational nightmare and loss of control. I recommend a limit to no more than five board members, with at least two being from within the company. This assures you a reasonable voice in strategy and investments.

Sometimes opting out as Founder and CEO, as your company scales up, or even being pushed out, is not a bad thing, as long as you still retain a reasonable percentage of your original founder’s shares. Most true entrepreneurs I know are really good at starting companies, but are not ready for the focus on processes and personnel that come with a more mature organization.

If you have done the proper homework along the way as suggested here, you won’t be a part of one of those sad stories of a new venture selling for millions of dollars, or going public, with the founder being squeezed out of all the gains. Remember, founder’s shares may be just paper when you get them, but they can be a goldmine if you treat them right.

Marty Zwilling

*** First published on Inc.com on 01/12/2018 ***

6 Strategies To Build Traction and Validate Your Plan

As an advisor to many new venture founders, I often hear their frustration at being told by investors “I love your idea, but come back when you have more traction.” As a member of an angel investment group, I have to admit this is probably the most common rejection we issue. The intent is to indicate that founder passion is not a substitute for real customers buying the product.

The challenge is to convince investors that your business will attract real customers, before you have a revenue stream that exceeds your expenses. Even if you are funding the project yourself (bootstrapping), you should be asking yourself the same question before you have burned all your resources. Pivoting early, based on real customer feedback, is always cheaper than later.

I learned this the hard way a few years ago in a startup where customers loved our idea and the free prototype, but we couldn’t sell one for the full price needed to meet our financial projections. We simply hadn’t tested the price sensitivity in the market segment and geography that needed the features we offered. In fact, no founder can predict all the variables in today’s marketplace.

So what should a new venture founder do to convince themselves, as well as potential investors, that they have a viable business before the results are conclusive? Here are some strategies that I recommend from my own experience, to improve your odds of business success, as well as build traction points with your investors:

1. Quote market research and input from outside experts. No matter how passionate you and your friends are about your solution, it doesn’t mean that if you build it, they will come. Seek evidence from recognized sources, like Gartner Group, and spend time with industry experts and real customers, before quantifying your opportunity and prices.

2. Start selling it on social media before you build it. Marketing is everything these days. On the average, it takes as long to build marketing momentum as it does to build the solution. Really listen to the feedback you are getting. If you wait to begin marketing until your product is final, you will find it very expensive to pivot to meet real world input.

3. Build a realistic revenue model and price, based on cost. The free model, with an implied intent to monetize later, doesn’t work with investors anymore. It takes real money to sustain a business, with a margin in the 50 percent range, and some realistic milestones and metrics. Sell at least one at full price to a real customer to show traction.

4. Document and initiate a multi-faceted marketing plan. Word of mouth and viral marketing alone are not adequate, and a website is not all you need for credibility. To get the visibility and distribution for scaling, plan on one or two levels of partner relationships, as well as real events and promotions early. Traction is marketing and sales results.

5. Gather early customer testimonials and commitments. Great customer experience expectations these days span the range from shopping, closing, delivery, usability, to support. If you don’t have real customers yet, focus on the size of the pipeline, letters of intent, and penetration into recognized retail and distribution outlets.

6. Show team organization and preparation for scale up. New ventures requesting funding without credible operational and financial leadership will likely be declined. Don’t assume that customer-facing employees can be hired and trained at the last minute. Your plan targets and milestones in these areas are key to achieving the results you expect.

I’m not suggesting that all these business elements need to be perfect before you ask for funding or open doors for business. As an active angel investor, I do expect founders to be able to communicate a plan and progress toward these elements, just as I expect them to understand and communicate all the elements of their technology and their solution.

There is no magic indicator in business, just results. The more evidence that you can provide of customers in hand, or waiting impatiently outside the door, the more likely and timely it is that you will be able to achieve the next step. Your passion and personal conviction are necessary, but not sufficient, to turn a great idea into a scalable business.

Marty Zwilling

*** First published on Inc.com on 01/09/2018 ***

7 Guidelines For Funding New Research & Development

As an advisor to new business owners, and an occasional angel investor, I see new business proposals daily, many seeking investors to fund early research and development (R&D) of a new product idea. Unfortunately, most entrepreneurs don’t realize that the words “research” and “development” are red flags to investors, and all such proposals are routinely discarded.

Although it may seem counter-intuitive, angel investors and venture capitalists (VCs) are looking for solutions that are already complete, with some real market traction, that need funding to be scaled to a large market, with potential for rapid growth and a large return. Funding new product research and development is just too risky, with a large time delay before any return is likely.

In fact, there are people and organizations amenable to very early stage opportunities, so my advice is target your proposals to the right people to match the stage of your effort. Broadcasting or repeatedly hitting the wrong people is not only is a waste of time, but it kills your credibility with those investors later when you really may need their help. Here are the guidelines I recommend:

1. Recruit friends and family at any stage. People who know you, trust you, and believe in you above all else are always candidates for requesting an investment. In the trade, this category of investors is called friends, family and fools (FFF), and is the primary source of funding for entrepreneurs with no prior track record in business or technology.

2. Look to academia and the government for basic research. If you are looking to fund a technology study, before any specific commercial product can be considered, you need to focus on relevant large organizations with deep pockets. Sources include government grants, universities, and large enterprises searching for next generation products.

3. Find private fund incubators for technology pilots. If you project is more in the applied research stage, ready to solve practical problems, but haven’t yet named a final product, the investment sources should be extended to include large private and public fund initiatives, such as AMA IBM Healthcare or Environmental / CleanTech Projects.

4. Explore crowdfunding for the prototype stage. Funding for commercial product prototypes is still R&D in the eyes of most VC investors, but in business areas with large consumer opportunities, this activity will catch the eyes of crowdfunding investors. It’s still considered high risk for investment, since manufacturing and quality issues are likely.

5. Target specialized VCs for the certification stage. These days, almost every new product is not deemed scalable until it has been certified as meeting a multitude of quality and agency standards, including the Environmental Protection Agency (EPA) and Food & Drug Administration (FDA) clinical trials. Industry specific VCs may jump in at this stage.

6. All professional investors love the scaling stage. Solution development at this stage is the process of scaling up for manufacturing and marketing rollout. The technology is now embodied in a replicable solution, and has been sold to at least one customer. Your fundability with investors now depends on traction and perceived execution capability.

7. Reinvest early returns to expand the product line. Even for mature startups, there is always a need for further product development and research to compete and diversify the business, and investors understand this. But to prevent confusion with basic R&D, these costs should never be called out as a major category in your use of funds to investors.

Fortunately, in many attractive business domains, including mobile software, Internet apps and ecommerce, the cost of product development is at an all-time low. Developers are finding powerful tools to build mobile apps and websites for a few thousand, rather than millions of dollars. They don’t need the long research and development cycles of a new technology.

Thus smart entrepreneurs often find personal funding for solution development, and save investor funding pitches for the larger scaling-up marketing costs later. Build solutions, not technology, and don’t waste your time and credibility talking to angels and VCs until you have something of interest to them.

Marty Zwilling

*** First published on Inc.com on 01/04/2018 ***

10 Keys To Finding That Perfect-Fit Business Partner

In my experience, the initial idea for a new product usually comes from a single entrepreneur, but the implementation plan for a new business requires a team, or at least a co-founder. The reason is that any one person rarely has the bandwidth, interest, or skills to manage all the tasks required to build a business. Thus I find that two heads are usually better than one in a startup.

Way back in the early eighties, I had the privilege of working with Bill Gates and Steve Ballmer, when Microsoft was still a startup. I realize now that these two were near-perfect co-founders, with Bill having the technical passion, and Steve bringing the business experience from his prior stint at Procter and Gamble. Their skills and interests were complementary, and their trust in each other was palpable.

The challenge is how to find that elusive perfect-fit partner. As a mentor to aspiring business owners, I often get asked to find that partner for them, since founders are usually too busy with their solution. I always laugh, and ask them if they want me to find a spouse for them as well, since the right partner requires many of same attributes of chemistry, values, and passion.

I may indeed be able to mention a couple of possible names from my meeting with others, but I believe that finding the right co-founder or partners is more critical than any other task for a new entrepreneur, and it needs to be done personally. Thus I always recommend a common series of steps that I have seen working for other entrepreneurs:

1. Write a partner description for that ideal co-founder. Take a hard look at your own business strengths and weaknesses, and write down what partner skills and experiences would best complement yours. Your best friend, spouse or a family member is the least likely candidate, so don’t start there. Seek input from seasoned investors and peers.

2. Network to find co-founders as you network to find investors. In fact, your ideal partner may also be an investor. Many of the same venues, such as industry conferences and entrepreneur forums are useful for both. Online, it pays to join entrepreneur and investor groups on social media, and build relationships with people meeting your criteria.

3. Explore matchmaking sites for business partners. Co-founders are business partners for startups, so don’t be afraid to join and explore sites such as FoundersNation, StartupWeekend, and CoFoundersLab. Also start a discussion on the wealth of business blogs frequented by entrepreneurs, where you can make your interests known.

4. Support local university entrepreneur organizations. University professors and student leaders always know a selection of top entrepreneurs, alums or staff members who are just waiting to find the perfect match for their own interests, skills and ideas to change the world. Support local activities and you support yourself.

5. Look for a partner from a different culture or background. In today’s global economy, your ideal partner may be half way around the world, from a different geography and business culture. Every startup infrastructure is flush with smart people from all cultures, many of whom may be ready and able to bring new energy and creativity to your startup.

6. Re-connect to strong associates from prior assignments. If you were impressed with someone’s drive and capabilities in a prior work role, now is the time to connect again to check their interest and availability, or recommendations they may offer. Use caution to avoid employer conflicts of interest and non-compete clauses.

7. Relocate to a more lucrative geography. Finding a high-tech co-founder in the middle of Kansas may be a long search. There’s a reason that Silicon Valley and Boston are hubs for high-tech startups. These areas may have not just your co-founder, but also the robust ecosystem your startup needs for investors, programmers and customers.

8. Explore candidate values and goals outside of work. Co-founder chemistry and interest matches are best explored outside the office. Find some common hobbies or sports to get acquainted before giving away half your company. Business partnerships are long-term relationships, so take your time getting acquainted before closing the deal.

9. Jointly define major business milestones and key deliverables. This process is the ultimate test of a true shared vision and working style. Building a startup is hard and unpredictable work, and people get busy, so now is the time to jointly commit. If you can’t work as a team now and easily agree, it probably won’t happen at all in the future.

10. Negotiate and document roles early, including who is the boss. No matter how equal you all are, there is only room for one at the top to make the final decision on hard issues. Especially when everything feels good today, don’t be hesitant to ask the hard questions of each other. Investors and stockholders expect only one chief executive officer.

There are so many challenges in a startup that no founder should try to go it alone, as you need someone to share your successes, and help you recover from the inevitable setbacks. When you find someone that works, I’m betting you will be together on your next startup, and the one after that. Great teams persevere, and success breeds success.

Marty Zwilling

*** First published on Inc.com on 01/02/2018 ***

6 Steps To Empowered Employees And Unstoppable Growth

As a business advisor, one of the things I see most often as a drag to productivity and growth is employees who, despite their best efforts, can’t change things that they know are hurting the company. They want to grant deserving customers special concessions, or fix a broken process, but are convinced it may cost them their job, or find that no one above them seems to care.

Perhaps you remember as well when the norm in business was a no return policy, or one size fits all, or getting support meant waiting hours on the phone to reach an unhelpful and unhappy employee. If these still exist in your organization, they are huge red flags and you can be certain that you are losing your best employees as well as customers.

Yet every CEO I know believes that his team is motivated and empowered to make the business better for both customers and the company. I’ve spent many hours identifying the causes of this dichotomy, and working on specific steps to fix it. In that context, I found in a new book, “The Unstoppable Organization,” by Shawn Casemore, some good steps for every business owner:

1. Schedule time for personal feedback from employees. Don’t assume that feedback filtered through your management chain is adequate. We have all heard how messages change, when passed up or down the line, even without any politics or personal agendas. You need to hear first-hand what is working well, and what is not delighting customers.

2. Plan to redesign and realign employee teams every quarter. Market changes happen rapidly and regularly these days, requiring a realignment of skills, processes, and approaches to keep up. Don’t let your team get stuck in the “way we have always done things.” New perspectives are invigorating for the team, as well as for your customers.

3. Provide multiple direct communications to every individual. Don’t assume that your priorities, challenges, and support needs will “trickle down” through the management chain. Use multiple and regular communication opportunities to amplify your message, including daily briefings, team updates, as well as management by walking around.

4. Utilize technology and tools for collaboration and sharing. Things that are not measured cannot be managed. New and better technology is becoming available every day to present dashboards and metrics to show how well processes and empowerment are working, assess workload backlogs, and capture customer feedback and satisfaction.

5. Identify team champions to drive initiatives and processes. Employees who have the respect of other team members, and have shown more motivation, are typically more effective than managers in driving new processes, and identifying areas that need tuning or change. Make sure these champions get your full attention, recognition, and support.

6. Assure employee engagement and buy-in for each change. Buy-in starts by clearly listening and implementing ideas from the front lines, with full employee attribution, rather than implying management initiatives. Engagement is always enhanced with the right incentives, financial and recognition, as well as quick reaction to interim feedback.

I recognize that all of these steps go against the traditional business wisdom that growing successful businesses must define inflexible and fully documented customer processes for efficiency, automation, and lower cost. But the reality is that customer and employee expectations have changed, and your competitors have stepped up to the demands for positive experiences.

Of course, every successful business is about achieving the right balance between costs and returns, as well as keeping up with marketplace demands. So while you must continue to strive for repeatable processes, it’s time to recognize that your customers are now much more empowered, and you must do the same for your team.

It will make your organization unstoppable, more profitable, and you will certainly find the business to be a lot more fun.

Marty Zwilling

*** First published on Inc.com on 12/26/2017 ***

How To Validate Your Innovative Product As A Business

In my experience with technical entrepreneurs, they work hard on creating an innovative and elegant solution, and assume that customers will flock to them (“if we build it, they will come”). The reality is that successful businesses these days require an equally elegant business model, with the right marketing, delivery channel, price, and target customers, to get real traction.

In fact, many experienced entrepreneurs argue that constructing a business model around your solution is far more critical and difficult than developing the product. Certainly the knowledge and skills required are different. That’s why I recommend that two co-founders are often better than one -- with one expert on the technical solution, and the other with business model experience.

This dual-leadership approach would have avoided the disaster I experienced in a startup a few years ago where beta customers loved our software solution as a free prototype, but we couldn’t sell a single one for the full price that seemed reasonable for all our work and innovation. The founder had simply not done the work to validate a price and the perfect customer segment.

In the investment community, this work is called proving the business model. It starts with validating a business opportunity (a large customer segment willing to pay money to solve a real problem), in much the same way as your proof of concept or prototype validates your technical solution. Here are seven steps I recommend for establishing the right business model:

1. Validate the value of your solution with real customers. Customers often complain that existing approaches are not intuitive or integrated, while old solutions may be familiar and locked in. Estimate your costs, including a 50 percent gross margin, as a lower bound on a price. Products too expensive for the market won’t succeed, and prices too low will leave you exposed. Match with competitor prices and market demographics.

2. Confirm that your solution effectively solves the problem. Once you have a prototype or alpha version, expose it to real customers to see if you get the same excitement and delight that you feel. Look for feedback on how to make it a better fit. If it doesn’t relieve the pain, or doesn’t work, no business model will save you.

3. Finalize your channel and marketing strategy. Now is the time to pitch the business model to a group of customers or a specially selected focus group. This is not just a product pitch, but must include all elements of your pricing, marketing, distribution and support. Here again is your chance to make pivots for almost no cost.

4. Test your model with industry experts and investors. An advisory board of outside people with experience in your domain can give you the unbiased feedback you need, as well as connections for setting up distribution and sales channels. It’s also valuable to talk to potential investors for their views, even if you are bootstrapping the effort.

5. Execute a pilot plan in with a limited geographic scope. Good traction on a limited rollout is great validation of a business model. It allows you to test costs, quality and pricing in a few stores or a single city, with minimum jeopardy and maximum speed for recovery and corrections. Save your viral campaign and major inventory buildup for later.

6. Make every pilot customer commit to be a reference. Give extra attention to those first few customers, and ask for publishable testimonials and word-of-mouth support in return. If you can’t get their support, even with your personal efforts, take it as a red flag that the business will probably not scale at the rate you projected.

7. Get national visibility at trade shows and industry meetings. You need positive visibility, credibility and feedback from these organizations as a final validation of your business model, as well as your product model, in the context of major competitors. This may also be a great source for leads as a key part of that final rollout and scale-up effort.

Your business model may be a more sustainable competitive advantage than your product features, or it can be your biggest risk exposure. Too many of the business plans I see are heavy on competitive product features, but light on business model details and innovations.

If you or someone on your team hasn’t spent at least the same effort on the business model as on the product service, you are only half prepared for the real world of business today. It’s hard to win by doing half the job, especially if that is the easier half.

Marty Zwilling

*** First published on Inc.com on 12/20/2017 ***