Friday, November 28, 2008

The Difficulty that is Marriage, a poem by Paul Durcan.

Paul Durcan is one of the most completely original voices in Irish poetry. He was born in Dublin in 1944 and was educated at University College, Cork. He’s won the Patrick Kavanagh Award, the Irish American Cultural Institute Poetry Award, The Whitebread Prize, and the London Poetry Book Society choice for The Berlin Wall CafĂ©.
I was looking for a poem suitable for Thanksgiving, and since I give thanks each year for my family above all else, and especially for my sainted wife, this poem seemed to fit the bill very nicely.

The Difficulty that is Marriage by Paul Durcan.

We disagree to disagree, we divide, we differ;
Yet each night as I lie in bed beside you
And you are far away curled up in sleep
I array the moonlit ceiling with a mosaic of question-marks;
How was it I was so lucky to have ever met you?
I am no brave pagan proud of my mortality,
Yet gladly on this changeling earth I should live for ever
If it were with you, my sleeping friend.
I have my troubles and I shall always have them
But I should rather live with you for ever
Than exchange my troubles for a changeless kingdom.
But I do not put you on a pedestal or throne;
You must have your faults but I do not see them.
If it were with you, I should live for ever.

Wednesday, November 26, 2008

Getting the team organized.

Startup teams should come with a label that says “some assembly required.” Teams are a higher form of organism than groups of individuals who are sharing information and tasks. Real teamwork exists only after group members have made and demonstrated their commitment to shared goals, visions and values, and after they’ve articulated and reached consensus on their roles and responsibilities. If you start with an informal, unstated management philosophy, then there’s no formal process to fall back on when you grow to employ hundreds of people.

Team members should be clear about, “Here’s what I’m offering the group. You can count on me to lead when we're dealing with these issues.” This clarity should emerge from a discussion of what team members expect from each other. The usefulness of this discussion depends on the degree to which individuals understand each others’ jobs and responsibilities. Informed resolution of individual positions, requests, offers and counter-offers leads to an agreement about who will provide leadership for what. Each venture team member should have a formal accountability and performance agreement.

Never assume the obvious is apparent to others. If X equals the number of people in a group, then X squared minus X equals the number of possible misinterpretations of anything communicated. So, with two people there are two possible misinterpretations, with three people there are six, but with five people there are 20 possible misinterpretations.

Conflict promotes two common reactions. People either join political coalitions or seek isolation in their work (which is perceived either as a safe haven or a place where they get their greatest satisfaction). When people can’t deal with personality conflict, they tend to get busy on the task and hope everyone else is mature enough to go along. Smart people miss the mark when they’re insensitive to cultural issues. Economically oriented finance people and analytically oriented engineers often find the topic of norms and values too soft for their tastes. So they ignore culture - to their peril.

Terry Morse's rules for success: (Morse was a founder of Salient Software).

Rule #1: Make the decision that makes the most money.

No matter what their mission statements say, all for-profit businesses have one overriding purpose: making more money. Try convincing an investor that he should settle for a lower return on his money and you'll appreciate the importance of this rule. Making the world a better place is great, as long as it makes you and your investors lots of money.

Rule #2: Don't give your customer any excuse to say "no."

This simple rule covers every aspect of a product, including features, safety, support, and price. Consider your potential customer's decision making process, and make sure your product or service eliminates his doubts before he can formulate them. Talk to the people who don't buy your product to find out what’s keeping them from doing business with you.

Rule #3: If you're very smart and work very hard, you can do one thing well.

Business books will tell you to "focus on your core competence," or something similarly trendy. Simply restated, this means - work like crazy on the one thing your company does better than anyone else, and don't get distracted. Others may tell you to diversify your product line, or extend your business into new markets. Don't do it! A startup company has limited resources and limited market recognition. A diluted focus is a slow road to oblivion. To test if your company has a tight focus, see if you can describe your business and its products in one sentence.

Have a happy Thanksgiving. I'll be back on Friday with a poem.

Tuesday, November 25, 2008

How to hire a great startup team.

Hiring good people is like getting married - if you do it right, you don’t have to do it often. If you’re in a situation of excessive risk, hire somebody who has already learned to shave on someone else’s beard. Hire the management team you think you’ll need five years from now if everything works out. Hire people who share your vision and agree with your business principles, and make sure these are clear to the people you're recruiting. Have the best candidates spend time with the people they’re going to be working with. Hire backups for key people; the biggest weakness in smaller companies is a lack of bench strength. If you want an innovative organization, hire, work with, and promote people who make you uncomfortable. You need to understand your own preferences so that you can compliment your weaknesses and exploit your strengths. Never hire or promote in your own image. It’s foolish to replicate your strengths or your weaknesses. If you hire people with the same character traits as yourself, you’ll just end up fighting with them.

1. Look for exceptionally smart people. It's fundamental. When you get exceptionally smart people on your team, that's a big plus. In addition, look for a combination of experience, drive, commitment, and passion. You don't want all experience - but you don't want all drive, energy and passion either. Getting that mix right is the difference between ventures that achieve greatness and startups that don’t go anywhere.

2. Look for people who can take a concept from a standing start and make it live and breathe. Chris Whittle, the CEO and founder of Edison Schools says, “We've noticed there's no variable on success. Theory says you should have a bell curve of results, but it doesn't happen that way. If there are 20 units to be sold, we've found that a certain group of people will go out and sell all of them. Another group will sell nothing. There's not much in between. The variable in this is entrepreneurial skill. Either people have it or they don't, although they may have it in different ways.”

3. Look for venture team members who are likely to wear well over time. Ask yourself: "Are these the people I want to be in trouble with for the next five years of my life? Are they great at recruiting other talented people? Are they great at selling?” In a small startup company, everybody is selling all the time. People who will build a new company need to be innovative, challenging their industry's traditional rules and conventions. You need high-level people who are willing to roll up their sleeves and engage customers. The most senior managers in the company need to be the first ones out of the trenches.

4. Get to know the compelling interests of venture team members, Talk honestly about one another's aspirations, goals, philosophies and values. Outspoken and abrasive personalities get people irritated, make it difficult to attract new people, and can destroy the team’s development. Values stem from a person’s previous education and experience, sentiments, attitudes about themselves, the obligations they feel toward others, and their ideals and objectives. For each of us, reality is whatever our values allow us to recognize. We see only what we expect to see. When people see things only from their own point of view, the actions of others which are inconsistent with their values seem stupid or unexplainable to them.

5. Don’t put too much emphasis on credentials. Hire higher than you need at the moment. If you're planning on growing, you'll need all the help you can get. Look for characteristics rather than test scores when hiring people. Maybe youth, energy and creativity outweighs experience and learning. And make sure that the group members have a sense of humor. Fit is as important as function.

6. Build some slack into the team in case someone leaves. The venture team that companies start out with is often not the one they eventually end up with. Typically, at least one of the cofounders falls out before a new venture is successful. It helps if some members of the team can handle different responsibilities because when there are changes in personnel, the business can't just stand still. “Scaleable” should apply to employee skills as well as headcount. If the founders all come from the same profession, such as engineering, they're experts in their own world and, frequently, that world is all they know. The chief financial officer should be able to explain the company’s technology to a six-year-old. It’s no good having people who are great at what they do but who don’t understand what the company does.

The founding team are as critical to the business as its customers. Consider hiring prospective executives as consultants for a three-month trial period first to see how they'll work out. If you've made a mistake in hiring, correct it immediately. Sometimes the only way to change a person is to change a person. Put a steel band around your heart. If you don’t run them out of business, they'll run you out of business. See that no equity changes hands during the employee's first year as dealing with someone who owns a percentage of the company complicates the termination process.

Monday, November 24, 2008

Build a great team.

In today’s world, there's plenty of technology, plenty of entrepreneurs, plenty of money, plenty of venture capital ready to back good ideas. What's in short supply is great teams. Your biggest challenge will always be building a great team. All teams are incomplete all the time because you're always growing your team.

Most successful startups have a leader from whom everyone else takes their cues. VCs have a saying that, “If the light ain’t on at the top, it’s dark all the way down!” Great leaders are great communicators. They have unquestioned integrity and they're ruthlessly, absolutely intellectually honest. They’re great recruiters, always building their network of talented people. And they're great sales executives, always selling the value proposition of the enterprise. But it’s important to have excellence in the other functions as well. A great marketing company like Intuit had Scott Cook. At the heart of every great technology company is a technical genius. Apple had Steve Wozniak, Sun Microsystems had Andy Bechtolsheim and Bill Joy, Netscape had Marc Andreessen, @Home had Milo Medin.

Successful companies marry this kind of seasoned talent with people who have fresh perspectives. Many years of experience in an industry can sometimes turn out to be a detriment rather than an asset when looking for new ideas. Nanogen’s Chairman Howard Birndorf is an exception. He's Biotech’s Johnny Appleseed with nine startups under his belt (Nanogen, Hybritech, Glen-Probe, IDEC Pharmaceuticals, Ligand Pharmaceuticals, Nantronic, Neurocrine Biosciences, Gensia and Viagene). He says, “Look for people who are smarter than you, who both compliment and support your own skills. You need to find people who understand how to take risks, people who aren’t afraid of change, who can go from one day to the next with a big change in either direction without being blown away.” Kevin O’Connor, a cofounder of DoubleClick says, “The thing we most tended to look for in people was intelligence - and athleticism: people who loved to compete, who didn’t like to lose.”

Look for smart people who have a combination of experience, drive, commitment and passion. Getting that mix right is the difference between ventures that achieve greatness and startups that merely survive, or worse. The person’s priority has to be making the company successful, not getting a certain title or a private office or the like. In startups, it’s important to meet the spouse - they have to live with the 18-hour days, so they need to know the plan. Have your top people take assessment tests - then build the profile that’s worked for you and use it to hire new people - that way, you know what you’re looking for.

Creating a successful high tech company is as much about good people as good technology. Bill Gates says, “It’s important to have someone you totally trust, who is totally committed, who shares your vision, and yet who has a different set of skills and who can also act as a check on your ideas. Some of the ideas you run by him, you know he’s going to say, ‘Hey, wait a minute, have you thought about this and that?’ The benefit of sparking off somebody like that is that it not only makes a business more fun, but it leads to a lot of success.”

Friday, November 21, 2008

The road not taken, a poem by Robert Frost.

Robert Frost was born in San Francisco in 1874 and died in Boston in 1963. He was buried at the Old Bennington Cemetery in Bennington, Vermont, where his epitaph reads, "I had a lover's quarrel with the world." Although he never graduated college, Frost received honorary degrees from Bates College and Oxford and Cambridge universities, and he was the first to receive two honorary degrees from Dartmouth College. A popular and often-quoted poet, Frost was honored frequently during his lifetime, receiving four Pulitzer Prizes.

Many people can quote the first line or the last two lines from this wonderful poem. It's worth reading afresh all the way through however, if only to validate Paul Valery's observation that, "Poetry is to prose as dancing is to walking."

The Road Not Taken by Robert Frost

Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth.

Then took the other, just as fair,
And having perhaps the better claim,
Because it was grassy and wanted wear;
Though as for that the passing there
Had worn them really about the same,

And both that morning equally lay
In leaves no step had trodden back.
Oh, I kept the first for another day !
Yet knowing how way leads on to way,
I doubted if I should ever come back.

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I –
I took the one less traveled by,
And that has made all the difference.

Thursday, November 20, 2008

Tips for dealing with VCs.

Here are some tips that may mean the difference between VCs showing you the money - or showing you the door!

“It's the market, stupid!”
Investors want expanding and profitable markets. VCs dream about market sizes that will ultimately produce in excess of $1 Billion in annual sales. Yet, many business plans either shoot way too low, or worse yet, don't provide believable market size estimates in their pitch

It's a team game.
The management team that will drive the company is key to many investors. However, many plans only identify the CEO and rarely do justice to other team members whose track records can often stand out as major selling points. Don't make that mistake. Also, specify key people or alliances whose involvement is contingent upon funding. Investors know that hiring good people is expensive and that having a solid team at the beginning is a big plus.

Few startup companies can do one thing well and almost none can do more than one thing well. Don't arrive at a potential investor's office with three simultaneous product development schedules for three different markets. Show the discipline to pick the best one or you'll be dead in the water.

Have a great story.
Investors are looking for a reason to believe. Give it to them, fast, before they get bored. Most VCs, even if they like your plan, need to sell their other partners before they can make an investment. Provide a simple, compelling story they can use to sell you and your ideas.

Will the dogs eat the dog food?
Be sure to answer the fundamental marketing questions; “Who is the customer? What needs do you satisfy? What are customers willing to pay?” Do your homework. Always connect your product with the customer.

Unsolicited plans are rarely read and almost never funded. Use your friends, accountants, lawyers and bankers to open doors.

Time is money.
Most investors are very busy. Make it easy on them. Executive summaries should be two pages or less, business plans should be under 20 pages. Plans are never too short and almost always too long. Stick to these topics: - Size of market - Product / customer experience - Management team - Competition. Never say, "We have no competition." You are either naive or there's no market. Neither is attractive to investors. Find your competition and argue why you're better.

Realistic financial projections.
Very few companies have ever done $100 million in sales their first year, but many forecasts include overly optimistic projections. Build your financials from the ground up and compare them to other companies in the industry to ensure that they're reasonable.

Valuation is more an art than a science and will generally be established by the market. Many VCs talk to each other behind the scenes. As a result, you end up with a fairly narrow range of valuations, so you can rarely pit them against each other effectively. Focus more on finding a firm that can help you by bringing more to the table than money - industry knowledge, business expertise and contacts, and time to work with you as well as capital. And remember, you’re not likely to generate a lot of interest or get a lot of sophisticated advice at less than a $5M level of funding.

Exit strategy.
Many entrepreneurs focus on an initial public stock offering (IPO) as the only viable exit strategy. Most networking companies would rather sell to Cisco than do a public offering. Investors don't care, as long as the price is right, and neither should you.

Sales tool or operating plan?
Ultimately, a business plan ought to be a document you can use to run the business. Investors expect you to be prepared to turn your plan and projections into reality. Commit yourself to living your pitch. Otherwise, that problem will fall to your successors and you'll be looking for work!

Next week, I'll write about how to build a great startup team. But first, poetry tomorrow!

Wednesday, November 19, 2008

Start with the right management team.

Some Venture Capitalists (VCs) get involved in very early stage ventures, providing funding with only a concept. But in general, they’re reluctant to be the first investors in a deal. VCs are like penguins standing around the edge of the ice. If you get one to jump in, the others will be prepared to come in too. As someone told me recently, "They never say yes. They never say no. They just take a lot of notes." They’re not very interested in helping you build your business for the long term because they want a quick return on their money. With a VC on your board, you’re going to get help whether you want it or not. Founders often get fired if VCs decide they need a more experienced manager to move the business along faster.

VCs want validation that the company’s technology is OK before they invest, so strategic partnerships with established name companies can be helpful in this regard. Any validation you can get from a third party will speed up VC financing (based, for example, on the belief that a company like GE wouldn’t be involved in something unless it made good business sense). Young Angel-backed companies should explore the many options available under the strategic alliance umbrella, either in addition to or instead of next-stage VC funding, as many larger companies are seeking new ventures to fund. Microsoft invested hundreds of millions of dollars in new ventures in the past several years. Cisco has stimulated demand for state-of-the art network technologies by funding new ventures whose software and content create additional usage of network capacity. Investments in smaller companies can also provide an inside track to big businesses in new industries.

VCs are typically prepared to do more deals that Angels. Angels don’t have to invest their money with you. They can usually invest it in the public market and get a good return with considerably less risk. VCs, on the other hand, are under pressure to invest the money they raise. VC investors focus on different things when evaluating a business opportunity. In recent conversations, one VC pointed out that he wants to see a "control" manager in place, not a salesperson - but to start a business you need a salesperson! Another said the first page she looks at in a business plan is the management page. A third said his firm comes prepared to offer significant assistance with management having years of experience to help them so the management experience at startup isn’t that important. A fourth said he first evaluates the core risk of a business when looking at a business plan. Yet another reports he looks at the market opportunity first and then the management team.

However, in general, good management is a key to attracting VC investors. With technology investments, where time-to-market is crucial, VCs look for teams with proven track records - there just isn't time for long due diligence checks. Jim Breyer, a managing general partner of Accel Partners, has been an investor in over thirty consumer internet, media and technology companies that have completed public offerings or successful mergers. Breyer talks about the importance of the “entrepreneurial pitch” in getting to know the people involved in a business venture. Typically, everything starts with a business plan - more than 5,000 are submitted to Accel every year. Of these, Accel meets with about 250 teams and invests in 10 or 15.

Accel’s success depends less on its ability to read business plans than on being able to read the people who submit them. "The quality of the people is the single most important element in making an investment decision," says Breyer. “It's impossible to divorce business discussion from personal history.“ Breyer favors informal meetings where the business presentation is very interactive. Someone who is very structured (for example, someone who has to go through each slide when giving a presentation) will have trouble in this kind of meeting. Breyer believes they’ll probably have trouble as an entrepreneur as well. “Successful entrepreneurs may be short on experience but they’re tremendously flexible and want to make things happen quickly. If they can't get their message across in 60 minutes, then there’s something wrong.” Breyer says, “We come away from every meeting with a strong feeling about the team.”

I've found that people will put up money for a bad concept and a bad plan if the management team is right. But even good concepts and good plans won’t get funded if the management team is wrong.

Tuesday, November 18, 2008

What Angels look for in a deal.

Angel investors don’t usually flock together and most like to invest close to home. So, where do you find them?

- Local service providers know them. Talk with lawyers, accountants, financial advisers, bankers, and business consultants.

- Attend seminars and forums hosted by groups like UCSD CONNECT and the San Diego Software Industry Council (SDSIC).

- Contact organized investment groups, such as TechCoast Angels, which has 300 members throughout Southern California, from San Diego to Santa Barbara.

Here's what San Diego Angel investor Charlie Gaylord looks for in a deal:

- a defined market of at least $50M.
- a real business, not just a product (a product should probably be sold off to
someone else).
- a potentially rewarding exit - X10 return in three to five years (> 100% / year)
- a good business model (that's the idea you’re going to execute against to create a
profitable business).
- a team that can execute well.

When Gaylord invests, it’s usually in a field he knows something about and he does only two or three deals a year. He looks for something that’s big, necessary, and can be defended. He’s very interested in seeing potential sales growth validated, not with a “hockey stick” market projection, but with serious market research. He likes companies that are market driven, not technology driven, but says most of the plans he sees are product or technology driven.

If he hears that there’s no one in the market, he worries that there’s no market. If he hears that there are some serious players in the market, he worries that about being crushed. He’s drawn to products in emerging markets that are based on a fundamental improvement in something meaningful, such as a business process.

He says, “In summary, I’m looking for a business (not a product) which can grow to give me a financially rewarding exit (X10 return) in a reasonable time (3 to 5 years) that has a management team capable of leading it. I like to know the management team has thought enough about the business to be able to articulate it in a business plan.”

He suggests additional contributions a startup entrepreneur could look for from financial partners beyond just money might include:

- strategic relationships.
- business savvy.
- recruiting help.
- corporate governance.
- help preparing to go public.

Monday, November 17, 2008

Attracting Angel investors.

The word “Angel” originated on Broadway, to describe people who put up the money for theatrical shows. Historically, they seldom got their money back. In 2007, 400,000 Angels invested $25 billion in tens of thousands of startups according to the Center for Venture Research at the University of New Hampshire. These high net worth individuals typically put between $25,000 to $500,000 of their own money into early stage companies, an investment that’s often locked up for five or more years. Usually, Angels provide second-stage financing, after an entrepreneur has raised seed capital, but before the entry of professional venture groups who provide larger sums (preferably greater than $3 million) when the business is well established. Recent research tracking 1,200 Angel investors for ten years showed that 70% lost all or part of their money or got their money back with no return. However, some of the other 30% achieved spectacular returns and their success keeps everyone else in the game. To be a successful Angel investor, you may have to kiss a lot of frogs.

Angels invest primarily in people. Since there’s little or no business in the beginning, they focus first on the venture team, then on the idea. They look for a match in chemistry and interest. Their interest may be that they like the technology, or they may be a friend of the family. One of the benefits of working with Angels, apart from the money they bring, is the management assistance and board participation that’s available from experienced business people. Angels will often give a company a higher initial valuation than other investment groups. But remember that Angels may not be there for the next round when you need more money. Being overvalued at the start will likely result in a “down round” later on. When this happens, it looks bad and slows down the process of attracting more money. Investors want to see the company’s valuation in each financing round moving up. Once outside investors own a significant amount of equity in a company, the objective is not to keep other investors away but to find new ones who will pay a higher price than they did for equity in the company, thereby raising the value of their investment. So after the first round, talking to other investors, such as VCs, isn't just okay, it's encouraged. VCs hope to double or triple the startup's valuation from one round of financing to the next.

San Diego technology investor, Charlie Gaylord, likes to invest in market-driven rather than in technology-driven companies. He likes emerging markets that create new ways of delivering value to customers. He likes business models that disintermediate people who add more cost than value and eliminate the costs of inventory. He likes new models where you can build and create value in the brand very quickly. He hardly ever reads the details of the initial business plan’s financial projections. He’s more interested in the thinking behind it than in the details of the business plan.

What rewards are Angels looking for?
- they want financial returns (of course), but also
- the excitement / promotion of the business.
- they like the product, technology or team.
- they want bragging rights.
- they look for ways to leverage their experience / expertise in time, money and knowledge.

Gaylord says he'd rather have a company that dies quickly than one that limps along and never goes anywhere. In other words, he’d rather lose his money than lose his time.

Friday, November 14, 2008

How I write poems, by Abigail Drescher.

Albert Einstein once said it’s always unusual to find someone whose curiosity survives a formal education. It takes at least a couple of decades for people to realize that they were well taught. All true education is a delayed-action time-bomb assembled in the classroom for explosion at a later date. An educational fuse that's 50-years long isn't unusual. I believe that encouraging children to write and recite poetry at an early age helps to develop the intellectual curiosity that lights that fuse.

Elizabeth McKim and Judith Steinbergh, have been "poets in the schools" in Brookline, MA., since 1971. They're working poets bringing children the chance to learn about the art and craft of poetry.

"Poetry gives the children a place to put their thoughts," says Steinbergh, "but with a grace that comes from using literary techniques and choosing words, phrases, and images that will work for them. They learn how to become articulate in an economical way, like artists given paint, brushes, techniques. They can use all those things to transform their own thoughts and feelings into poetry. The intimate place with the child is the place where art is happening. You can see it in the child who is waiting for a word to rise up."

"We start with a lot of out-loud work," says McKim. "Poetry is voice and breath, but it is also how you put it on the page ... just getting thoughts down on paper doesn't mean it's poetry. That's where the craft part comes in. As McKim says, "The addition and subtraction after the first outpouring is the revision - the re-visioning of the poem, seeing it again." This is part of her strategy in having the student use unlined paper. "It helps them find their own form and find the voice of the poem."

How I Write Poems

I walk by a dandelion blowing in the breeze,
That gives me an idea for a poem,
my mind fills up to the top
with ideas and the ideas
even go down to my knees,
soon they will be down
to my feet, and I will be
so full I will pop.
I run to find a paper,
I hop to find a paper,
I jump to find a paper,
my mind is empty,
my knees are empty,
my feet are empty,
but my paper is full.

by Abigail Drescher, 4th grade

Thursday, November 13, 2008

Finding investors in a recession.

Under normal circumstances, you’re likely to actually get money from less than 5% of the people you pitch to. Given the current state of the economy, that percentage is even smaller today. Barbara Bry, a very experienced San Diego startup veteran, told me earlier this week that 2008 is the worst market for raising startup money she's ever seen.

Don’t be dismayed by this - it’s a lot like selling your house. There’s usually a buyer out there somewhere. People turn you down because they have no need, or they have no money right now, or they’re in no hurry, or they don’t have confidence in the business proposition, or they don't understand your pitch.

Paul Graham from Y Combinator says, "VCs are mostly money guys, not people who make things. Angels are better at appreciating novel ideas, because once upon a time most of them were founders themselves. VCs reject practically everyone. The inefficient market you get because there are so few players is exacerbated by the fact that they act independently. The structure of their business means a partner at a VC firm usually makes a couple of new investments a year, no matter how many good opportunities they come across.”

To have confidence in a business proposition, investors need to see:
- a fundable concept
- in a growing industry
- with a good management team
- addressing a promising, profitable market
- with technology that works
- and a highly fundable CEO

The key issues for investors are:
- How will revenue be generated?
- Is the business idea going to generate a significant return on investment?
- Is the management team up to the challenge?

In the past, entrepreneurs started businesses. Today, many invent new business models. For example, Mark McDonald started Nations Air Express in 1992, flying from Pittsburgh to Philadelphia to Boston and back five times a day and charging $89 or less for a one way ticket. By hiring World Technology Systems of Atlanta to run its ticketless reservation system, Nations Air saved $1,500,000 in initial expenses alone. World Technology also provided accounting, advertising and promotion, while other airlines took care of baggage handling and assorted airport services. All of this enabled McDonald to keep his payroll under 160 people, which he estimated was 120 fewer than if the company had done everything itself. He constantly searched for ways to keep his organization as simple as possible because, he said, “the more complicated it gets, the more expensive it becomes.”

(The demise of scheduled service for Nations Air came in 1998 after a Valu-jet crash in the Florida everglades created a huge backlash against small startup carriers with the perception that they were unsafe from the standpoint of maintenance and training).

Try to get funded before you launch and get enough money so you can build momentum in the marketplace. Strategic investment from Fortune 1000 companies is often the best way to find the "cheapest money" you can get. In Southern California, more money has always come from this source than from VC firms. Many large technology companies are eager to make sizable investments in promising new startups. This brings with it valuable board members and new channels for sales and distribution. This method also often leads to a direct exit strategy.

There’s also a growing numbers of so-called “Angel” investors, wealthy individuals and technology-industry veterans (often one and the same) who relish the vicarious joy and respectable returns of providing early-stage funding for new companies.

We'll cover the Angels next. But first, Friday is poetry day!

Wednesday, November 12, 2008

Identify sources of funding.

The most common way to raise money is to have an individual investor or a venture capital firm give you money in exchange for an equity position. You don’t need to issue additional stock to each current owner to achieve this. Instead, agree on the valuation of the company with your investor and then issue additional shares based on the investor's dollar contribution. For example, if you agree that the pre-money valuation of your startup is $4M and you raise $1M from an investor, that investor just bought 20% of the company ($1M invested / $5M post money valuation). So the company needs to issue new shares to the investor so they now own 20% of the total shares outstanding.

Understand the ground rules for valuation and know the value of your company. Hire a qualified appraiser or investment banker to help you. Never enter a negotiation without knowing the value of what you’re negotiating for. Be able to backup any counter-offer with market data on similar companies. However, valuing the company is the job of the potential investors as well; they’re the ones who should make the initial offer. Only two things can happen if you attempt to give them a valuation first, and they’re both bad: (1) You give them a number that’s too high and mess up the deal or (2) You give them a number that’s too low and that's what you get! And don't just focus only on the valuation. Focus on which investor is going to most helpful to you and do your best to make that deal work. Interview CEOs from other startups that the investors have worked with and find out which were the most helpful in building the companies.

Today, the Web is making it easier than ever to locate sources of funding because it allows people to search outside their geographic boundaries for investors interested in companies like theirs. For example, Venture Capital Access Online ( is a marketplace for the venture capital and private equity industry. It provides online services and tools to entrepreneurs, investors, advisors and service providers worldwide. Its flagship product, VCPro Database, has become the most popular venture capital directory of its kind available today. America's Business Funding Directory ( allows you to search over 4,000 sources of business financing. But unless your venture is in the hottest industry of the moment, don't expect to get much ready money from VCs in the beginning.

Go beyond appealing to obvious targets, such as wealthy people you already know. Create a broader list of people who have money and who are also relatively sophisticated investors. Write to about 30 of them, letting them know that you have an investment opportunity, should they be interested. To those who ask for more information, send them a venture summary. Others are likely to want a formal written business plan.

It’s expensive and time consuming to raise money - factor in the costs of traveling to other cities, for example, to meet with potential investors. Or having various groups spend half-a-day visiting your company, distracting employees. Make sure to ask for enough money to absorb the costs of raising more.

According to Paul Graham, a partner in the investment firm, Y Combinator, “Getting rejected by investors can make you start to doubt yourself. After all, they're more experienced than you are. Perhaps they're right? Maybe yes, maybe no. If an investor gives you specific reasons for not investing, look at your startup and ask if they're right. If they identify real problems, fix them. Don't just take their word for it or simply ignore their rejection. It might mean something. But you shouldn't automatically get demoralized either.”

Raising money from investors is harder than finding customers because there are so few of them. However, don’t let fundraising wear you down. Startups live or die on morale. If you let the difficulty of raising money destroy your morale, it’ll become a self-fulfilling prophecy.

Tuesday, November 11, 2008

Funding a startup.

The typical funding sequence begins when you put up your own money first. Next, you look for “FFF money” (from Family, Friends and Fools). Then, if you still need more money, you try to attract private investor or Angel money. This is usually followed by additional rounds of funding provided by professional venture groups (VCs).

The funding sequence is typically made up of the following stages:

The Concept Stage – here there’s a business plan and maybe a demonstration product. Money comes from your personal savings, FFF and Angel investors. FFF invest primarily in you, rather than in your business. Angels invest in you and your business.

The Early Stage – here there’s a working product and some beta customers. Funding comes from Angels and some VCs.

The First Pro Round – here the product is being used by some reference customers. Funding comes from VCs and some Angels

Later Stage Rounds are possible after market validation. Here funding usually comes from VCs.

The single most important thing to remember in launching a business is to never, ever run out of money! The most common mistake entrepreneurs make in getting funding is not getting enough in the beginning. Always ask for more than you think you’re going to need. That way, you can focus your energy on building the business rather than spending all your time trying to raise more money.

Try to fund to a series of milestones. If you’re looking for a long-term payoff, you want long-term money. Never take someone’s last dollar. If they don’t have the money to invest in the next round, it may hurt your credibility with future investors. Be careful to avoid the appearance of being turned down by anyone as this usually makes lead investors nervous.

Since the first round is seldom the last round, it’s important not to give away too much equity in the beginning. The First Pro Round often takes 40 - 50% of the equity in the company. Remember, having financing is better than having control. Having half of a big venture is better than owning all of a small one. Raise the money, take the dilution and earn the equity money back some other way. Take the money when and where you can get it - don’t wait until you need it. You’ll never know what dilution means until you need more money and you have to raise it quickly. Avoid having a “down round,” when the price per share drops below that in the previous round of financing.

People who failed in their first business venture usually say they were undercapitalized and while it's true some of the time, more often than not it's because they didn't use their capital wisely. Perhaps they spent money to celebrate when they were told they’d get the order, they celebrated again when they actually got the order, and they celebrated one more time when they completed the order. Remember Sam Walton kept driving his beat-up old pickup truck long after he was wealthy - the truly successful entrepreneurs don't need false symbols of success. Bootstrapping is more than just a response to a financial predicament; it's a belief about how to run your business.

Jeff Bezos, the founder of, was working on Wall Street, studying the Net phenomenon and thinking long and hard about the best possible businesses to build on the Web. He had a big advantage in being systemic and early. So he was able to self-fund into a business with a little seed capital from family and friends. Bezos figured he could grow without VC money, but he’d like their help. This was less about capital than it was about experience and relationships. So he interviewed and auditioned potential venture backers like he was hiring a vice president. He carefully checked references. He talked to entrepreneurs from ventures they’d backed that were successful and also with some that failed. He eventually teamed up with Kleiner Perkins, because, in his words, they were a center of gravity at that time for Internet businesses.

Monday, November 10, 2008

Common problems with business plans.

The business plan is too long.

When writing a business plan, I suggest keeping it under 20-pages. In fact, the shorter the better. The Intel business plan was one page long! The Sun Microsystems business plan was three pages long! Really long business plans scare people off and often don't get read. When you present it to potential investors, your presentation should have no more than fifteen slides.

The concept is unclear.

Use plain language to describe your business. Don't get caught up in technical jargon. Most great businesses are based on simple concepts. Write the plan so a smart college student could understand it.

The plan doesn't include customer input.

Who are your target customers? Have you factored in their input? You can conduct phone or Web surveys to quiz prospects about your concept, then summarize the results in your business plan. This shows potential investors that you talked to real prospects and incorporated their feedback into your thinking.

The competition section is weak.

Many entrepreneurs simply state they have no relevant competition. This is rarely true. Frankly discuss the strengths and weaknesses of your competitors and make sure to spell out how your company will differentiate itself from them.

The team description is too brief.

Many people invest largely on the strength of the start-up team. Show investors what the founders have accomplished in the past and why they’re uniquely qualified to make this venture successful. Be sure to include advisers and consultants who will actively participate if the company gets funded. Potential investors want to know who they’re dealing with before they commit their money.

I’ve been told that fewer than six out of one-million business plans submitted to venture capital firms ever become public companies. So, make the effort and take the time to prepare the best business plan you possibly can so you'll end up as one of the six!

Thursday, November 6, 2008

Woman work, a poem by Maya Angelou.

Maya Angelou (born Marguerite Ann Johnson in Saint Louis, Missouri on April 4, 1928) is an American poet, memoirist, actress and an important figure in the Civil Rights Movement. She’s probably best known for her series of six autobiographies, starting with I Know Why the Caged Bird Sings, (1969) which was nominated for a National Book Award. Her volume of poetry, Just Give Me a Cool Drink of Water 'Fore I Die (1971) was nominated for the Pulitzer Prize. Angelou recited her poem, "On the Pulse of Morning" at President Bill Clinton's inauguration in 1993. She‘s been highly honoured for her body of work, and has been awarded over 30 honorary degrees. Reflecting on her life at 80, she recently remarked, “When I try to describe myself to God I say, ‘Lord, remember me? Black? Female? Six-foot tall? The writer?’ And I almost always get God's attention.”

Woman Work by Maya Angelou.

I've got the children to tend
The clothes to mend
The floor to mop
The food to shop
Then the chicken to fry
The baby to dry
I got company to feed
The garden to weed
I've got shirts to press
The tots to dress
The can to be cut
I gotta clean up this hut
Then see about the sick
And the cotton to pick.

Shine on me, sunshine
Rain on me, rain
Fall softly, dewdrops
And cool my brow again.

Storm, blow me from here
With your fiercest wind
Let me float across the sky
'Til I can rest again.

Fall gently, snowflakes
Cover me with white
Cold icy kisses and
Let me rest tonight.

Sun, rain, curving sky
Mountain, oceans, leaf and stone
Star shine, moon glow
You're all that I can call my own.

Creating a business plan, continued.

More guidelines and cautions from San Diego investor Ken Olsen on creating a business plan:

How far along is the product?
- provide evidence of the current status.
- what are the product development milestones?
- no product is perfect - describe what’s wrong with it.
- if you claim it’s unique, prove it.
- what’s your intellectual property strategy?

Marketing strategy.
- what's the problem to be solved?
- what's the market to be addressed?
- who's the competition?
- what’s the value proposition?
- what's the value competition?
- what’s the selling cycle?
- what’s the customer buying cycle?

If you underestimate the latter, you’re likely to run out of money.

Development and operation plans.
- milestones for initial development.
- milestones for initial manufacturing.
- milestones for initial sales.

Talent and enthusiasm can only take you so far. You need controls and orderly functions as well, especially as you grow. Show that you have the capability to do this.

Spending and revenue results.
- concentrate on the first few years.
- provide estimates for five years out.
- show reasonable detail.

Potential investors will likely discount your estimates by 50%. You need to discount your own figures as well if you believe that everything has to go right to achieve these results. While your initial plan will inevitably be wrong, it shows people how you think. Investors will use this to calibrate your assumptions and your judgement.

Questions to answer when developing a capitalization plan.
- how much money do you have now?
- how much are you looking for
- when do you want it by?
- what are you going to use it for?
- how long will it last?
- what are you willing to give up to get it?
- what follow-on rounds do you anticipate?

Next, a brief review of some common problems with business plans.

Wednesday, November 5, 2008

How to create a business plan.

San Diego investor Ken Olson gives the following guidelines and cautions for preparing a business plan:

Create an outline.
- explain the risk and the return.
- restate the positive.
- mention the dangers and how you plan to deal with them.
- restate the uniqueness of your proposition.
- explain why the timing is right.
- say why the investor should believe in you.
- emphasize “this is real - we can win - the rewards are worth the effort and the risk.”

Prepare a summary.
- a description of the business.
-why is the product unique or special?
-what are you selling to whom?
- projections for revenue are?
-what are the main challenges?
-what are the temporary advantages?
-define the funding objectives.

Then edit the summary.
- what would raise eyebrows?
- what would smell strange?
- what wouldn’t be viewed as credible?
- why won’t it cost more and take longer?
- what big questions jump out?

Add an appendix, to include:
- competitive literature.
- articles from trade journals.
- resumes of key players.
- target customers.
- product specs, drawings, photos, patents.
- specify ownership and capitalization.

List the company’s objectives, long- and short-term. Include milestones for the next two years and milestones for the next three months. It’s critical to meet the latter.

Define the market opportunity.
- the need.
- the market.
- its size and growth rate.
- why you know this.

Don’t overstate the market. Segment it down to what you’re really talking about. Show where the market claims come from - footnote it.

Describe the team.
- management team.
- board of directors or board of advisors.
- the service providers, especially lawyers.
- the capital providers.

The reader will likely ask, “Who else is in? Are their interests aligned with mine?”

Don’t exaggerate the team’s capabilities. It helps to have experienced independent directors as part of the team. If lawyers and accountants are part of the team, they should provide their services for free for the first year or two so they can get your business when you’re bigger.

More on this tomorrow.

Tuesday, November 4, 2008

Get prepared to get funding.

The future doesn’t always come as quickly as people think it will. To use an old example, integrated CAD/CAM software, which married together three-dimensional engineering design capability with fully automated machine control, finally arrived ten years after futurists predicted it was just around the corner. Jabra started making headsets for phones before phones had someplace to plug them in. Then it sat on the edge of the bubble, waiting for its time to come, waiting for enabling opportunities to arrive - which they eventually did.

When you set out to find funding for your business, don’t be surprised if you’re no longer viewed as your old professional self. Your past reputation is likely to be overshadowed by your identification with a small company that no one’s ever heard of before. So, it’s essential be able to articulate the ideas behind the business concisely and accurately. Start by developing an “elevator pitch” that gets your central business premise across very quickly and practice until you’re able to repeat it flawlessly every time. Use it to keep customers and investors focused on the benefits of your products and services. Tell your story over and over. Part of the sales process is to be very good at telling your story. Have a 30-second elevator pitch and a 15- to 30-minute presentation. “Bumper-sticker” your mission in 15 words or less plus a visual. At each presentation, tell people, “This is where we’re going to be the next time you meet us.” Build credibility by always being where you said you’d be.

Preparing a written business plan is a necessary discipline for any startup. As someone said, writing is God's way of showing us how sloppy our thinking is. When packaging a business plan, aim for the convenience of the reader. Begin with an outline, then evolve it into a table of contents that’s detailed enough to find answers.

Ken Olson, currently CEO of Santrio Inc., is a very experienced and successful San Diego investor and a member at Tech Coast Angels. He says, "Plan to put in at least 100-hours in preparing your business plan. You’ll understand your business much better when you’re done. Don’t farm it out - do it yourself so you understand it and can state its underlying assumptions.” (I'll share Ken's advice for preparing a business plan tomorrow).

When preparing a business plan, don’t try to entertain the reader. Investors today are too jaded to appreciate it. They sort submissions by attractiveness of presentation and layout but the single most important factor is “where the submission came from.” Investing is mainly a referral business based on references from people the investor knows and trusts. Get those who invested in you first to work on your behalf drawing in others. To really stand out, get a referral from a CEO or VP that the people you want money from have already backed. And don’t just go after any kind of money - smart money that’ll be there when the going gets rough is best and it’s worth paying more for. It’s better to get a little money from a good investor than a lot of money from a bad investor.

Monday, November 3, 2008

Establishing a presence.

Pyxis, now a part of Cardinal Health, is the leading provider of medication and supply dispensing systems to hospitals, nursing homes and other healthcare facilities. Its technology allows these institutions to streamline the medication and supply distribution process, thereby cutting costs, saving time, and providing benefits to pharmacy, central supply, nursing and administration. When the two-year old company won a Most Innovative New Product Award from UCSD’s CONNECT in 1989, it was just starting out. Sales were low, and the concept had been greeted with what company founder Tim Wollaeger describes as "yawns and disdain."

Former CEO Ron Taylor explains why. "We were just introducing our first product, the MedStation, which was an automated teller-like machine for nurses to access drugs in hospitals. Because what we had was unique - there was absolutely no competition - the nurses and pharmacists were very interested to know that we’d been evaluated by a panel of business professionals and had already won an award." Pyxis included a segment about their innovation award in their sales video and took the award with them to trade shows and displayed it in their booth. "When you’re a very new, small company you have to make a big deal out of everything you have!!" says Taylor.

Winning a “most innovative” new product award gave the company local and national credibility, provided good exposure and helped with recruitment. "When potential employees were looking at different companies, they wanted to know who was doing cool stuff," says Taylor, "and being recognized for innovation was very important in that regard."

Pyxis went public in 1992 and became a wholly owned subsidiary of Cardinal Health in 1996. By 2000, Pyxis had more than 3,300 customers and over 1,500 employees, most of them based in San Diego. Tim Wollaeger, now managing director of Sanderling Ventures, one of California's oldest venture investment firms dedicated to building new biomedical companies, laughs about the difficulties in getting funding for the Pyxis start-up. "Ron Taylor and I went up to Sand Hill Road in Palo Alto to try and raise money," he remembers. "A venture capitalist I knew waved me out of the room and told me the MedStation concept was the single worst idea he'd ever heard. That was really hard to take." Wollaeger is clear in his advice to entrepreneurs: "When you have a really innovative idea, don't just worry about protecting it ... worry about how you're going to have to ram it down people's throats to get them to pay attention."

Emerging technology companies have two major problems raising capital. First, getting the right audience to listen to their opportunity, and secondly, the amount of time it takes to reach the right audience. Clark Adams of Ablation Technologies, says, “CONNECT's Financial Forum gave us the opportunity to present to a large group from the investment community that have a focused interest in health care technology companies. Many of the attendees represented groups that we were unable to schedule a meeting with before the forum. The exposure and time-savings were extremely helpful to our efforts to raise capital. The preparations that CONNECT puts all of its presenters through are an added benefit that is unseen at first. Presenters are guided through the presentation process with a formal review by key individuals. Input from these practice sessions sharpens the presentations and presenters."