2010 Answers To The 20 Questions Every Startup Should Answer

The results are in for the 2010 startup company survey recently sponsored by Kevin' Corner. The survey included 20 questions designed to uncover how startups are approaching their businesses, funding and operations. The response to the survey was great with more people participating then I had originally expected. The results are intriguing and in some cases unexpected. The participants were selected from the Kevin's Corner contact list. Over the past two years the Kevin's Corner blog has attracted thousands of visitors from 75 countries. Many of these visitors are entrepreneurs, business owners and investors.

The objective of the survey was to provoke thought amongst the startup community about how best to approach a startup and to solicit real opinions on how startup participants manage the startup process. The long term goal of the survey process is to see how startup trends are changing based on market and economic conditions.

The following are the results of the survey. I have added my own interpretation of each question to provide a context and hints as to the purpose of the question.

I would like to thank everyone that participated and took the time out of their busy schedule to answer the questions. I was extremely impressed by the honesty exhibited by individuals that provided comments and reasons behind their selections.

1.) Should you craft an exit strategy in the early stages of a company.

71.4 % Yes
14.3 % No
14.3 % Other

I was not surprised by the heavy skew towards the support of an exit strategy early in a startup's life-cycle. Many startups have a preconception of how and when they exit. They also have notions of how much they are going to profit from an exit. The problem with this is that savvy investors that I have spoken to can be turned off by this focus. What they really want to hear is how the founders are focused on creating a solid successful company. In reality making a company a success is hard work that could take a long time. If an entrepreneur goes into a venture with unrealistic expectations those expectations could have a impact on the startups ability to execute. With that said startups are build on dreams and many dreams are fueled by the big payout.

2.) Are conflicts and disagreements amongst co-founders good or bad for a startup.
50% Good
21.4% Bad
28.6% Other

I asked this question because conflicts inevitably occur in a startup and founders need to be prepared for them. Some discord is a good think because it stimulates creative thinking and challenges the team. To much of it and it will start to have a negative impact on the team. The comments from the survey support this position.

3.) All Internet related startups can be started and launched with little or no investment capital.
21.4% Yes
78.6% No

Most of the participants answered this question with a resounding no. I was surprised to see this because many people believe that you can bootstrap your way to Internet nirvana. The survey participants are obviously seasoned entrepreneurs and realize that this is more myth then reality.

4.) Startups should have a time line for milestone achievement.
85.7% Yes
0% No
14.3 Other

The majority of survey responders agree that setting milestones and seeking to meet or exceed them is a good idea. This is good advice for people just starting out with a new company. Unfortunately, many entrepreneurs do not break down their startups into measurable achievable goals so they never really know where they stand.

5.) Establishing business metrics in the early stages of a company is an effective management tool to measure progress against goals.
78.6% Yes
21.4% No

This is a follow up to question 4. Setting goals is great but being able to measure progress is better.

6.) A startup should always be engaged in fund raising even if the startup has proper funding.
71.4% Yes
07.1% No
21.4% Other

In general most entrepreneurs understand that continually being in the hunt for investment capital is necessary part of an entrepreneur's life. The comments did bring out that not everyone is good at this and it does eat up a lot of time and effort. These last points are well taken and does imply that someone in the startup needs to be a good fund raiser. In many cases this is all that member will be doing allowing the other members to get the real work done.

7.) Equity only compensation is an effective way to attract staff to a startup company.
26.6% Yes
50% No
21.4% Other

I was surprised by the results for this question. The answer does indicate that founders are now realizing that real cash is required to get a company up and going. One interesting comment was that equity is actually a very expensive way to compensate participants. I found this to be a very good comment because there is so a finite amount of equity in a company. Also the legal fees to continually allocate equity for compensation can add up to a significant portion of a startup budget.

8.) Are venture capitalists a good source of advice in the early stages of company formation even if you are not seeking their investment.
57% Yes
14.3% No
28.6% Other

The majority agrees that there is value to a VC's advice and comments even if theire is no investment capital coming from the VC. The comments themselves reveal that the individual VC's you talk to make a big difference in whether there is or is not value to the advice.

9.)What should your reaction be to an investor when they decide not to invest in your startup.
0.0% My idea and company are not worthy of investment
14.3% The investor does not know anything about my business
07.1% The company should change its strategy
28.6% The investor is not knowledgeable about my business sector
00.0% We are asking for too much money
64.3% Other

Clearly the answers to this question were not adequate to answer the question properly. The majority of the respondents answered this question with comments. The responders do not come away from an investors lack of interest with one take away. There are many things that can be derived from an investors lack of interest. One theme consistent amongst the respondents was that this reaction is not cause for panic. Investors are not all knowing and do have their own prejudices.

10.) What should you do if your working capital runs out.
0.0% Close the company
0.0% Mothball the company
14.3% Scale the company down
21.4% Change the product or service
57.1% Seek new investment sources
14.3% Put all of your own money into the company
28.6% Other

The majority of the responders indicated you should carry on and seek new capital sources. The comments themselves were heavily skewed in this direction.

11.)All startups should prepare a business plan even if they are self funded.
85% Yes
7.1% No
7.1 % Other

It was great to see that most startups do create some form of a business plan to sort out revenue, expenses and staffing.

12.) A commitment to a startup lifestyle will have no impact on an entrepreneur's family or close friends.
07.1% Yes
92.9% No

I have to admit that this was a leading question on my part. You never fully realize the impact of a startup on your family or friends until you are involved in the venture. A commitment to a startup has a significant impact on your personal life that can not fully be understood unless you have started your own company.

13.) If the majority of the people you survey think your business idea is a good one you should start a company based on that idea.
21.4% Yes
07.1% No
28.6% Ask them why they think it is a good idea
64.3% Ask them if they would invest in the idea
35.7% Other

The really important question is would a person invest in the idea.

14.) Startups should assume that outside(non-founder or friends) investors will invest in their company.
42.9% Yes
42.9% No
14.3% Other

I do not know what to take away from this dead heat. It certainly indicates that the entrepreneurial community is split on the role and commitment of outside investors.

15.) Institutional(Venture Capital/Bank Loan) investment is required for a company to reach its full potential?
21.4% Yes
50%% No
28.6% Other

The preferred answer to this question appears to be somewhat inconsistent with the answers to questions 3 and 7. Apparently, the crowd believes you need external working capital to run a startup. However, it they are not keen on institutional funding.

16.) Founders should invest all of their savings into their startups before seeking external funding.
0.0% Yes
78.6% No
21.4% Other

Clearly the participants do not suggest investing all of a founders cash into a business. This answer plus the answers to several other questions indicates that the preferred form of startup funding is angel or individual investor funding.

17.) Startup teams should be multidisciplinary including business, finance, legal, domain and technical expertise.
92.9% Yes
08.1% Other

Everyone agreed that in a perfect world you need a diversity of skill sets in a startup to make it work. This dispels the myth that a couple of geeks in garage can start and launch a successful company.

18.) Startup founders should have a preset time line for when a business will be successful.
50.0% Yes
21.4% No
28.6% Other

The participants generally agreed that a time-line of some kind should be established as a benchmark and guideline. Some of the comments indicates that things naturally happen that upset the plan. However this does not mean you should not have a time line.

19.) Startup entrepreneurs should get approval form their family members before starting a company.
14.3% Yes
42.9% No
7.1% All close family
14.3% Direct family members
14.3% Husband or Wife
28.6% Other

This one was very interesting based on the fact that the answer to question 12 indicated that the majority agreed that a startup lifestyle has a big impact on family and friends. Despite this close to half of the responders indicated they would go for it without family approval.

20.) Should a company's original business plan or idea be modified before the company receives market feedback.
35.7% Yes
35.7% No
00.0% If A Company Can Not Receive Investment Capital
14.3% If Too Hard To Bring To Develop And Bring To Market
21.4% Other

Most the comments in the Other category support the notion of changing direction based in different sources of information. This pushes the general consensus into the yes category.

In conclusion, this survey pointed out some very interesting startup characteristics, attitudes, operational approaches and funding preferences. All good portion of the entrepreneurial community that responded to this survey where seasoned entrepreneurs that appear to have at least one start-up under their belt.

It also indicates that entrepreneurs are beginning to change their notions about how much investment, the form of investment and the time-line for success are changing. It will be interesting to see if next years survey will differ from the current results.

Once again I do appreciate the contribution of the participants and the valuable information they have provided.. Having real life feedback to tough startup questions will help newly minted entrepreneurs, people considering a startup and existing professionals.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about startup companies. Kevin is a long time entrepreneur having started, sold, IPOed and operated a number of startups in the US and Europe. Kevin currently advices startup companies on technical, funding and business operations. Kevin is a frequent speaker at conferences in Asia, Europe and the US.

How Do I Structure My Startup For Investment And Acquisition?

I recently attended one of the usual Silicon Valley conferences where a group of startup CEO's, lawyers, bankers, VC's and entrepreneurs get together to keep the dream of the holy grail sale or acquisition of a startup company alive. It was interesting because one of the newly minted entrepreneurs immediately asked the question "How do I structure my startup for an easy exit?".

I will have to admit that I chuckled under my breath and thought to myself "wrong question". You should be thinking about how you are going to keep your company above water to survive long enough to get to the point where someone actually cares about you and your company. With that said many entrepreneurs do make decisions early on in the life of their company that impede their ability to sell or go public.

The following are approaches that entrepreneurs can take in the early formation of their company that will make the company more attractive for sale or investment.

LLC Versus Incorporation - Many entrepreneurs start out forming their companies under the LLC form of business organization. Frequently, entrepreneurs are driven to this approach because they have concerns about the reporting and expense associated with incorporation. They also harbor the hope that their company will be profitable one day allowing them to distribute those profits(profit interests) to the founders. These are all good reasons to start a company as an LLC. However, they are not good reasons from an investment and exit perspective.

Realistically, revving up your startup to profitability is no easy task. Secondly, even if you get there you are more likely to plow those profits right back into your company to keep it growing. For investors or potential acquirers the reinvestment behavior is what they are looking for in an entrepreneurial company.

From a structural perspective investors and acquirers do not like the LLC format because it is inconsistent with the format they are accustomed to investing in and purchasing. They prefer the vanilla corporate structure because it is well understood when it comes to merger and acquisition.

Yes, you can convert your LLC over to a corporation if a sale or investment is imminent. However, why go through the hassle and expense. Start out as a corporation to make your company more attractive to potential buyers.

The Team - Unfortunately investors are subject to being influenced by impressive resumes. This is unfortunate because many successful companies are started by people that have great ideas and good business skills that never went to designer label schools or worked for Fortune 500 companies. Despite this well known fact, investors and potential acquirers may overlook your startup and even pass on an acquisition if they do not see well known labels attached to team members. If you or your company fits this description I suggest you add someone to your team that has "credentials". Even if the credential holder is an adviser it will help your cause.

Investment Categories - Interesting enough investors and acquirers are not that creative when it comes to the investments and acquisitions that they make. Even in the high flying Tech/Internet world investors have a tendency to only invest in areas that they deem to be "hot". This means that even if you have a great idea, good growth and even some profits to prove it investors may overlook you because you are not in a space that they care about. Before you pick an idea, product and or service to form a company around determine what investors care about. This is easy enough. Take a look at their portfolios and track recent IPOs. Granted, this may be difficult if you are looking for an exit two or three years away. However, most investing trends have a history and a trail you can follow and extrapolate from to determine where investment is headed.

Conclusion - Asking the questions how do I structure my company for exit at the start of a business may not be the best thing to be thinking about at that stage in your company's history. However, there are actions you can take early on in your company history that will make you more attractive to investors when the time comes to cash out.

Common Startup Misconceptions And Mistakes - Forgetting The Original Business Plan

Entrepreneurs typically spend a lot of time developing an original business plan in preparation for the launch of their business. Some excellent thinking, analysis, research and collaboration goes into this plan. Unfortunately, after the business is launched the plan is usually forgotten. Entrepreneurs get caught up in the day to day operational aspects of their business and rarely stick to the discipline and self assessment associated with the preparation of the original business plan. This is unfortunate for a variety of reasons.

Structure And Discipline - It is extremely easy to become distracted and pulled in many directions during the startup phase of a business. Investors begin to suggest alternative business plans, adding contractors and employees requires personal attention, financial challenges require changes to original planning, day to day operations require time and energy, etc. This plethora of distractions can result in a loss of focus on the overall goals and basic premise of the business. Digging back into the original plan from time to time can bring a business and business owners back into focus and in some cases back on track. The simple discipline of periodically reviewing and possibly changing the business plan is a reminder that the business is based on certain fundamental principles and assumptions. Periodic business plan review will force the entrepreneur to take a step back from operational management and engage in critical business assessment.

The Business Is Not Going According To Plan - A startup very rarely goes as planned. Ironically, entrepreneurs understand this. However, they typically fall into react mode without gauging how the company has diverged from the original plan. Without a baseline it is very difficult to understand where the business is going and what success really means. A review of the business plan and a critical assessment of what has changed will reorient the business owner and the company providing an organizational, marketing and financial assessment of the current business environment and how it impacts the future success of the business.

Setting Goals And Objectives - Without a baseline it is hard to set and measure success goals and objectives. The original plan implicitly or explicitly contains very clear goals, objectives dates and milestones for the business. It is important for a business to maintain this focus. If the business has changed since inception (and it always will) reset the goals and update the business plan with those goals expressed in concrete financial, marketing and operational terms.

Communication Tool - The business plan is a good communication tool to unite the company around common goals and to communicate to employees and to investors how the company is doing. The original plan is the starting point for this process. It is not that difficult to periodically update the plan and use the plan as a tool in regular employee and business meetings. Using the plan as a communication tool will provide continuity and a regular baseline for an audience to assess and contribute to discussions about the state of the business.

Conclusion - In the initial stages of a business a company spends time and energy on developing a plan for a business. When a business gets started this investment can be lost if the business plan is not continually assessed. Leveraging this investment continuously throughout the life cycle of the business will keep the company on track, identify areas that need attention and provide the company with a communication tool to keep employees and investors on the same page.

Common Startup Misconceptions and Mistakes - Assessment Of Time And Money Requirements

The old adage that veteran investors and entrepreneurs will tell you is that it will always take more than the expected time and money to achieve milestones in a young company's life cycle. The biggest misunderstandings occur in association with business launch and profitability milestones. There is wisdom in this pronouncement. However, entrepreneurs very rarely get the needed advice to avoid the frustration of missing dates and having to raise more money to get their companies off the ground and at break-even levels. The following are a number of reasons why entrepreneurs miss the mark and how to avoid this happening to your business.

Investor Pressure - Ironically, investors are usually the ones forcing entrepreneurs to provide then with dates and numbers that are most likely not going to be met. It may be that an entrepreneur has to cave in and give investors the dates they want to hear. However, the mistake entrepreneurs make is not acknowledging to their team and themselves that these are not the expected delivery dates. This cascades into a potentially dysfunctional situation where dates are never made and team morale drops. The best advice is to craft a realistic time line and expenditure guidelines for your team and create an operational model around them. Even if investors are pressuring you to deliver faster it is of no benefit to your business if you consistently miss these dates. In the end a savvy investor is more interested in the truth and not about being placated.

Overly Optimistic - Entrepreneurs are naturally excited and enthusiastic about their companies. This comes with a feeling that anything is possible and a get it done attitude. This is great from a motivational perspective and it does result in pulling in dates that would otherwise be extended in a later stage company. However, optimism and drive should not overshadow the real picture. Listen to your team! If your team is giving you a good reason for a date of delivery, or you do not have the resources to accomplish what you would like in a certain time frame, you should acknowledge it and plan accordingly. Pushing a team to deliver on unrealistic dates has all kinds of consequences.

Lack Of Experience And Expertise - You can't know what you don't know! Face it, entrepreneurs commonly encounter challenges that they and their teams have never faced before. This is a natural part of the fun starting a new business. However, do not be naive in believing that you have any idea of what it will take to get something done until it is actually completed. The real danger of continually predicting aggressive completion dates and not achieving them extends far beyond the external perception of investors and the marketplace. It can also have a devastating impact on the morale within your company. No one likes to repeatedly miss goals and objectives. If a business is missing dates or delivering low quality product it could be that the business does not have the right skill set mix. This is very common and is easily addressed by focusing on the skills that are missing and bringing them into the company as soon as possible.

Cost Estimation - It is difficult to get a handle on cost until you have had some experience engaging suppliers, buying various items, using contractors and adding employees. Market conditions and the economy change making some items cost less and others more than expected. Before you go to far down the road creating or pitching cost estimates get some operational experience with the business and then back those into the pitch and business plan.

Sales/Revenue - The best way to predict revenue without any real operational history is to look at your competitors that are recognizable businesses. These competitors do not have to be exactly in the sweet spot of your space. These predictions may not be an absolute indicator of revenue dynamics for your business. However, they will provide real life numbers that are useful to you, your team and to investors. Also be careful of the hockey stick long term predictions for revenue. Keep the number to the first year of actual operations. The future is too hard to predict and investors no longer buy the hockey stick metaphor.

Conclusion - Realistically, projecting completion dates, revenue, operational costs and calculating the bottom line is difficult for a new company. It is best to stick with an investment amount you need to fund the early operational costs of the business and work from there. A knowledgeable investor will get this. Certainly your business has to be game changing in some way to attract attention. Showing potential numbers associated with the upside of your business is great. However, do not over pitch your company forcing your team and yourself into unrealistic goal setting. If you do you will back your business into a corner that will potentially have a long term negative impact on your business and your employees.

Common Startup Misconceptions and Mistakes - Dependence On Contractors

I have started and worked with a number of startup companies. My personal experience growing businesses from early stage development to sale, IPO and closure has taught me that there are common mistakes that entrepreneurs make and misconceptions they hold that frequently impact the long term success of their businesses. These misconceptions and mistakes are the result of the entrepreneurs being new to the process of organization building. The use of contractors is very common for startups. Contractors are a great resource if used properly and a real challenge if not managed properly.

In the early stages of a startup temporary contract workers are commonly used to bootstrap a company. Contractors are used because funds are limited, the business is not organized in a way to bring on full time employees or the business is not sure how long it will take and what effort is required to accomplish tasks. Initially, using contractors to get a prototype completed or to explore what it will take to build a company may be the only option. Despite these objectives and constraints entrepreneur also need to realize the consequences of using a temporary work force to bootstrap a company.

C0-Dependency - In the long run relying too heavily on contractors without planning for a transition to a more permanent workforce could have a detrimental impact on a startup. Many entrepreneurs do not think about the consequences of building a company based on temporary workers. In many ways they treat temporary workers as permanent employees relying heavily on their expertise, allow contractors to be the knowledge depository for the business and build organizational structure and communication channels around a contracting staff. When a company is required to transition to a more permanent structure the processes created using contractors may be inadequate for the long term growth of the company.

Transition Planning - Frequently contractors can only commit to so many hours or for a fixed duration of time. People become contractors to allow them to float between projects and to control the amount of hours that they dedicate to each project. Startup's can quickly evolve from a temporary worker need level to full time commitment levels. If the contractors cannot transition to full time roles the business will have to start the hunt again for other individuals to full their role. The search for resources takes time, energy and money resulting in lost productivity for the company and a distraction for the management team. The best advice for a startup is to create a transition plan to a full time staff in the early phases of company growth. This will help to constrain the work contractors are expected to achieve and put in place processes that assure that the work contractors have done is optimized and the new staff is capable of picking up where the contractors left off.

Knowledge Loss - In most cases contractors are temporary. This means that all of the knowledge and processes that they acquire or create from a technical, operational or business relationship perspective could be lost when they depart. This loss of knowledge can have a detrimental impact on an organization causing it to take two steps backwards before it can move forward again. In some cases the loss of a technical contractor could require a future redesign of a product or platform because the contractor did not document or communicate the architecture of the system to anyone in the company. Also, even if the design was document the new technical resource may not understand the design or agree with it. An entrepreneur should make sure that all contractors adequately document their work, save their code is a source control system and are contractually obligated to spend time with new contractors or permanent employees. Operational processes, marketing arrangements and business relationships should also be held to the same standards making sure that all parts of the organization are protected from knowledge loss and to avoid misunderstandings with external entities when the temporary workers depart the company.

Explicitly Establish Tasks To Be Completed - Frequently a business owner will give general direction to a contractor to achieve a task. A contractor can easily interpret a goal and task in a way that is very different then the business owners understanding. To avoid this the business manager or owner should draft a document that explicitly outlines the task to be completed, the hours to be expended on the task and the desired results. This could be in the form of a specification, ways of measuring completion of the task or expectation of how much time it will take to complete.

Quality - Most startups place an emphasis on speed to market with an implied and assumed but not stated emphasis on quality. The assumption that a contractor understands the assumed value of quality in their work could be an incorrect assumption. Contractors are frequently expected to "get it done" and to "code faster" to show results quickly. There is an inherent trade off of getting something done fast and the quality of the output. If the quality component is not explicitly communicated the contractor will get it done quickly and then go off to another task causing the process to spiral into a constant feedback loop addressing output quality issues with previously developed products and processes. Eventually, this could result in a expensive reset for the company. The best way to deal with this is to articulate quality exceptions and to have a way to measure the quality of output.

Cost - There is a common misconception that contractors are less expensive then full time employees. This is usually not the case unless the entrepreneur is constraining the contractor's hours. In my experience when a business gets going the hour constraint goes out the window potentially resulting in sky rocketing labor costs or the lack of completion of key components of the business because the funds are not available to complete tasks. To avoid this from happening businesses should establish fixed budgets for all items and contractually hold contractors to adhere to those budgets. This may require some work on the part of the entrepreneurs to budget and work with the contractor to determine the actual cost of a project. Even with a contract in hand situations may occur that require a contractor to invest more time and effort into a project then originally estimated. Despite this the business should stick to its overall budget potentially taking funds away from one project to fund another. The worse possible scenario is that no projects are adequately completed. A prioritization or projects is required to assure that only the highest priority projects will be addressed with the available funds.

Conversion To Employees -There will be a time when the company is in a position to take on permanent employees. In general, contractors have good reasons not to become full time employees. There rates may be high enough to exceed a salaried job, they prefer to be independent and not tied to any one company or they may have other interests outside of their contracting duties. For these reasons it should not be assumed that existing contractors will automatically convert to full time employees. When a contractor is hired determine if they will be willing to transition to a permanent position. Work out the proposed compensation and details of the transition with the contractor making sure everyone agrees on the details of the transition. This will help mitigate the ransom effect where a company becomes dependent on a contractor allowing the contractor to negotiate a deal that is disadvantageous to the company. If a contractor will not be able to transition to a permanent employee start planning and searching for potential employees early in the company's development. Finding good employees takes time and effort.

Team Building - Team building is part of the process of building any company. Team building includes the creation of a "culture", communication processes, knowledge retention mechanisms, ethical guidelines with the goal of creating common goals and vested interest in making the company successful. Team building is difficult to accomplish with a staff of temporary consultants. This is not the fault of the consulting staff. Some business owners can become frustrated by the fact that a company built around temporary workers is not generating the culture and attitude they desire. Certainly the business owners should articulate the desired company culture, goals and long term objectives of the company. Most contractors will respect this. However, if a company is predominantly staffed by temporary workers the company culture will reflect the values of the temporary workforce.

Conclusion - Inevitably startups will use contracted resources in the early phase of the company's formation. There is nothing inherently wrong with using contractors as long as the business owners understand the implications of this decision, adjust accordingly, maintain the proper expectations for the contractors and plan for the future transition from a temporary workforce to a permanent staff.

Building A Startup Company On A Lean Budget

In my previous blog entries focused on early stage startup challenges I discussed the necessity for entrepreneurs to self fund their own startups. The following are some tips for how an entrepreneur can build and launch a company with minimal funds.

Open Source - We have moved away from proprietary software products to the free software world of open source. Open source products allow an early stage company to leverage the work of a team of developers and beta testers(customers) for no cost(or very low cost) to the startup. If your product or service is software based this is a great way to get product in front of consumers quickly with minimal development expenditure.

Cloud Computing - Cloud Computing has obviated the need for large and expensive hardware purchases. The concept is simple. Use someone another company's hardware to run your business. The cost is based on "usage". Usage is defined as data storage, CPU and bandwidth. This is a great way to get your business or your web site hosted for a fraction of the cost of doing it yourself or having a hosting center take care of it.

Beta/Community Programs - One of the biggest challenges for startups is to get validation and direction for their product or service. Engaging end users in a beta program is a good way to get free feedback on the product design, function and quality. Beta testers are extremely tolerant of a shaky early release product as long as their suggestions are taken seriously and they see steady improvements in the product or service over time. These same people will eventually become customers if you treat them properly and you make them feel that they are part of an elite first viewer participant group.

Leveraging The Future Value Of Equity - Although the idea and concept you start out with may have no immediate monetary value the future company based on that idea could have significant value. Savvy individuals will get this and will participate in helping you launch your company in exchange for a piece of the company.

Web Site Development - Irrespective of what your product or service is all companies should have a website that describes the product or service, acts as a launch pad into the product and provides updates for an ever curious Internet community. Putting up an initial web site these days is easy and inexpensive. There are plenty of online services that will provide you with starter templates to get your message out, accept credit card transactions and track your traffic. The most important thing a company should do is get the e-mail addresses of the visitors so you can continue to market to them in the days, weeks and years ahead.

E-mail Campaign Services - E-mail is still a great and inexpensive way to reach out to existing and new customers. There are a number of e-mail campaign platforms that will provide you with the tools to create your own e-mail campaigns and maintain mailings lists. In the initial stages of your company your email campaigns should cost you very little because your lists will be small. If your e-mail lists do grow to substantial size(100 of thousands) then this will be a great problem to have.

Corporate Programs - Many large and established companies with great products and services realize the future value of startup company. They know that if they provide startups with access to their products and services in the early stages of development they will most likely continue to use the company's products and services once the startup becomes successful. It is a shrewd strategy based on the fact that once you build your company around a product and service it is difficult to switch. Mircrosoft and Sun Mircrosystems (now Oracle) are just a few of the big guys that like startup companies. Take advantage of their somewhat self-serving offerings remembering that you may be committing to a long term relationship with the company.

Business Partnerships - Business partnership opportunities are still around and possibly growing because of the recent economic downturn. An existing business needs products and services to put into their sales channel. Developing a new product or service can be expensive for an existing company. If they can get a startup to build a product the existing business can use in their channel they may fund part of the development in exchange for a share of the market. The existing company may also see the startup as a new sales channel for its existing customers.

Social Media(blogs, Facebook, Twitter, Linkedin, YouTube etc.) - Every company despite their size can obtain a significant amount of consumer attention by using free social/viral media channels. Building a presence in these environment is not expensive. The key to successfully using these services is to use them in tandem to get the "Social Media Effect". There is no better way to put a company on the map and to acquire customers then through social media.

Search Engine Optimization (SEO) - Natural search is still a potent and powerful way to attract consumers to your business. SEO is a bit of a black art but there is some science to it. Text is better than graphics, meta tags still have value, recognizable key words in the text matter, links to your site from other sites increases the importance of your site and traffic matters. The more traffic to a property the better the ranking.

IM/Skype/Freeconference.com - Loss the traditional phone set up it is too expensive. If you want to contact someone or have a conference, etc. use a free IM service, conference with Skype or use Freeconference.com if you really need to use traditional phone lines. This is especially important of you are going to do business internationally.

Sweat Equity - Even though the items I have listed are all great ways to keep the cost of launching your startup down they all require "sweat equity". Value = sweat equity + investment. Nothing comes without a cost. This means that startup founders have a unique challenge of having to invest their time for no cost to grow the company.

Scaling Up and Scaling Down - The other challenge for entrepreneurs is the ability of the co-founders to demonstrate that they can "scale up and scale down". Many of the items described require an entrepreneur to be a CEO one day and a web developer the next. Have the suit and tie ready along with the jeans and a tee-shirt. Multitasking will keep the labor costs down.

Conclusion - There are many ways to keep the cost of your startup down enabling you to launch it with very little initial financial investment. The inexpensive startup phase does require a co-founder to be versatile taking responsibility for a number of different and unrelated tasks. Sweat equity is one of the key ways to control the cost of startup. the more you do yourself the cheaper it will be to launch your company.

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2010 Entrepreneurship And the Realities Of Self-Funding

Entrepreneurs enter the business world with many preconceptions. My previous blog on the "Value Of An Idea" and the subsequent feedback reinforced the fact that entrepreneurs hold a diverse set of opinions about the true nature of the business environment as it relates to ideas, valuation and funding. One of the most debated topics for new ventures in the current economic climate is sources of funding for early stage companies. The climate has made it exceedingly difficult to find investment capital forcing entrepreneurs to be creative in the financing of their businesses.

The necessity to self-fund a business has become almost mandatory for startup ventures. The current economic climate exacerbates the financing challenge. However, even in relatively good economic conditions an entrepreneur will most likely have to self fund the early stage of business formation.

I have started or participated in the formation of many businesses and there has never been a time when the early stage of the business did not require some level of self funding. This is an important point because many startups believe that the current economic environment is unique in its stingy attitude towards funding early stage companies. In my experience this is not necessarily the case. It is a matter of how you define "early stage". The current economic climate is stretching the definition of what early stage means resulting in financiers expecting far more product and business development before they express interest in putting money into a business.

So how should an entrepreneur approach the early funding of a company? How does the current economy make this period of business development different than in years past?

1.) There Are No White Knights - Do not approach a business assuming that a white knight or bank is going to invest until substantial progress has been made with the business. The current economy has made this more apparent.

2.) Friends And Family - If the current economy has significantly changed one aspect of fund raising it has been friends and family as a source of early stage working capital. The economy has hit individuals more so then many institutional investors resulting in this sector of funding being an unlikely place to find funding.

3.) How Much Money Do You Need? - Do not underestimate the investment required to start a business. Make a calculated assessment on how much money you are going to need/invest. A common mistake is making an investment too small to make enough progress before external funding or profitability. Current economic conditions require a business to show much more progress than in the past before financing can be secured.

4.) Business Planning - Create a business plan even if you are self funded. The plan will help guide the business and act as a benchmark to determine if the business is viable at certain points in the business life cycle. Certainly reality very rarely tracks a plan. However, the plan is a good guide for how far you veer from your original plan and what additional funding will be required to reach you business goals.

5.) Know Your Limits - Many enthusiastic entrepreneurs will continue to invest their own funds beyond the initial planned investment. This is dangerous and potentially damaging to your family and your personal finances. Make a decision on how much you are going to invest and hold to that decision. Any investment beyond the initial plan should be thoroughly evaluated. If an additional investment is made there should be clear goals and objective associated with that investment.

6.) Early Investor Commitment - Although an institutional investor will very rarely invest in the early stage of a company they should be consulted prior to the start of a business to determine investor interest. There is no reason to invest your own personal funds in a business if there is no institutional interest in your idea or business. An important business milestone is an investor's expressed interest in investing in a business based on a set criteria. Investors are great sources of information about the business categories that investors are interested in. Your idea and company may or may not fit into one of these categories. If it does not you should reconsider and attempt to reposition the business in such a way that it fits the investor profile.

7.) Spread Financial Risk - Form a team of individuals to start a business. Do not go it alone. This approach has many benefits but for the purpose of this subject it spreads financial risk. The disbursement of risk reduces the pressure on you to carry the company on the back of just your wallet and makes for a much easier sell to your family and supporters.

8.) Get Family Buy In - Any investment of personal funds should be vetted with family members. Your decision will have a big impact on your family requiring buy in before moving forward.

9.) Live To Fight Another Day - New business ventures are tough sledding and the majority of them do not reach their intended goal. Set specific milestones that allow you to determine if the business is on the road to success. If it is not have the courage to move on. If the business does not work out you will certainly learn useful lessons that will come in handy when starting and managing future ventures. Very rarely does an entrepreneur come out of a business venture without some positive life and business experiences.

The current economic climate makes it difficult to obtain early stage funding. Some self funding is going to be required to get a business to a stage where an external investor will participate.

The funding environment for 2010 will improve but will continue to be challenging. There are key business areas that will attract "early" stage funding. Make sure you know what those are and position yourself to take advantage of the opportunity.

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What Is The Value Of An Idea?

Many entrepreneurs are excited about their ideas and the potential for those ideas to turn into great businesses. This excitement translates into a perceived valuation of the idea. An entrepreneur may assume that the idea is extremely valuable and an investment in a business based on the idea is obvious. In many cases the entrepreneur's valuation is not consistent with the publicly perceived value of the idea.

There are cases when a pure idea does have immediate monetary value. If the idea represents a break through mathematical formula, insight into a physical law, or a new chemical process the idea may have immediate monetary value.

However, in most cases an entrepreneur has to show an investor more than an idea to entice them into investing.

This does not mean that the idea has no value. In fact, the idea stage of a company is very important and "valuable".

1. Starting Point - Everything starts somewhere and the creation of the idea that will one day power a company is usually the symbolic starting point for a business.
2. Brainstorming - The idea phase of a company is a blue sky anything possible stage. It is exhilarating and stimulates thinking around the technology, company structure, staffing, marketing and product development that will be forthcoming.
3. Intellectual Property - Although the idea itself may have no monetary value a patent does have value. If the idea is truly unique a patent process should be initiated. If a patent is granted the idea will add value to the future business.
4. Rallying - Presenting an idea to another individual or group is a great way to start a dialogue about an idea's potential. The idea discussion will help bring like minded people into a discussion about the idea and its potential merit. The idea itself may form a common bond amongst like minded individuals that will eventually take interest in the tangible manifestation of the idea.
5. Validating - Getting the idea out into a public forum will help determine the validity of the idea as it relates to its commercial potential. Be careful about confidentiality when soliciting public feedback. Isolate your public contacts to individuals you trust to keep your information confidential. Having them sign an NDA is a good idea.
   
6. Investor Introduction - At the idea stage it is very unlikely that an investor is going to invest. However, sharing the idea with investors is a good way to prime the pump for a future investment and to determine if a business built around the idea is of interest to the investor. The investor may know other people that would be interested in the business. The one caveat is confidentiality. Be careful about sharing your idea with investors that may take the idea elsewhere.

The inclination to focus on an idea as having monetary value prior to having an actual business associated with the idea is not the correct way approach to idea valuation. Vet and develop the idea from a theoretical notion into something tangible such as a product, service, etc. before you considering the idea as having monetary value. Use the idea to motivate a team around you to create the product and service that will eventually represent the real value of the idea.

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The One Skill An Entreprenuer Has To Have

I have had the opportunity to work with many entrepreneurs and startup businesses and there is a consistent theme associated with the ones that have been successful. Startup companies face a myriad of challenges and attract extremely talented, motivated and intelligent people. These individuals have preconceptions about what is really going to make the business successful and they do have great skills that will help a business succeed. However, there is a skill and talent that stands above all that is absolutely essential for the success of the business.

The ability to raise investment capital and to do it over and over again is the magic bullet skill all successful entrepreneurs have. You may argue that the business has to have great potential, that the product needs to be innovative, the market for the product or service large and growing, the business owners need to be hardworking and bright, you have to have a great marketeer, etc. Sure these are great to haves. However, many companies led by accomplished entrepreneurs with great products or services have failed because the company was missing the key ingredient.


So what are the qualities, skills etc. that make for a good fund raiser?

Pitching/Selling: Raising money is all about how you present the business, yourself and the team. Pitching an early stage company is different from pitching an existing product or service because the product or service either does not exist or is in some form of development. For this reason potential investors will be focused on the entrepreneur trying to determine if that individual is capable of creating and operating a business.

In the initial few minutes of the elevator pitch the investors will concentrate on the presenter. Who are you? What is your background? What successes have you had? How are you qualified to run this business and manage the initial investment. The presenter should lead by answering these questions before he or she gets into the details of the business. Establish creditability early in the exchange.

Dealing With Objections and Rejection: Investors are more likely to object or challenge the fund raiser then to agree with their suppositions. This should not be taken as a negative. It is a way for the investors to dig deeper into the business. Respond in a positive way and answer the challenges with facts and figures. If you do not have an answer be honest and indicate you can not answer the question now and will get back to the investor. Never take a challenge personally. Rejection is always a big part of the process. A good fund raiser will always learn from each rejection or challenge and build responses to them in future presentations. Politely, acknowledge the challenge at the time of the challenge and commend the potential investor for pointing out any potential deficiency in the business.


Determination: A fund raiser has to be tenacious because the fund raising effort will require endless hours and repeated calls, pitches, etc. The investment community will be looking to see how the fund raiser handles the long and difficult funding process, requests for additional information, etc. Fund raising is a sprinting marathon requiring the fund raiser to be prepared for long and challenging effort.

Success History: The fund raiser has to have a history of success in some capacity. It could be academic accomplishment, business success, startup experience, etc. The fund raiser also has to emphasis accomplishments in a way that is not perceived as self aggrandizement. The accomplishments should be noted in the interest of explaining their relevance to the business. The success background expose should be interspersed with other information about the business indicating that the information is important but not the sole reason to invest in the company.

Investor Networking: The concept of networking yourself to success is a bit of a cliche in this day and age. Networking for the purpose of fund raising is different then hanging out in social networks and letting people know you are out there. Fund raising networking requires some serious face to face time with potential investment sources. In a perfect world this form of networking should begin well before a entrepreneur decides to raise funds. This method will result in a more fundamental bond between the fund raiser and the funding source. When the time comes for actual money raising the request for funding will be coming from a person that the investor already knows and has some confidence in his or her ability to deliver on expectations.

Multiple Fund Raising Source: The law of averages requires a fund raiser to have a multiplicity of funding sources. Before heading out on the official funding road you should have a portfolio of between 10 and 20 pre-qualified investors ready to pitch to. You may find that that you have to pitch and work with an even larger amount of investors before you successfully land a round.

Research: Dig into the backgrounds and portfolios of the potential investors. What are they investing in? What was their most recent investment? Talk to an entrepreneur that has worked with the investor before? What are the most likely question the investor will ask?

Flexibility: You certainly have to be agile when it comes to raising funds. Do not get hung-up on the amount and structure of a deal. You should have an amount your are looking for and a specific purpose for the funds. However, be prepared to take a greater or lesser amount of capital. During the process you will have to be willing to change your business model, change your schedule at a moments notice and be anywhere the funding source wants you to be.

Personal Investment: It is very unlikely that anyone will invest in your business unless you have invested your own money first. Certainly time invested in the business counts for something but good old hard cash ranks much higher.

Commitment: Raising funds is a full time job. . Do not kid yourself into believing that you can effectively tend to other business needs during this period. Everything else will be secondary during the process until the deal is closed.

You Are Always Fund Raising: One common thread amongst all good fund raisers is that they are always raising funds even when the business does not need the funds. During every business meeting, customer visit, conference, family and friends gathering think about how this might be an opportunity in the fund raising process.

Trustworthiness: This is where salesmanship differs from raising money. You can be a really good sales person even if your character is somewhat in question. This is not the case for a fund raiser. You have to legitimately be above board and have a trustworthy reputation. This means you actually have to believe that you can deliver on what you are promising and you make it perfectly clear to the potential investors what the risks are. Most investors will understand that there is risk to any investment. What they do not want to deal with is risk generated by a questionable business partnership.

Sources Of Capital: Many entrepreneurs waste their time seeking investment in the wrong places. This is a difficult one to sort out if you have never been on the funding road. The right funding sources are dependent on many factors; what is the business, what is the state of the business, what is the state of the economy, geography and how much you need all dictate what sources are best for the operation.

Timing: Like many things in life timing has a big impact on the success of a venture. Raising money to fund a company is no different. The current economic environment is a classic example of a time that is sub-optimal for raising funds. Even the most accomplishment fund raisers have been challenged by the events that have occurred over the past year. Sometimes it is better to hold back and get on the funding road at a different time. A good indicator of the right time is increased deal flow represented by a growth in investor's portfolios, IPO activity, M&A activity and public attention being focused on a specific economic sector that is associated with your business. Windows of opportunity open and close quickly so continuous research is required to hit it just right.

In conclusion, closing a round of funding is a skill and talent. When you are fortunate to have an investor interested in your business it is important to close as soon as possible even of you have to modify the deal terms.

Good Luck!!

What Is Your Start Up Worth?

Establishing a valuation for an early stage company is challenging. There is little financial history to predict future earnings and the real character of the company is still forming making it difficult to find comparable references with similar financial history.

Entrepreneurs are frequently unfamiliar with traditional ways to value companies and may approach valuation as an ownership issue rather than the market's assessment of their company's worth. Conversely, savvy investors attempting to acquire an ownership stake in a company may attempt to take advantage of an entrepreneur's desperate need for working capital by artificially deflating the valuation using the current company valuation and not the future growth and earning potential of the business.

Despite these challenges investors and entrepreneurs do need to agree on valuation based on a reasonable scientific method of establishing valuation.

This will keep fund raising negotiations on track, less emotional and instill confidence in current and future owners that the valuation is real and a legitimate reference point for future rounds of funding.

To this end I have elicited the expert advice of Lucia Wallace, Senior VP at Houlihan Lokey, to help craft this blog. Lucia is familiar with negotiating valuations for companies of all sizes in various stages of maturity. She has taken an interest in early stage companies and has provided good advice on what valuation approaches are best for early stage companies.

We will start out with an overview of traditional methods used to value companies and how they do or do not fit early stage companies.

Discounted Cash Flow (DCF) - This valuation method uses an estimate of future cash flows generated by a company. A discount co-efficient (discount rate) is applied to the estimate. This discount rate is based on the level of risk associated with the estimates.

In many cases a start up has no historical reference for cash flow making the DCF method of valuation suspect. A business owner may inflate the cash flow to demonstrate the great potential of the business to please investor expectations. An investor may deflate the predicted revenue to obtain a greater percentage of the company (or would assess the business owner's expected cash flows as having a high degree of risk). With no real history of cash flow the debate over cash flow valuation can result in an uncomfortable negotiation scenario were each party is arguing for a valuation without any real basis for the argument. At the end of the day, the discount rate is supposed to reflect the appropriate level of risk - which is extremely difficult to pin-point (if you do not want an excessively wide range of values).

Book/Asset Value - There are a number of valuations based on the value of the assets of a company. For technology based start ups this may be the value of the product/technology developed to date, patents, cash on hand, etc. However, the primary asset of a start up or early stage company is the collection of intangible assets (patents, technology, workforce, management team, advisors, access to cash, etc.), which is very difficult to value. Hard assets (furniture, plant, real estate, equipment value, etc.) have an easier determinable value, however, generally make up a small portion of total value of a company. Future value is the important piece of the puzzle because early stage companies are usually growth companies with the real investment value of the company in the future not the present.

Visits/Traffic/Eyeballs - A web oriented company can predict its future value based on expected web traffic. There are good comps for this. However, not all visit/traffic business models are the same. For instance, if there is a product platform developed to support content delivery or a unique business process has been crafted to differentiate the company the visit/traffic approach does not give you the full valuation picture. In the end the traffic has to be tied to some demonstrable and supportable revenue number. Just indicating that the company is going to generate traffic is going to be challenged.

So how do you get a substantiated value for a company that makes sense to investors and to start up business owners?

The best approach is to compare your company to another similar company. Back in the day an investor made an investment in an entity with no financial history. From that point on a "comp" has existed for all future investors and entrepreneurs.

The world has become more complex, in a good way, providing all kinds companies to choose from to establish a valuation for your early stage company. A start up can establish a valuation based on Market Multiples for comparable companies.

Market Multiples - Market multiples can be derived from either publicly traded companies, financing of private companies, and/or M&A transactions. Using this approach, you calculate the multiple on a financial metric (e.g., enterprise value /current value, enterprise value / future value (one or two years out) or enterprise value / current or future EBITDA) for the comparable company, and apply that multiple to your financial metric.

• The easiest way is to find publicly traded companies, as both valuation and financial information is easily available. Let's call these Public Comps. Note that the valuation in the public domain is generally for a "minority" ownership (i.e., a few shares), and not for a significant or even "controlling" ownership position. If you are selling some aspects of control, you need to account for that.
• You could also use a private company that has recently received funding, and pre-money valuation has been publicly disclosed, and you are familiar with some financial metrics (e.g. approximate revenue). You can calculate revenue multiples (or multiples on unique visitors, or EBITDA multiples) based on these Private Financing Comps. More likely than not, however, you won't have detailed financial information, so its difficult to draw detailed conclusions from this approach. If you are creative, though, you might be able to gather some information from the investor About the private companies in their portfolio - many are proud of these investments and publicly display them on their web sites, talk about them and market them to other investors and consumers.
• You can also use an M&A transaction (M&A Comps), for which both the transaction value and the target's financial information are available. Similarly, you can calculate revenue, cash flow or earnings multiples implied by the M&A transaction. Please note that an M&A transaction also reflects a premium for gaining control.

Trade of Shares For Investment - Valuation, investment and equity distribution are all tied together. I discussed equity distribution in a previous valuation Blog.

Keep in mind that the investor is investing in a very early stage company. This = risk for the investor. To mitigate the risk of the business plan not playing out exactly as planned the investor may ask for a greater percentage of the company then may be might expect. This should not be confused with conceding "control" of the company to the investor. In most cases, the last thing the investor wants is to control/manage your company. This is why they are so interested in the team running your company. You should be focused on getting the investor interested in your company, establishing measurable valuation and obtaining an amount of working capital that will conservatively allow you to focus on running the business and not remaining in perpetual fund raising mode.

In conclusion, start up valuations are hard to evaluate with traditional valuation approaches. The best way to obtain a satisfactory valuation for the business owner and the investor is to compare your company to similar companies that have public valuations. Yes, the valuation of the company may impact percentage ownership. Valuation and equity discussions will be intertwined in negotiations so make sure the basis the valuation and equity distribution are clear.

The Entrepreneur's Survival Kit For The Current Economy

As an entrepreneur and an adviser to many start up companies and entrepreneurs I have first hand knowledge and experience fund raising, interacting with investors and building new teams in this economy. I have seen many business plans, have spoken to scores of investors, worked closely with new companies and have shepherded aspiring business owners through the early phases of business development. I have learned a few lessons about how entrepreneurs can best position themselves to optimize their time and effort in the current climate and hopefully experience a positive outcome for themselves and their business.

Expectations - There is no secret to the fact that investment in new companies is down. One source estimates that VC's are investing 50% less then they did last year at this time. The climate has also impacted individual and angel investors. Their own portfolios have been diminished and they are not immune to the new "economic conservatism" sweeping the globe.

The first thing entrepreneurs need to do is to adjust their thinking to coincide with the impact of the new economic reality on their proposed business. This may sound obvious yet many aspiring business owners still think that they can float an idea, get funded and become successful using an outdated formula. Sorry, but this is not likely given our current economic environment. This is not to say that you should pack up your tent and give up. On the contrary this may be one of the best times to start a business if you can weather the storm and introduce a new product or service that fits into the dynamics of the new economy.

The key is to set an expectation that raising funds is going to be harder and take longer then it has in the past. Get yourself ready for some creative thinking on how to bootstrap your company and sustain it on a lean budget until you have concrete evidence of customer adoption and sustainable revenue per customer.

What Is Being Funded? - Before you go to far down the road of building a company you should determine what investors are investing in. Before you commit money and time in a venture check to see if your idea fits into a category that investors recognize as an area that has potential for significant upside. I call this "Riding A Wave" and have referred to it in previous blogs. Your idea or business may seem to you as revolutionary with great potential. However, if investors are not interested in your space it may never get funded. You need to position your company in a way that is aligned with current funding trends.

To find out what investors are interested in go to VC web sites and look at the recent investments they have made. This will be found in the portfolio section of the web site. Investors are very concerned about investing in areas that other investors are interested in. The net effect is that the herding investment strategy creates a higher level of investment in a sector which in turn helps to fuel the market for that sector.

There is a delicate balance between investor interest and investment saturation. You want to see investors investing in your sector but not too much investment. If a majority of the investors already have representation in a sector it may be too late for you to participate. This is what I call "The Cresting Wave". Unless you have a unique spin to your business that represents an element that can enhance the initial wave investors will pass on your investment if they already have representation in their portfolio.

If you find that some investors have made investments in your area and others do not have portfolio representation you are in a good place. Just like a surfer get your board waxed and get out there. Timing is everything and in this economy even more so!! You want to catch the investment wave at the precise point that gives you maximum investment opportunity. You can not be too late or too early.

Friends And Family - Traditionally friends and family members have been looked upon as an early source of seed funding for a business. This may not be the case anymore. Your friends and family are also feeling the effects of the economy and may not have the money or the inclination to part with the funds they have. However, they are still a great support group and may be able to contribute in other ways.

Family members may have more time on their hands because they are out of work or working shorter hours. Many of your friends and family will have skill sets that you can use in getting your business off the ground. Instead of asking them for money ask them if they can help with bookkeeping, sales, programming, document preparation, investor led generation and general business advice. They may also have some extra space, computer equipment, phone, fax machines, etc that you can use to setup and run your business.

Your friends and family do want to help you. Asking them to invest their time in something that may help their own careers and broaden their skill sets will be welcome. It also fosters a better relationship. Your are communicating that you value their expertise and skills not just their cash. The long term implications of this will be invaluable.

Stage Your Business And Product Development - Seed round of funding is really hard to find these days. Generally speaking investors are not investing in ideas or very early rounds. This leaves entrepreneurs in a bit of a dilemma. So how do I get my business started with no external initial working capital?

The best way to deal with this situation is to break you product or business down into segments that get you to a point were you can fund a prototype or alpha version of you product without external funding and grow the business recognizing the uncertainty in the investment market.

• The Initial Product or Service -It is highly likely that you will personally have to fund the first iteration of your product or service. The goal for this phase is to create something that demonstrates what it is and what it can do. It does not have to be fancy or pretty but it does need to work.
• Taking On Customers - In the web world this is a bit easier then in some domains. Investors today want to see how consumers react to the product or service. Drive some traffic to your web property and get a hint of the economics of your business and customers reaction to your product. If you do not have a web based product try to get people or companies to try out the product on a trial basis. If it is a capital intensive product identify a potential business partner that will work with you to create a prototype and have them introduce it to their customer base.
• Investment Round - In the first two phases you should have been contacting potential investors making them aware of what you were doing and providing them with progress updates. Be prepared to send them an executive pitch. Your experience in the first two phases will provide you with good hard evidence and facts about the dynamics and potential for your business.
  

Preparing The Investor Pitch - I am a great believer that your first impression matters a great deal in increasing your likelihood of getting funded. It is also the one area that entrepreneurs continue to struggle with. In this day and age if you are lucky to get an investor to look at your business you will only get a minute or two of their time to skim the presentation.

Many of the plans I see are either too long, too complicated or incomplete. To combat this I have gone to the extreme of providing my portfolio company's with an executive pitch template and two year operating plan spreadsheet to help them understand how to think about their business and structure their thoughts. The executive pitch should contain the following:

• What Is It?
• What is Different About It?
• Who Are the Competitors?
• What Other Companies In this Sector Have Been Funded And For How Much?
• How Are You Going To Make Money?
• How Much Money Do You Need?
• Who Are the Team Members?
  
• When Will You Have Your First Deliverable?
• When Will You Be Profitable?
• Where Are You?
  

There are certainly clever ways to present this information that will increase its impact. However, the essential information must be there, be accurate and well formed. The presentation should be brief and to the point. If it is a slide show it should be between 10 and 15 slides. If it is an executive summary keep it around 5 pages.

Pitch Review - Never send a pitch or document to an investor without someone you respect having reviewed the presentation. It would be best to identify a reviewer that has no idea about what you are doing and get their reaction. Adjust and change the pitch based on the feedback. If possible run through the presentation verbally with someone to understand what sections should be presented in what order and to determine the proper cadence for the presentation. Also, have some experts in your field take a look and see how you compare to the competition.

Submitting The Investor Pitch - You should still create and submit an investor pitch to funding sources even if you are in the first two stages of your business development. Investors are great sources of information and feedback. Investors need entrepreneurs and have a keen sense of what is happening in the marketplace, understand technology and will tell you what you need to do to get funded. If you are not an experienced entrepreneur with investor contacts have some one that has good contacts submit your plan for you. Investors are particular about what plans they look at. Having a known entity submit your plan will increase the chance of getting a response to your plan.

• What Are Investors Funding? - Many entrepreneurs have great ideas and products. However, this does not automatically mean that investors will invest. Submitting a plan to various VC's and individual investors will help you to understand what they care about.
  
• How Do Investors Perceive Your Business? - Investors may have a very different perception of your business then you do. It is important to get your company aligned with their thinking or find a way to convince an investor that they might consider thinking about your business in a different way.
• Relationship Building - An entrepreneur should spend time cultivating relationships with investors. Submitting your pitch and engaging an investor in a dialogue is a good way to start the relationship. Their feedback may be a short e-mail response or a sit down meeting and a run through your presentation. Either way getting to know each other is important. You may be on the funding road for the duration of your business life and have to submit multiple plans. Sincere and professional relationships with investors are important. It may make the difference between a go and no go in getting your business funded.

Iteration - Do not back yourself or your business into a corner where you can not iterate on the product or business model. The business environment is changing rapidly especially in the areas of customer monetization and technology adoption. Your business organization and or your technology platform should plan for this and be flexible. The business, product and customers you originally envisage may be very different at various stages of your company. You may have to reinvent your business several time to get funded and to adjust to ever changing consumer preferences.

Globalization - There is no such thing as a local economy anymore. Doing business has changed radically. A company or product that does not have a global offering is going to struggle and miss opportunities that could have made it successful. Study markets outside your comfort zone and understand how you can create a product or service that is attractive to them.

Research - Start up businesses require tremendous energy, time and focus from all of its members to make a business work. Despite the need to get the product and service up and running as soon as possible you always need to be looking around to see who the competitors are or might be, what technology may impact your business, what new investments are being made by investors and changes in consumers preferences. This is especially the case now when everyone is adjusting to the new economic reality. Changes are occurring at a rapid pace and require a company to react quickly these changes.

Do Not Give Up - We are all being tested in our personal and professional lives. Entrepreneurs are especially challenged. However, this is not a reason to give up and not pursue your dreams. In fact, if you can figure out how you can create a business that specifically address the new world order it may be the best time ever to establish a business. The overall business environment will get better. If you can get something going now you may be surprised at how successful you will be a year from now.

In conclusion, the current economic climate requires special tactics and techniques to increase an entrepreneur's chances of success. In many ways lessons learned from launching a business in these times will pay off as the economy improves.

For more advice on how best to succeed in the current economic environment readers may want to review the following previous blog entries:

Riding the Semantic Web Funding Wave
How Do I Establish A Valuation For My Start Up?
The Ten Best Ways To Improve Your Chances Securing Venture Funding
Raising Seed Capital In the Great Recession
How Will Web 3.0 Change Your Life?

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Riding The Semantic Web Funding Wave

The Semantic Web is Hot! I have been following Semantic Web/Semantic Net technology for some time. I am not alone. I recently covered this technology in How Will Web 3.0 Change Your Life? It clearly falls into the emerging technology category that I covered in Commercializing Emerging Technology .

Many investors, bloggers, news services and VC's are all in on this growing Wave. This is an emerging technology that could have significant impact on the next generation of search engine companies and how we will all find information on the web.

There is a top 10 hit list of companies that are leading the charge. Yes this is all occurring in a down economy. Many established companies and organizations are claiming participation or incorporation of this technology into their service or application. Yahoo, Microsoft, Rueters Twine and Mozilla are good examples of organizations that see this technology as a necessary part of their business. The new companies are getting funded and in some cases already being sold to larger companies.

Siri Raises $8.5 Million For Personal Artificial Intelligence.
Travel Search And Discovery Application Announces $4 Million In Funding.
Audio and Video Searcher Plugged Secures $6 Million Funding.
Microsoft Buys Linguistic Web Search Firm Powerset.
Reuters To Buy Search Company ClearForest.

From an entrepreneur's perspective this is a classic example of a Wave created by research institutions, technologists and investors. In my article on The 10 Best Ways To Get Funded I specifically talk about how important it is for entrepreneurs to be aware of growing investment Waves. The semantic web is a great example of how entrepreneurs have capitalized on a Wave to successfully get their companies funded and get them sold before they have demonstrated any significant uptake in revenue and traffic.

Many entrepreneurs in their enthusiasm about their idea and business overlook the importance of being associated with a Wave. No matter how good your idea is it has to be understood in a larger context and associated with a movement or trend that is much larger then the business itself. If you can not define your business in this way then the funding road is going to be difficult.

So what is the definition of a Wave?

• It completely changes the way business is conducted.
• Potentially creates entirely new markets.
• Draws attention to small and previously unknown companies.
• Is not dominated by large and well funded companies.
• The big guys need it too if they are going to stay competitive.
• The media love it and want to cover it.
• It comes from out of the blue and surprises traditional media.
• It has the potential for universal impact and big numbers.
• Based on fundamental physical or organizational science.
• Is supported by well respected people in academia and in business.
• Starts small and grows over time.
• Has the potential to create other Waves or is part of other Waves.

The Semantic Web certainly fits the bill for being a Wave. My advice to all entrepreneurs is to research this phenomena and either get on board, make sure you are riding your own Wave, catch a Wave or define your company in the context of a Wave. It may be the the best way to get your company funded in the current economic environment.

The 2009 Get Funded Challenge!!!

Get your company funded in 2009! Show investors that you are ready for the business challenges facing all businesses in the coming months. Does your team have the right stuff?

There is no doubt that getting funding in 2009 is going to be more difficult than in previous years. The VC's have decreased their investment outlook and individual investors are tightening their belts. This environment increases the competition for funding. Entrepreneurs need to work harder to get their companies funded.

To assist in helping aspiring startup companies to get funding in 2009 I am running a challenge through the month of February. The objectives of this challenge are as follows:

1.) Conduct A Company Self Assessment - Is your company ready for the funding expedition? There are a number of items that are critical for success in getting funding. The challenge will help you to determine if you are ready to go or if more work is required before you go out into the market.

2.) Organization - The challenge will force you to think objectively about how best to structure your company and pitch to improve your chances of getting funding. The discipline of organizing your information and asking yourself key questions well be good preparation for the inevitable investor pitch.

3.) Presentation - Appearance, articulation, command of the facts and the ability to captivate an audience matter. You may have the best idea and company imaginable but without an excellent presentation it could easily be overlooked or misunderstood.

4.) Exposure - My blog receives traffic from 47 countries. This traffic includes many investors looking to fund the next big opportunity and entrepreneurs looking for funds. When I publish the results of the competition investors will see your company and will reach out to you if they are interested.

All plans must be submitted to me by February 28. I will post the top plans on my blog on March 15^th.

I will select no less than 1 and no more than 3 companies.

All plan information will be confidential . If you want to be covered by an Advisor and Confidentiality Agreement I have posted a web version for your review.

What do I need from you? Please read my previous blog "The 10 Best Ways To Improve Your Chances Of Securing Venture Funding" to understand what it really takes to get funded. Translate those requirements into the following items.

1.) A PowerPoint presentation of no more then 10 slides that demonstrates your ability to concisely and quickly convince investors that your company can be a winner.

2.) Link to your company web site, prototype, product alpa/beta version, etc.

3.) Main contact and e-mail address.

4.) Details about your business including the following items.

a.) Company name and business organization. Is it a corporation, LC, LTD, etc?

b.) Age of the company.

c.) The country/region/state/province where your company is domiciled.

d.) What round of funding is this? Seed, A, B, etc. How much institutional or angel money has been invested in the business to date?

e.) Leadership team member details.

f.) A description of your product or service.

g.) Target customer profile.

h.) Competitors and where you line-up in relation to the competition.

i.) How much money are you asking for and how are you going to use the money.

j.) When will you be profitable?

k.) A two year operating budget that includes marketing, development, equipment, personnel and revenue projections. Please provide this in spreadsheet format.

l..) What is the cost of acquiring a customer and what is the lifetime value of a customer.

m.) What wave are you riding?

n.) What waves have you created?

o.) What makes your company different?

p.) If you have been out raising money what are investors telling you?

Please submit this information and the Advisor Confidentiality Agreements to my email address at kflood6@gmail.com.

I will review as many plans as possible during the month. I may have questions which will require your contact details. Please limit all your questions to essentials and submit them to my e-mail address only.

Good Luck!!!