A Members Only Jacket for Entrepreneurs

Members Only JackYou might remember me from high school. I was that tall skinny kid, the one with the shiny braces and the dirt on his upper lip (aka a mustache). Yep that was me.

And I was super cool. You know why? Because I wore a Members Only jacket.

In case you don’t recall, a Member’s Only jacket was a ridiculously expensive windbreaker and a required item of clothing. If you wore one, you were in the same club as the popular kids. I convinced my hard working parents that I needed one because my old jacket “didn’t fit right.”

With the benefit of hindsight and some introspection, all I can say is WTF. I looked ridiculous. Wearing a Members Only jacket didn’t make me cool, popular, or help me get a girlfriend which was the real objective.

In college, I stopped worrying about being cool and I connected with people I liked. These friends may have resembled the characters on Rudolf’s Island of Misfit Toys, but I was with the right people, and I was happy.

Fast Forward

Social NetworkSocial NetworkSocial NetworkDo you remember this scene from The Social Network

That’s right, the new cool kids are successful entrepreneurs, and they are at the center of the circle. Around the edge are a lot of hopefuls trying to get noticed. They go to events (for other entrepreneurs), they have the title (founder), and they talk about their latest project (idea).

They are proudly wearing an Entrepreneurs Only jacket and a member of the club.

If this sounds like you or someone you know, don’t sweat it. I was that person, feeling like an imposter, trying to fit in.

But here’s the thing. You are looking for affirmation from a group of people that have a negligible impact on the outcome of your business. You are trying too hard to be a member of the wrong club, and you are wasting precious time.

As an entrepreneur, the right club is with your customers, the ones who pay you money. Go to their events and take a genuine interest in their issues, not just the ones your product or service “is a solution for.” Add value and solve their problems, and you will be accepted, elevated, and you will find affirmation.

Now take off that stupid jacket and get to work.

Unforced Entrepreneurial Errors

Empty Roll of Toilet Paper

Entrepreneurial Errors

In late 2014, I read The Toilet Paper Entrepreneur by Mike Michalowicz.  The central theme is that entrepreneurs need to be good at finding creative approaches to all sorts of problems, an idea I can get behind 100%.

To illustrate, Mike tells a story about sitting on the toilet, doing his business but unaware that the person sitting before him was a jerk and didn’t replace the empty roll of tissue.

Don’t panic, he says, because a waste paper basket is within range:

“Time to examine your newly found treasure trove: A used snot-rag. Good, very good. A Q-tip. Oh, the inhumanity! Useable, if you must. A few cotton balls. OK, you can work with that. And… dental floss? No way! You draw the line at dental floss. So with three sheets of TP, a few cotton balls, a used tissue and a little poking around with a Q-Tip, you walk out fresh as a daisy ready to face the world.”

The lesson:

“In this most challenging, most human moment of all we demonstrate our infinite ability to pull “miracles” out of the trash. When we literally have no option to just get up and walk away, we find a way to get the job done. With three sheets, some wastebasket scraps and possibly a torn up cardboard roll, the impossible becomes very possible.”

Cute, but why do we need to put ourselves in the position of demonstrating “our infinite ability to pull miracles out of the trash?”  Why not take a peek at the toilet paper situation before taking a sit?

I suppose it would be a much less interesting to tell your friends that you almost had to use a Q-tip for a wipe.  It certainly would have ruined the plot line for every episode of MacGyver.

The same question applies to starting a company – why rely on your ability to pull a miracle out of the trash, or from somewhere else, when it is 10x easier to deal with the issue before it EVER becomes  a problem?

Not with me?  Here are a few examples:

1) You go to a startup weekend and team up with a great co-founder.  Everything clicks and you win first prize.  Eager to continue, you agree to split the equity 50/50 (that seems fair, right?) and you get to work.  One problem – your co-founder checks out after six months and you forgot to put a restricted stock agreement in place.

2) You promised to give a new employee 50,000 stock options  but didn’t get them approved (and priced) by the board.   And now you are out raising a round of funding which is going to increase the strike price on the options.

3) Since you are pre-revenue you don’t bother to keep up with financial statements.  You know your cash balance and your burn rate, so that should be good enough, right?

4) You actually didn’t have such a good handle on your cash balance (or your payables) and AWS is turning out the lights on your server.  Too bad for all of your customers.

These are all situations that you do not need to be in.  There will be enough challenges to deal with, many of which will be first-class head scratchers and require you to use all of your creative abilities.  So save your brain power for those situations and try and keep the unforced errors to a minimum.

photo credit:  GorillaSushi

Waiting for Superman

waiting for superman

waiting for superman

Last week, I received an email from a reader about an issue he is having in his business.  He said “[our problem] revolves around waiting for superman.”

Waiting for Superman is the name of a documentary film about the state of the education system in the United States, but I doubted that was what he meant.  So, I asked for clarification.

His response:

Superman means funding:

  • Once we get another developer we’ll be able to solve all of our technical issues.
  • Once we get funding we can fully scale.
  • Once we fully scale we will be taken seriously on platforms such as Techcrunch.

I want to be able to resolve these issues, but cannot as I have to wait for Superman to come and magically make the business correct itself.

My advice:

Too often, founders create a mythical silver bullet (Superman) that will make everything right, but 99.9% of the time the benefit is overrated.  Real progress is made in boring daily increments of .1%.   Yes, I know, the daily grind sucks, but that’s what being an entrepreneur requires.  And taken in aggregate, small improvements are a very big deal.

But let’s say Superman does magically arrive to “save the day.”  In the case described above, the result is going to be an inappropriate focus on scaling, and scaling MUCH too soon.

Scaling should occur only after two critical milestones have been met:

  1. Product/Market Fit:  In a small, but representative sub-segment of your business, does your product (or service) solve a real problem and are customers willing to pay money for it?
  2. Repeatable Customer Acquisition Model:  After getting step one right, can you find a set of repeatable steps for acquiring customers that allows you to build a profitable business?  i.e. you can’t be in the business of spending a $100 to acquire a customer with a lifetime value of $50.

And one last thought.  Getting noticed by Techcrunch is nice validation but the likelihood of it changing the trajectory of your business is zero, unless Techcrunch readers are your core customers.  On the other hand, if you get a 5 star review in an ultra-niche publication focused exclusively on your target market, now that’s a HUGE win!

A great read on this topic is a book written by Peter Sims called Little Bets:  How Breakthrough Ideas Emerge from Small Discoveries

What’s the Big Idea?

what's the big idea

Last weekend I bought a new computer, well at least new for me.  You see, I’m not a power user, so I love buying a cheap PC every few years, one that is slightly out of date.  My purchase was an inexpensive HP desktop with a 500 GB hard drive and 4 GB of RAM, and it cost all of $250.  #Score.

Now, contrast this with an IBM XT, circa 1985.  In the mid-80’s, I could purchase an XT with a 10 MB hard drive and 128K RAM for about $2500.  So for 1/10 the price, not considering inflation, I purchased a computer with 50,000x more hard drive and 31,250x more RAM.

That’s quite a bit of innovation in the past 30 years in PC hardware.  And the same thing has occurred with many other tech products.  How about networking speeds?  How about cell phones?  And how about how the internet has changed almost everything?

And yet, over the past few years, the Venture Capital community has engaged in public handwringing about the lack of innovation and big ideas coming from today’s entrepreneurs.  Here are a few quotes to support my point:

“The tech world should be utterly ashamed, because we are at an absolute minimum in terms of things that are being started.” – Chamath Palihapitiya in Techcrunch April 2013

An entire generation of entrepreneurs are building dipshit companies and hoping that they sell to Google for $25 million, lamented a venture capitalist to me recently. He believes that angel investors are pushing entrepreneurs to think small, and avoid the home run swings. And you don’t get a home run unless you swing hard, he says. When you play it safe you nearly always lose.   VCs and Super Angels: The War for the Entrepreneur

Innovation slowed down dramatically after the 1960s, Mr. Thiel said. We are not focused enough on getting back to a culture of innovation — people are just trying to figure out ways to coast.  According to Mr. Thiel, not enough energy is spent tackling big, challenging problems, like space exploration. Instead, many people are chasing incremental progress and short-term gains.   Contrarian Investor Shuns Hot Idea for Bigger Picture

what's the big idea

Sorry, I don’t get what all the crying is about.  With cloud computing and pay as you scale pricing models, it just doesn’t take as much money to build most startups these days.

As a result, big bloated VC funds that need to put $50 million into a company are dying off.  Perhaps the VCs need to eat their own dog food and find some innovation in their business model?  Or maybe AngelList will do it for them?

So What Does This Mean For You?  It’s not a crime to pursue a business idea that isn’t judged by the VC intelligencia as a “big idea.”  Go execute.  Build a product or service in a growing market, and use a series of “small” successes to create a valuable company.  And don’t let anyone with a self-serving agenda tell you your idea isn’t worthy.

 

Robbing Peter to Pay Paul

robbing peter to pay paul

robbing peter to pay paul

Robbing Peter to Pay Paul – “To take something from one source and use it towards another.” (source:  Urban Dictionary)

Last week, I asked readers of my newsletter to email me with  issues they were having in their businesses, and I received several excellent questions.  With permission, I am answering a question from Todd publicly.

Todd:  What would you recommend to consider when looking at using short term loans to bridge seasonal gaps?  This could clearly be applied to other scenarios where the costs are front-loaded and the revenue is delayed.

[With our software], there is a seasonal sales cycle, with a big bump in January and slowly trailing to December. We’re trying to fund tech development and marketing through this period but are facing declining revenue while we’re increasing costs. One of the things we’re considering is getting a short term loan or line of credit. This financial tool doesn’t seem to be discussed in many sources, but seems to have some valuable characteristics.

Tim:  My initial reaction is that a short-term loan is not good strategy for managing expense levels which are running ahead of revenue.  I don’t doubt at all the seasonality of your market, but it seems like a better choice would be to strategize about:

  • Turning up the marketing even more in January when you have a captive audience and using the extra cash during the lean months,
  • or looking for opportunities to run non-seasonal promotions,
  • or lowering development expenses to be in line with average monthly revenue versus peak revenue.

If you were a retailer with physical inventory gearing up for the holiday sales season and a predictable business, I might be more inclined to look at the short term loan.  In the case of a young software company, it would likely be difficult to collateralize the loan.

Todd:  From my perspective, a short term loan simply has the equivalent of “code smell,” whatever that may be in financial terms. 

I definitely agree about including better strategic planning so that we can better carry Q4 2014, but that’s 15 months away from where we currently stand.  I was thinking about the short term loan as a tactic to bridge Q4 2013 and allow us to effectively run campaigns without being cash-starved.  By the time the revenue comes in January, we may have missed the sweet spot.

From a collateral perspective, I would assume they would be personally guaranteed.  😉 We are a startup, and a software one at that.

Basically, this helps justify my efforts around developing more focused marketing.  Our marketing efforts are nascent, so the acquisition cost per customer is difficult at this time.  Our user base has grown organically, though direct referral, so we’re now putting together our marketing strategy, trying a few different things and seeing what’s working. 

I’d be interested to hear your thoughts on how to best take advantage of this off-season to break the seasonal trend as much as possible.

Tim:  “Code smell” – I like this, but I had to Google it 🙂  Yes, this is exactly what a short term loan would be, not a bug, but an inefficient design.  Maybe an equivalent phrase would be “Robbing Peter to Pay Paul.

I have several thoughts about Q4 2013, but keep in mind I have considered these ideas for about 5 minutes.

As a general principal, I think you would be well served to find a marketing strategy that doesn’t require you to run campaigns and/or eat the risk up front.

  • As an example, what about running a self-managed affiliate program.  Give each of your current customers a unique code and for anyone they refer that purchases you product, they get $10.
  • And it need not be limited to your current customers.  You could offer something similar to bloggers in your market by simply providing the same type of unique code plus a few sizes of banner ads.

Collateral – Yes, that is exactly right.  But since that is the case, seems like you just cut out the middle man and make the loan to yourself 🙂

Customer acquisition cost – seems like it is worth testing in this area.  For example, if you can run targeted Facebook ads at .30 cents per click and get a 2% conversion rate, your cost would be a $15 per customer.  If that turned out to be true, then it would be printing money.

Todd:  Short term loan is out, and I now have a better idea of why it smelled, so thanks for helping elucidate that idea.  Bringing in the collateral really brought it into clearer light. 

  • Marketing is on.  In our initial retargeting campaigns, we’re paying approximately $6 per customer, so we’re ramping that up now.  
  • General marketing, non-retargeting, is still being explored and defined, especially for the off-season.   

 

photo credits:  Arenamontanus and marsmet541

Generating Business Ideas

Business Ideas for Students

Good business ideas come from a thoughtful process unique to your situation and your goals. So before you start scribbling ideas on paper, spend a few minutes answering the following questions and thinking about why you want to start a business and the type of business you want to create:

  1. Does your business need to be cash flow positive quickly?
  2. Will it have a social responsibility component?
  3. Are you in a position to sacrifice short term revenue and profit for longer term growth?
  4. Do you have access to start-up funding or will you rely on “sweat equity?”
  5. Are you willing to work with co-founders?
  6. Are you willing to hire employees?

There are no right answers to these questions and there is not a one size fits all definition for what it means to have a successful business.  Your definition should be a byproduct of your values and goals, not the expectations of other people.  Being honest about what you want is critical before you decide what business idea to pursue.

Find a pain point

As Bill Clinton is famous for saying, “I feel your pain.”  And that’s exactly what you need to find, someone who has pain or a problem.  But the trick is to find customer pain in an area where you are a subject matter expert.

So where are you a subject matter expert?  A few places to start are topics related to your major, your hobbies, your jobs or internships, and your experiences as a customer.  You should be able to make a long list of problems and potential solutions from these areas.

With your list in hand, revisit the type of business you want to create.  Do the solutions you listed align with your goals?  If they don’t, cross them off and move on.

Do some research

Now it’s time to find out how potential customers view competitive solutions, and I would suggest you start with Google.  For each of the search queries below, substitute [Keyword] with the name of a brand, a product, or a solution you are researching.  For example, if your idea is to build an alternative blogging platform, you might want to use “Wordpress” in the queries.

Search Queries:

  • “[keyword] sucks”
  • “hate [keyword]”
  • “alternatives to [keyword]”

Click on search results that look interesting, and also take a look at some alternate queries listed at the bottom of the Google search page as show below:

Google Search

Another suggestion is to search on general question and answer sites like Quora or in more specific online communities and forums related to your idea.

And lastly, go talk to and interview real people – as Steve Blank says, “Get out of the building.”

Like your customers

Have you ever been given this advice? “Start a business focused on what you are passionate about.”  Sounds like solid advice, but I think it ignores an important part of the equation.  Yes, you need to care deeply about what matters to you, but you had better like the people who you are helping, your customers.   And these customers need to be willing and able to pay if you want to stay in business.

Let me illustrate:  John is a graduate of a prestigious law school.  He is passionate about the law and the intellectual challenge, and he loves to compete and win in court.  After a short stint working for the district attorney, John starts his own law firm as a criminal defense attorney.   For the first year, the business is going well.  John is winning cases, winning the respect of his peers, and building a business.

Unfortunately there are problems, and all of them are centered on John’s customers.   30% are delinquent in paying their bills, and on one occasion, after losing a case, a client threatened to harm John.   While John loves having a law firm he comes to the conclusion he isn’t as excited about helping people who are accused, and in many cases guilty, of criminal behavior.  John decides to pivot and focus on civil cases involving people who have been injured while at work.

Find a link between your passion and people you genuinely care about!

Don’t shun small ideas

Starting with a small idea, one that moves your forward toward a bigger opportunity is a great strategy, and it is the thesis for the book Little Bets by Peter Sims:

“Rather than believing they have to start with a big idea or plan a whole project out in advance, trying to foresee the final outcome, they make a methodical series of little bets about what might be a good direction, learning critical information from lots of little failures and from small but significant wins that allow them to find unexpected avenues and arrive at extraordinary outcomes.”

Let’s say you want to create a web-based platform for scalable peer-to-peer tutoring.  This is a pretty big idea and vision, but how about breaking the problem down into a series of “little bets,” each of which would move you toward your ultimate goal?  For example:

  • Step One:  Create a one-on-one tutoring service on your campus.
  • Step Two:  Offer a reduced rate multi-person in person model.
  • Step Three:  Extend the multi-person model to offer remote tutoring via Google Hangouts (use existing technology).
  • Step Four:  Grow this business by recruiting additional tutors.
  • Step Five:  Add scheduling, membership, and billing features.

Execution matters more than ideas

As good as your idea may be, it will not matter if you aren’t willing to work hard.  This is true regardless of who you are and what you have accomplished.  In another example from Little Bets, Sims tells a compelling story of how comedian Chris Rock approaches a brand new project:

“In gearing up for his latest global tour, he made between forty and fifty appearances at a small comedy club….  In sets that run around forty-five minutes, most of the jokes fall flat.  His early performances can be painful to watch….  For a full routine, Rock tries hundreds (if not thousands) of preliminary ideas, out of which only a handful will make the final cut…  Rock deeply understands that ingenious ideas almost never spring into people’s minds fully formed; they emerge through a rigorous experimental discovery process.”

Too often people look for an easy path to business success.  Trust me, it doesn’t exist.  It is hard work and takes a long time to find your way.  But now, with a filtered list of ideas, you are at a much better starting point.

photo credit:  Matthew Yohe

Can You Build a Successful Company Outside of Silicon Valley?

Let me say up front, “I like Silicon Valley a lot.”  I like the people, the energy, and the innovation, but I cringe when I hear entrepreneurs say they have to move to Silicon Valley to build a successful company.

Rubbish!

“Tim, if I want to raise venture capital, don’t I need to go to where the money is?”

My answer is perhaps.  But I do not concede the point that every tech startup needs to raise venture capital to be successful, and I will come back to that later.

If you are convinced you need venture capital, Silicon Valley certainly gets a big piece of the venture funding pie.  From the data below provided by Pricewaterhouse Coopers, we can see that Silicon Valley received 38% of the funding in Q1 2013:

PWC

But my argument is that obtaining venture capital funding is NOT the definition of success.  It may be a milestone, but it isn’t success.

Instead let’s look at an arbitrary, but somewhat agreed upon, definition of a successful company, one that has an exit greater than $100 million.  Here is a chart from Mark Suster showing these exits over the past decade:

$100 million exits

By my calculation, it looks like only 502 total exits greater than $100M out of the thousands of venture backed startups – those aren’t exactly compelling odds!

“But Tim, my odds of being one of those ‘successful companies’ goes way up if I am in the Valley.”

Really?  My gut tells me that isn’t the case, but you probably want some data.

I went to my friend, Michael Shea who owns Shea and Company, a technology-focused investment bank based in Boston.  On his website is quarterly data for publicly disclosed M&A transactions in the software space – yes, I know this doesn’t include things like life sciences and hardware, but it is a decent proxy for overall activity.

In looking at the data for the prior 12 months, there were 29 transactions greater than $100 million and 20 of those from companies in the United States.  And how many of those came from Silicon Valley?

FIVE, that’s how many, or 25% of the exits.  And by the way, SIX of the exits came from areas outside of the top 10 regions receiving venture capital.

Before you skewer me and say that I didn’t look at enough data, you are absolutely right.  My point isn’t to show you Silicon Valley is less successful at producing great outcomes, because I am sure that isn’t the case.  I would expect if we looked at all of the data, the percentage of funding would be similar to the percentage of exits greater than $100 million.  My point is that being in Silicon Valley doesn’t appear to improve your odds versus companies located in other regions.

Now, back to the point about “needing venture capital.”  Here is some “interesting” data, courtesy of CB Insights:

tech-acquisitions-funding-status

Yes, plenty of companies need venture capital, and plenty benefit from it – but clearly it isn’t mandatory for every company.  And, if you can find your way to success via bootstrapping, you, your co-founders, and employees will own 100% of the equity.

 

Working with Business Advisors and Mentors

business advisors

business advisors

Yesterday I was asked how entrepreneurs should work with business advisors and mentors, but instead of giving a snap answer, I decided to unpack the question.  Here are my thoughts:

What are the differences between coaches, teachers, advisors, and mentors?

Typically business advisors and mentors are people who help in an informal way and are not compensated unless they take on a formal role with your company.  This is different than what you should expect from a teacher or a coach:

“Mentorship is a back and forth dialog – it’s as much about giving as it is about getting. It’s a much higher-level conversation than just teaching. Think about what can we learn together?  How much are you going to bring to the relationship?  If it’s not much, then what you really want/need is a teacher, not a mentor. If it’s a specific goal or skill you want to achieve, hire a coach, but if you’re prepared to give as good as you get, then look for a mentor.” (Source – Steve Blank)

Should I try to find just one mentor?

Not if your goal is to be a successful entrepreneur!  Jack Welch argues entrepreneurs need to absorb information as quickly as possible, from a variety of sources, and not be joined to a single mentor.

[responsive_video type=’youtube’ hide_related=’0′ hide_logo=’0′ hide_controls=’0′ hide_title=’0′ hide_fullscreen=’0′ autoplay=’0′]https://www.youtube.com/watch?v=0ipNo1BLeIk[/responsive_video]

  • “[having] a mentor may be the dumbest idea that ever came down the pike.”
  • What you want is to have a “nose for knowledge.”
  • “You want to be looking at ten people.  I like the way this person speaks, I like the way that person makes presentations.”
  • “You can’t copy someone else, you want to be an amalgamation of the best ideas you can put together.”
  • “The most important thing is to get comfortable in your own shoes.”

What should I look for with advisors?

David Cohen wrote an excellent post called The Mentor Manifesto that provides a great framework for being a mentor.  The key takeaways you should apply to your search are as follows.  Look for someone who:

  1. Tells you the truth even when the truth hurts.
  2. Listens well.
  3. Acts in a timely manner.
  4. Is willing to say “I don’t know.”
  5. Can be trusted with confidential information.
  6. Provides specific advice but not orders.
  7. Values what you have to say.

How do I find business advisors?

Finding advisors and mentors is a process that takes months, if not years.  It should be an outgrowth of networking in your community.

Here is my suggestion:

  • Each week, have lunch or coffee with at least one person that could potentially be part of your network.
  • Meet with entrepreneurs of all stages:  People like yourself, people who have successfully built companies and when possible, people “way out of your league.”
  • Over the course of a year, you will find a few people you have a connection with and who show an interest in what you are doing.  Your goal should be to find three to five advisors.
  • Make time to meet with your advisors once per month.

Should the relationship be equal and balanced?

No, not initially.  Over time things will begin to shift, just as Brad Feld writes:

“When I look back on these and all the other mentors I’ve had (and continue to have today) and the people whom I now mentor, one thing stands out: the rare, but brilliant moment when the relationship shifts, the distinction between mentor and mentee dissolves, and you become “co-mentors.” Even if you aren’t “peers,” the learning becomes bi-directional. Everyone in a mentoring relationship should strive for this equilibrium, because it is here where the greatest learning occurs.”

What should we talk about?

Your meetings with business advisors should be informal, but you need to be prepared.  Build a list of questions or topics you are struggling with and put them on the table.  The discussion that follows is usually the mentor drilling into your problem and working with you to find the answer or helping you with a plan to find the answer.

You aren’t obligated to follow the advice of a mentor, but if you repeatedly ignore it, you will damage your relationship.  In addition, if you say you are going to do something, follow through – otherwise you are wasting valuable time.  Lastly, be thoughtful about how much you ask for versus how much you are offered.

And if you have an opportunity, pay it forward by mentoring someone else.

Photo credit:   MyDigitalSLR