Welcome, entrepreneurs!

This blog is for you, whether you are dreaming of starting a business, getting your new company off the ground, looking to raise capital, or just making sure your startup is on the right track. You’ll find topics like: What’s in a business plan, how to determine whether you’ve got a good idea for a business, and how to think about financing your venture. You’ll see that my approach favors speed and flexibility - a combination I find practical for today’s environment. You’ll also find me saying that the most important aspect of business planning is the thinking behind the plan.  Need some help? Click here to learn how UpStart Advisors can help you launch your venture. And click here to follow me on Twitter.

Pricing pixie dust

Just re-read a chapter of Predictably Irrational.  Fascinating thoughts on pricing. Consider this… Let’s say you’ve got a restaurant, and the most expensive entree is a $20 strip steak. If you add a $24 soft shell crab entree, you’ll increase revenue. But you won’t sell much if any of the $24 crab.

Huh? Pricing is all about context. Adding the $24 crab makes the $20 steak seem inexpensive on a relative basis, and you’ll sell more of it – trading customers up from the $17 entrees.

If you are thinking about pricing strategy, give this book a look.

Caught on film: BootStrapper in the wild

One of my clients just wrote me an email that warmed the cockles of my heart (though it could just be I’ve eaten too much bacon this week).

We worked together to craft a business plan for him on a business to business service . The plan helped him focus his strategy, and develop a roadmap for moving forward. He was torn between whether to bootstrap, or raise capital to grow faster. He pitched to several angel investor groups, and got through three rounds of grilling before hearing those dreaded words:  ”We’d like to see some more traction before we commit”.

At that point, it seemed the best choice was to stop spending time trying to raise money, and start spending more time closing sales.  Here’s an email he sent me today:

“The investor thing was not panning out as quickly as I had hoped, but maybe that was a blessing in disguise. (It also took time away from my focus on customers).  I (re-focused), and damn is it rolling now!!!  I’ve signed some GREAT exclusive contracts and all is going great. Moving from 0-60mph right now. The time spent with you was invaluable to my success. The structure and focus you gave to me during our sessions was a catalyst in this next generation of my business endeavor.”

All the credit goes to him (yes you, “Pablo”). You’re a text-book example of how drive, tenacity and resourcefulness lead to success, even with limited capital. You are my bootstrap hero of the week. Kudos.

16 questions to ask yourself when planning a business

Here are questions I ask my clients when helping them develop business plans to raise capital:

1. What are your goals for the business? Is there a revenue number you’d like to hit? Do you want to sell the business, and pull out some amount of personal wealth? Do you have other motivations (e.g. fame, press, a bridge to other opportunities, etc.)?
2. Who is on your current team, and why are they uniquely qualified to execute your plan? As you expand your business, what are the key management roles you’ll need to fill? Have you identified candidates for those roles yet? Do you know what the cash / equity compensation will be?
3. Do you have recent data on the size and growth rate of your industry? What are the key trends driving the business?
4. What customers will you be targeting? Can you prove that they’ve got unmet needs
5. What will be your unique positioning within the market?
6. What businesses most closely resemble the one you will build? Do you have data on how they built their business, including the evolution of their product lines, distribution, and revenue
7. What will your product offering consist of, and how will it evolve over time – including categories and price points?
8. What’s your marketing strategy?
9. What are the unit economics of your business? What does an average sale look like in terms of revenue and variable costs? What’s your break-even volume?
10. What’s most likely to go wrong with your plan, and how can you prevent it from happening? How have similar companies failed / what obstacles did they run into?
11. Who are your competitors? How are they doing? How will you differentiate yourself from them?
12. What are the next phases of implementation? What tangible milestones will you aim for in each phase?
13. What have you accomplished to date that helps prove you are capable of executing against your plan?  That can include:  the team you’ve built, distribution channels and performance in those channels, revenue, branding, etc.
14. To what extent have you projected your future revenues? Expenses? Team structure? Distribution?
15. How much capital are you raising in the current round? Where will the money get you? How will you spend it? Will you need additional funding? When? How much?
16. What’s your exit strategy? Who will buy your company? Why? What will they pay? What transactions can you point to that lend credence to your exit strategy?
17. What is the valuation of your company today, and the basis for that number? How much equity are you willing to give up to new investors in this round?

236 people get married per DAY thanks to eHarmony

A few weeks ago I sat on a panel about exit strategies for startups, run by Collective-E and the American Business Women’s Association. I’d say most of audience members were what I’d call Digital Immigrants – people over 40 who were, on a relative basis, late adopters to phenomenon like social networking.

One of my fellow panelists had her wedding site acquired by eHarmony, and the question came up, “Why does eHarmony care so much about weddings?” The answer shocked just about everyone in the room:  On average, 236 eHarmony members marry every day in the United States as a result of being matched on eHarmony. Just then, a woman in the audience of about 50 people raised her hand. “I’m one of them,” she said.

What’s the lesson here? Perhaps just an indication of how quickly and drastically the world has changed due to the web. The last time I was single was about 5 years ago, and while I consider myself to be pretty open to trying new things online, I never tried the online dating game. Now, it’s the norm, not the exception.

Lottery vs. venture capital

I was just reading in Crain’s that only 19 companies in the NY-metro area closed early-stage venture capital funding last quarter. 19!!!

That got me thinking, are you better off playing the lottery? The numbers aren’t apples to apples, but just for fun, consider this:

• 1,600 people per year in the U.S. win at least $1 million in the lottery.
• 483 companies raised seed stage VC funding in 2008, and another 1,072 got early stage funding.

Not far off!! So, unless you’re sure you’ve got the right stuff (e.g. team with previous startup wins, chance to generate $100 million+, significant traction to date, a network of vc contacts, etc.) – stick to bootstrapping or angel funding through your early stages.

The case for product evolution

One of my clients is looking into launching a specialized job site, in a space that seems to have been overlooked. One thing he’s wrestling with is whether to A) Start small, dominate one niche, and expand, or to B) Go after something a bit bigger right from the start.

I see a lot of entrepreneurs flame out with option B. They spend months raising capital, building fancy tech, and launching major marketing campaigns, only to find out that the dogs don’t want to eat the dog food they’re serving.

Instead, I usually vote for option A. Seth Godin does a great job of explaining why here:

“Envision the events that might happen to a brand (shelf space at Walmart, an appearance on Oprah, a bestseller, worldwide recognition, a new edition, worldwide rights, chosen by the Queen, whatever) as a series of dominos.

It turns out that if you start with all of them at once, you’ll fail. And if you start with the big one, you’ll fail.

But if you line up all the dominos one by one, in the right order, you may just have enough energy to push over the first one. That one, of course, adds momentum so that when you crash into the second one, that one goes too. All the way to the Queen.

Wait! Isn’t this obvious? Sure it is. So why is it so often ignored?

Brands get stuck constantly. And they always get stuck circling the big domino. They try to launch worldwide and beat Google. They try to get an endorsement from the Prince of Denmark. They try to break out with a feature on a major blog. They try to act like Coca Cola from the first day. And they try and they try and they try until they get so frustrated, they quit.

A few brands pick out tiny dominos instead. And topple them. And they do it again. They do it so often they create noise, momentum and most important, a sense of inevitability. That’s how you win.”

Bootstrapping pointers

A friend and business parter, Beth Schoenfeldt, from Collective-E, just asked me a couple questions about bootstrapping for a webinar we’ll be teaching about bootstrapping on October 20th (lemme know if you want to participate: david @  upstartadvisors .com). I thought you might find the Q&A helpful:

Beth: Can you name any big brands that were originally started by bootstrapping?

David: Apple, YouTube, Facebook, Yahoo, Google all got traction via bootstrapping before raising significant outside capital.

Beth: What are a couple great ways to get services or products for less?

David:

• Hire less experienced employees with raw potential. Train them yourself (but avoid giving them inflated titles). Bring in top talent later.Use freelancers where possible – especially for one time or part time needs.
• Forget the pr firm. Instead, wse social media to create your own voice to the public, via blogging, Facebook, Twitter, LinkedIn, etc. Establish yourself as an expert, and develop a rapport with bloggers and journalists so they reach out to you when they need your POV.
• Syndicate. Tap into other properties with audiences you’d like to reach via guest blogging, active postings on message threads.
• Barter. Find products or services you can provide with minimal / zero cost, that other companies may find valuable. Got an email newsletter or website that makes money from advertising? Give away some of your inventory (better yet, unsold inventory) in exchange for products or services.

Beth: What if you have bootstrapped it for a while now and feel stuck, any suggestions?

David: You can always raise capital after boostrapping. In fact, it’s often better to bootstrap your way until you’ve made significant progress (e.g. revenue) BEFORE raising capital. Having that traction will make it faster and easier to raise money, and usually lets you keep more equity.

Anatomy of a vc funded startup

More insight into the Mint deal, and how the stages of financing and growth play out in a venture-backed model from Christine.net:

The straight shot: Why should you raise money, and how much?

• Step 1: When you’re ready with an Idea: Raise $100K from friends and family, and use it to build a prototype.
• Step 2: Once the prototype is done: Raise < $1M in seed capital, and get into market with an alpha launch.
• Step 3: After that initial launch has traction: Raise $5-10M, and use it to prove/scale the model.

Garage Phase: What are the costs and milestones?

Here’s how MINT spend its $100K of garage money:

• Founders: $30K/year living expenses
• Engineering 1st hires: $30-50K/year
• Office: $400/cube/month
• Tech: $10K
• Legal: Deferred payments for 0.50 – 0.75% of company

Roughly, 2 founders + 1 engineer/contractor = $150K/year burn. This gives you 6 – 9 months of runway before you need to raise a seed round.

In order to get that seed round, you’ll need to understand your competition, and come up with projections. Everyone knows this will change…but you need to show your thinking around it anyway. As an example, MINT originally projected $30/user/year for lead-gen and CPA. (Aaron noted that the company is pretty close to this today. But this is the exception rather than the rule.) Know how the business model works. People do X behavior and it turns into $Y income, add up those $Ys and it’s a $Z business. If you can walk people through these assumptions convincingly, you’ll get that seed round.

Seed Round: What are the next costs and milestones?

• Salaries: $50 – 90K/year ($450K/year for 5 people)
• Overhead: +20% ($100K/year)
• Legal: $25K + $2K/month ($50K/year)

MINT.com raised $750K in its seed round to cover these expenses for 12 months, which is about how much time you’ll need to develop into the Series A stage.

What model do you build next in order to raise the Series A? Testing and learning from your seed model, show user growth, retention, COGS, revenue per sale/user, and profit. The accumulated loss is how much you need to raise, and a well-though funding strategy combined with an understanding of (hopefully good) business economics is what will speed the Series A process along.

Series A: Now what?

• Salaries + Overhead: $200K/year/person
• COGS: Varies, but even one-time expenses magically add up to $150K/month
• Legal: $10-50K/month

Total burn for a 30-person team: $6M/year. Naturally you don’t start out burning this much, as it takes time to grow the team. However the numbers work out, your goals should be the same: Get profitable within 2 years. Raise the capital you need to do this without much distraction.

If you want to raise more after this in order to grow more aggressively or extend otherwise, your success in achieving those first two goals will speak for itself.

Economics of an exit

Just read an interesting article on Silicon Valley Watcher, describing the economics of a vc-backed exit:

“…Here’s how the math works against EVERY employee at an overfunded startup – take the mint deal for example: $170M exit (maybe $70 or so is future perf related so that leaves $100M), even without liquidation prefs, the employees get basically nothing. $40mil VC = maybe 60% of the company, 20% for the founder CEO, 3% each for the next 5 guys. That leaves everyone else sharing $5mil to vest over the next 4 years. And even that’s skewed for a few people. So with the biggest VC exit of the year, the employees are basically vesting a $20k annual bonus. gee thanks. Huge VC rounds are only good for people who own big, early, preferred chunks already.”

Of course, that kind of exit is pretty rare, especially lately. And usually there are a few founders splitting that 20%. Plus, of COURSE there are liquidity preferences up the wazoo, so the pie gets reduced (VCs get their investment amount off the top, or sometimes 2x that amount, before the pie gets divided among them and the others).

Build a great team that can bootstrap

Excerpt from a great post on TechCrunch by Meebo CEO Seth Sternberg. Among other things, he argues that it’s critical to have a great founding team, and that your team should get a product up and running before raising capital. Keep in mind this is about tech, and may not be quite as easy to do in other industries, but directionally the points are spot-on:

“At the exact moment you had your idea, ten other people had the exact same idea. There was just something in the environment that made it the right time for folks to think that one up. The race has already begun! Who’s going to execute first? Who’s going to execute best? If you want to waste nine months trying to raise VC money for that idea, great. But six months in, you’re gonna cry when you see someone else put out that same product you’re pitching me right now. Like I said, forget everything else and just get your product out the door. Now.

Inevitably, the excuses begin: I need to hire people to build the product. I don’t know any developers. I need money for the servers. I want to get that last promotion at my current company first!

Here’s the rub: in consumer internet (and often enterprise), if your founding team doesn’t have the chops to get a prototype of your product out and in the hands of a blogger to test and write about, you might as well save yourself a lot of pain – you’re not going anywhere. Need proof? Just look at some of the most successful tech companies in the last decade: eBay, YouTube, Sun, Oracle, Apple, Cisco, Facebook, Yahoo!, and Google. All of them share a couple common traits: they launched before taking outside investment, and they were able to do it because they had a set of founders with the skills to build the initial version of the product themselves. Only eBay was founded by a single individual – the rest were team efforts.

Read the full article here.