Are You Solving a Real Problem?

“I gotta’ fever and the only prescription is more cowbell” – “The Bruce Dickinson” –  from the SNL skit with Christopher Walken

Many of the startups I meet have gotten the message that in order to have a sustainable business model, one has to solve a problem.  That solution can come in a few forms – perhaps it is providing a capability that did not exist previously or making it quicker and more efficient to satisfy a recurring need.  For the former, I would suggest LinkedIn which opened up the world to our personal business profiles and for recruiters, gave them access to people who were currently employed – not just those in transition.  The latter would be characterized by Uber – transportation on demand.  So, the message seems clear, but achieving this goal has remained somewhat elusive.

I see a good number of pitches every week.  I think one recurring theme is the absence of an understanding of the importance of this message; you need to ease the pain or bring comfort for your product or service to be sustainable.  So, many pitches start with the standard “how many times have you tried to…  only to be frustrated by…” Unfortunately, at times, the “problem” they present is one that many of us rarely encounter like booking a trip around the world.  When the problem they present is not real, you can feel the silence in the room.  It makes me harken back to the old Family Feud scenario – you know, the one where the host asks a question like, “Name something that rhymes with ”time” and the overthinking parent responds “sublime.”  This is usually followed by an attempt at supportive applause from family members who know in their heart that answer is not going to appear when the host announces “our survey said.”

So, how does this happen?  I am still somewhat surprised at the lack of market research and even “web surfing” that is done when someone comes up with the centerpiece of their investment thesis.  It is like they are Bruce Dickinson, and all they are focused on is more cowbell.  As the great scholar in this space Jeff Timmons once said, “an entrepreneur knows the difference between an idea and an opportunity.”  Look, I am clearly not at the center of the startup universe, but when I see an idea which looks just like other pitches I have seen and a presenter is not even aware of that competing product or sights a difference such as “ours is a mobile app,” it makes you understand how tough this part of the equation really is.

So, please make sure that before you invest a lot of time and energy, you get some objective people (like advisors or others you know in your network) to provide some really critical feedback on how much “pain” is caused by the problem you are addressing.  It may take longer to get on the road to success, but with the right approach, you have a much better chance of completing your journey.

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How to Avoid Fundraising Woes (Hopefully!)

“The hurrier I go; the behinder I get” – quote by Lewis Carroll

I talk to so many startups that struggle with fundraising that at times it is really heartbreaking.  Well-intentioned and motivated entrepreneurs seem to get their dreams crushed by turn-downs and wasted meetings. While I have been advising startups for more years than I care to remember, I promise to find financing.  So, a quick story on that point.
It was a number of years ago and I was working with a company that had pioneered some really groundbreaking voice recognition technology.  They were making the rounds with investors and having a bad time of it. They approached me and I thought it fortunate that I knew an investor who understood this space.  We worked on refining their approach and they had their meeting.  They were told at the end of the meeting that both their team and technology were really top-notch, but the investor already had a voice recognition investment and wanted to diversify.  Once I heard this, I decided I did not have enough time in the day to get inside the mind of all the investors out there and thus, my no promises on funding pledge.
So what are the three things I find are major contributors to fundraising woes:

The first is clearly the lack of a sustainable business model.  Your solution must address a real problem (see my blog “Are You Selling Aspirin or Vitamins?) and be elegant in its simplicity.  Making it too complex to use is a no–no as is the model which will rely on advertising (eyeballs) to generate revenue.  If it takes three slides to describe your model or it requires too many revenue streams, it will not work with many investors who have come to appreciate the fine art of simplicity.  For you older folks, this in my opinion is why Excel endured and VisiCalc did not.

Next, approach the right investors.  For established companies seeking to expand, there are various sources of funds, from cash-flow lines of credit to asset-based loans to private equity and subordinated debt.  Financing 101 says match the financing need with the proper source.  It is the same for emerging growth companies.  Seed money is not venture money – getting a VC to get interested in your pre-revenue startup is an impossible mountain to climb.  Focus your efforts to match your stage of development with your financing source.

Finally, make sure your market is big enough.  I just reviewed a pitch deck for a “commission type” model.  All the market size data was based on gross sales which really exaggerated the market opportunity as certain sales in that space did not involve a commission.  If a CPA like me realizes that point, so will an investor.  Stay relevant and make sure there really is a big enough market.

So, if you want to avoid running around in circles as you undertake your rounds with investors, please keep these ideas in mind.  It may not result in success but at least it may keep you from spinning your wheels.  Good luck.

Myths About Startup Equity

“Mr. Fuji as everyone knows, is a fountain of misinformation.” Quote from the late great Gorilla Monsoon a star from the World Wrestling Federation.

Here in the New York Metro area, we get the chance to hold sessions with loads of startup companies.  From incubators to accelerators to coworking spaces, we get the opportunity to meet with some of the best and brightest minds especially in the tech space. Their ability to question everything and absorb a multitude of ideas and observations is second to none and a unique skillset that many of us admire.

We are accountants and consultants and so topics we present tend to center around accounting and taxes. While I would love to think those attending are mesmerized by our subject matter, I have come to believe it is the free pizza and soft drinks which attract them. However, there is a subject we cover that seems to draw a bit more of a response than the equivalent of sitting through a root canal – – and that subject is equity. How to split up the pie; techniques to use to share ownership and pitfalls to avoid seem to get attendees to perk up. Like most things in life, when deciding on equity sharing, a bit of advanced planning helps; but who has the time when one is creating their MVP, trying to drive the community to their product or preparing for a Demo Day.

Unfortunately, we have heard a few myths over the last couple of months and I thought it best to take some time to clear the air a bit.

  1. “You can wait to issue equity” – actually when you issue equity is completely up to you; the value you have the use in the transaction is the issue. Just keep in mind assuming the value of your entity increases over time (or else why would you give up your life for it) the higher the value, the more difficult this task becomes.
  2. “Founders can always get shares at discounted rates” – one of the better tales we have heard. Founders’ shares only have minimal value before you raise financing and there is no near term proof of value (usually by some outside party.) However, once funds are raised, you may get more shares as a founder but the new (and usually higher) value has to be taken into account.
  3. “We don’t need no stinkin’ valuations” – unless you are in a clear founders’ shares startup situation or use the value of a recent transaction, yes you do need a valuation (referred to as a 409a as this is the IRS regulation that governs.) Without it, your tax exposure can make you the next Leona Helmsley.
  4. “I can always file an 83b” – as long as it is filed within 30 days of receiving the equity, it uses an appropriate value and you pay any related tax, yes you can. After that, you can’t put that genie back in the bottle and you are on your own.
  5. “Who cares if my company is an LLC or C Corporation?” Almost every investor does; and most prefer C Corporations.

Equity issues are complex and costly so please consult with your attorney and accountant before completing any equity transactions. Relying on a myth can cost you dearly.

Five Steps to Raising Funds

“Step 1: We find the worst play ever written.  Step 2: I raise a million bucks.  Lots of little old ladies out there.  Step 3: You go back to work on the books; one for the government and one for us.  Step 4: We open on Broadway and before you can say Step Five…  Step 5: We close on Broadway, take our million, and fly to Rio.”

Paraphrase of dialogue from The Producers by Mel Brooks

Okay, so you don’t exactly subscribe to Max Bialystock’s approach to raising funds.  Most of you do not start out counting on failure to succeed.  But, based upon some of the approaches I have seen, it may be helpful to compare and contrast what you are proposing versus what Max is doing; perhaps there is a hidden lesson there.

Everyone looking for financing wants the five steps to follow to achieve success.  I wish I had them, but this is one of the hardest things to do in business and, in 40 years, I have not found the secret formula.  However, I can offer five points to consider but they will all take some time and hard work.  (If it was easy, the success rate would be so much higher.)

  1. Prepare a pitch deck that is based on a true business model.  If you need help, you can refer to our website.  The good news is it will tell you exactly what should be in the deck; the bad news is you need to provide the content.
  2. Invest some of your money. Investors are not interested in helping someone with no “skin in the game.” They want to know that you are serious and have something to lose if you do not succeed. Fear is a great motivator.
  3. Get friends and family to invest. If the people who know you can’t be convinced, how are you supposed to win over strangers? They don’t need to mortgage their homes; they just need to demonstrate commitment.
  4. Communicate and refine your plan. Talk to advisors, friends and your network. See what they like and don’t like about your plan. And don’t force the issue; don’t let them feel bad if they are not thrilled and would like to tell you so. Make the feedback process easy and use what they say to consider modifications.
  5. Target your investors. Understand what they want and how you match up. If you are pre revenue and looking for seed money, friends and family and angels are the place to go, not venture capital funds. Use your network to get to the right people. A few good targeted meetings are much better than dozens of ones that end “don’t call us; we’ll call you.”

So, nothing magical here and no guarantees.  But, like everything else that is worth pursuing, it is a process.  Don’t let it control you.

Start Up Phase Over – Now What?

“Communication breakdown.  It’s always the same Having a nervous breakdown Drive me insane”

Lyrics from Communication Breakdown by Led Zeppelin

One of the real thrills of being an advisor to entrepreneurs is getting the chance to watch a fledgling startup evolve into an early stage growth company.  Like an adolescent moving on to adulthood, you suffer through the pains of minor failures and rejoice at the success maturity brings.  As is usually the case, after witnessing this phenomenon hundreds of times, it is easy to make some observations about what seems to have worked.  While many facets of an evolving entity are involved here, these are my top five focus points which seem to foster success when they get into the sight of an emerging entrepreneur:

  1. Communication – you can probably guess from my sighting above that first and foremost, there has to be a focus on communication.  Expectations are higher as you reach this stage.  What you expect from others, the ability to talk to every employee every day and other techniques that were your modus operandi begin to get challenged.
  2. Build your team – you by now realize you can’t do it all so finding the right people to help execute your vision is key. This is another “says easy; does hard” challenge. Use all the tools you can from word of mouth to social media to attract the right talent. Do not skimp on the time you spend in this area. It is your most important task.
  3. Direct vs. do – instructing others instead of doing it yourself requires a different skillset. It means planning and setting goals so others can help to move the business forward. Letting go a bit becomes the biggest barrier to success but soon you realize you can’t just cram for that exam the night before and ace it. Not enough hours in the day for that approach.
  4. Establish processes– yes, as non-entrepreneurial as it sounds, those that are successful in executing a growth plan follow processes. There is a reason places like Zappos achieve their levels of customer satisfaction – there are tested processes to cover every situation
  5. Formalize measurement– you can’t just look around and see what is happening anymore. You need formalized goals and ways to measure progress against those goals. You can’t see product going out the door if your distribution center is now hundreds of miles away.

So, as you take your journey to success, reflect on these points of focus and never lose sight of the “culture” which is your company and which in many ways, helps to determine not only what you are but what you will become.  Have a great trip.

Business Divorce – It Ain’t Pretty

“My dad doesn’t live with us anymore.  He lives in New York and drives a taxi.  My mom hopes he’s going to die real soon.” – Dialogue from the movie Kindergarten Cop

At this point in my career, I have lost track of the number of clients that have suffered through an ugly separation of ownership.  Fortunately, from my perspective, the statistics do not seem to mirror the rising number of family divorces, but that doesn’t mean that they are any less emotional, costly or time consuming.  In fact, my good friends at a regional law firm have a practice called Business Divorce.  If you can build a practice around it, I guess it is pretty prevalent.  So, as I work through another round of business separations, I thought it might be helpful to point out a few ways to avoid this situation:

The first is the obvious (at least to me) – choose a partner or partners wisely.  Just as in real life, don’t just look at what each brings to the table, but how compatible you are.  Every business will go through cycles – those ups and downs that make business life both interesting and frightening.  You need to take some time to understand how you will ride the waves together.

Next, there is ownership and there is voting power and the two should be considered separately.  For example, when looking at a funding source, granting an ownership interest versus a voting interest is not the same.  I experienced an individual who helped a company find a bank and earned a 30% ownership in the business.  While the economic pain was hard to deal with (the principal owner never forgave himself for that decision), the individual had no real knowledge of the business and more time was wasted by management explaining every move it made. The lack of focus on external matters was in my opinion one of the reasons the business failed.

I am sorry but 50/50 or equal voting deals are not one of my favorites.  I can rattle off half a dozen failures with this structure. Perhaps the worst was the father who owned 100% of a business and left it to two of his two siblings equally when he passed. They had equal voting and economic ownership.  One really knew the business (and worked it) while the other considered it to be more of a hobby. Their constant infighting eventually resulted in the sale of the business long before it achieved its real value.  You can share the economics without sharing voting rights – it is not that hard.  I also find it hard to argue with the concept that somebody has to be in charge.

Finally, follow the old adage – do not get into a deal without knowing how you will get out.  The interplay of owners at the onset of a venture is much more amenable than facing each other when parties decide it is time to “go in a different direction.”  Early on in the relationship is the time to focus on this issue.

So, follow some simple rules and you and your Partners will have a nice long run as colleagues and friends – not spending your latter years wishing the worst for each other.

For Mature Companies Only – Part Two

Ace Ventura: “I have exorcised the demons . . . this house is clear.”  From Ace Ventura – Pet Detective

In my prior blog, I outlined a few ideas around why mature companies should remain vigilant regarding the potential for Disruptive Technologies (which are not always technologies) in their industry.  It all sounded a bit ominous, and I did promise to help “exorcise the demons,” so I will provide you some actions to consider.

We all know that change is inevitable and best practices involve embracing that change.  They key is to prevent that embrace from becoming a stranglehold.  So, to help address the impact of disruptive technologies, mature companies should consider the following five steps:

  1. Develop a positive attitude toward innovation.  Get out of the office, stop gathering only where flocks go (like the standard industry trade show) and free up younger staff to explore the world of innovation and social media.  Appropriate MeetUps (you can even form your own) are a good starting point.
  2. Visit accelerators and incubators.  These are the new bastions of disruption and, the more you know, the better off you are.  Today in the NY Metropolitan Area, many of these groups are being formed around industries – food tech, ed tech, fin tech.  Visit them and get involved.
  3. Revisit you brainstorming/strategic approach.  Challenge basic assumptions and make sure those barriers to entry and differentiators remain in place and enhance them. Review your SWOT – there are solid reasons why your business has endured so make sure you remain focused on them.
  4. Know what your competition is doing.  It has never been more important to know this and by scraping data from the internet and social media, your horizons will be expanded and you will be able to counter new threats.  Keep in mind, the market is usually waiting for the market leader to embrace an emerging technology and, in doing so, you can retain a strong competitive edge.  Don’t be afraid to take advantage of your market position.
  5. Follow the money.  There are billions of dollars available to fund new ideas.  There is also data available on what is getting funded for you to review.  Many established and technology companies (like Google and AOL) have their own venture arms and on a daily basis, complete deals which are “disruptive” to their own disruptive technologies. Many start ups seek to partner with the industry leader to use that positioning to further develop their own growth strategy.  Be ready to take advantage of it.

So, my advice is simple.  Do not put your head in the sand and ignore what may be developing around you.  The success of these disruptive technologists cannot be ignored and I would bet if you reflect back on what you did today, you will see at least one example of how they have altered your actions as a consumer.  Embrace the change and use your strengths to maintain your position of leadership and your company will continue to prosper.