1. Focus on Cash Flow
2. Make Little Progress Every Day
3. Try Stuff
4. Ignore Schmexperts
5. Never Ask Anyone To Do Something That You Wouldn’t Do

Sound advice from someone who knows. I’ll add one more thing that I think is the most important lesson of all:

6. Do What You Love

When you love what you are doing, you will pour your heart into in and it will show. And, whether or not your startup is a big success, you will have done something you enjoyed and will have no regrets for having started it.

© Eye on Startups & The Startup Guidebook

• Be Smart and Thrifty, But Don’t Panic. This, Too, Shall Pass
• Marketing is Muscle, Not Fat. Be Careful About Cutting It.
• Don’t Lose Focus By Chasing Business You Wouldn’t Normally Want
• Don’t Discount
• Don’t Neglect the Elephant in the Room

In his last point, McKee drives home the point that as the leader of your company, you have to let your employees know that you’re on top of things and that you have a plan for guiding the company through tough times.

When John Crowley spoke about his days founding and running Novazyme at the TCN Year-End Gala Event, he recounted days when things looked bleak at Novazyme — they were running out of cash, or drug development wasn’t going as well as they hoped, etc. — and that he had to make sure he went out of his way to talk to his employees to tell them what was going on and project continued optimism. That was one of his “lessons learned” from starting and running a company: You have to remember that you are a leader and that everyone is taking cues from you on how to handle challenges.

Its a good lesson to remember: Being a leader not only means being the big boss giving orders — it also means being the lead cheerleader whether things are looking great or otherwise.

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I couldn’t agree more. As an consultant who conducts due diligence on startups for early-stage investors, I am often struck at how many entrepreneurs approach investors with me-too ideas for startups with basically the same business model, market entry approach, etc.

If the business you are copying is wildly successful (hence the reason for copying it), what makes you think your startup can unseat it as the market leader? If the business you are copying is languishing, then why in the world would you have the same exact business model and marketing strategy?

As you are honing the business plan for your startup idea, take care not to fall into the trap of looking just at the obvious. Think outside the box and think what it could be if you do the opposite!

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MHT quoted Janice DiPietro of Tatum LLC, a CFO services firm, as saying that the IPO costs vary from company to company depending on the strength of the company’s management team, its record-keeping history, and the size of its market share and customer base.

Of these three, I think the biggest factor is the record-keeping. With the advent of the Sarbanes-Oxley Act of 2002, companies are subject to more rigorous financing reporting requirements than ever before.

Many startups often make the mistake of not taking SOX compliance seriously. As a result, when the time does come (as in the case of an IPO or an acquisition), there is a scramble to get everything in order and in compliance. And this is what costs money — accountants and lawyers don’t come cheap.

In consulting with startups, I am always surprised when I hear about a startup that isn’t paying attention to SOX. Seeing that SOX compliance is required for a successful exit event (an IPO or just about any form of acquisition), why wouldn’t a startup be paying attention to it? Don’t these startups (and their investors) believe they will eventually reach one of these exit scenarios?

If you are a startup, get your house in order to comply with SOX. If you are an investor, demand that your portfolio companies have a plan to address SOX compliance.

Unless, of course, you’re not thinking of a successful exit. <g>

© Eye on Startups & The Startup Guidebook

About halfway through the event, Don Dodge, a serial entrepreneur, angel investor, and member of Microsoft’s emerging business team, gave a short talk on the value of networking in the fundraising process.

Don confirmed what I said in a previous post, i.e., with the potential of being inundated with business plans coming through mail and email, investors must necessarily have some way to filter which new startup they will look at in detail. And that filter is usually a warm introduction to the startup (by a colleague or friend), or positive personal contact with someone at the startup. Hence the need to not only network, but to be prepared with an elevator pitch to catch their attention.

In his closing remarks, he said something that struck a chord with the entrepreneurs in the room. He asked everyone in the room to think about their stock portfolio and think about why they invested in those particular companies, out of thousands of others. That is, why did you invest in just 1% to 5% of the market?

VC and Angel investors are no different — out of the entire universe of businesses that they see, they invest in perhaps just 1% to 5% of the ideas which they think will make them money, whether because of technological superiority, market leadership, or a belief that it is the next big thing.

As you are going around seeking funding, you need to make sure you can position your company as one of the top 5% of startups.

So, are you in the top 5%?

© Eye on Startups & The Startup Guidebook

While I was impressed with the company’s progress, I didn’t say anything, but I guess my face gave it away. He grinned and pointed to a cartoon graphic he had created — a picture of the purple dinosaur Barney with a red circle-slash on top of it.

“No Barney Deals,” he said.

That is, he didn’t sign any partner deals where all it did was generate “I love you, you love me” press releases, with no financial or otherwise strategic gains for either party.

He is so right. I have seen so many startups fall into the trap of chasing after a “deal” with an industry giant, with nothing coming out of it except a press release and press coverage by industry rags. The VP of Marketing looks good because he’s got a stack of positive press coverage he can show off, the company looks good because it looks like it is gaining traction, and the industry giant looks good because it looks like it has partnered with a nimble startup for innovation. But in the end, nothing of any real substance comes out of it.

The reason this happens is that these “deals” aren’t business deals at all, but are just publicity opportunities for everyone. For business agreements to succeed, the terms of the deal need to be clearly specified — whether sales leads, actual sales, or a warm introduction to target customer(s).

No Barney Deals!

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It’s not simply a matter of identifying the target market, you need to be able to articulate who the buyer is, why they will buy your product or service, and how you expect the market to grow.

A few years ago, an entrepreneur was pitching an idea for a startup to an investor client — a device to allow older generation mobile phones to have speaker phone capability. The idea was that this would appeal to many business phone users that wanted speaker phone capability on their cell phones.

During this period of time, speakerphone-capable cell phones were just then beginning to be introduced to the market, so at first blush, there would seem to be a ready market for this product idea.

But there’s a disconnect here: the target market they were trying to sell to, i.e., the business cell phone users that need speaker phone capability — are generally the high-powered successful business person that has no qualms upgrading to newer phone models. So, the question remains: who will buy it?

The other thing to note is that by its very nature, a “retrofit” market is a declining market — there will be buyers as long as there are old phones to retrofit, but as users start to upgrade to newer phones, the market eventually dries up. So while there is a market initially, it’s not a growing market.

Asking investors for money is hard enough. If your primary target market is a question mark and your overall market is shrinking, it will be impossible to convince any investor to bite on your story.

In the end, the entrepreneur ended up using a combination of SBA loans and bank loans to fund the company. I don’t know what this says about the SBA or banks, but I guess it is a good thing that these institutions have different metrics for making their decisions.

But you have to wonder, did they ask the question: Who Will Buy It?

© Eye on Startups & The Startup Guidebook

In one case, the CEO’s role was quite clear. The CEO lied to customers about product development times in an attempt to land deals, and then lied to the board about revenue projections using these unsigned deals. It was
a case where one lie led to another lie, snowballing into one giant catastrophe.

Sometimes, the company can survive after a bad CEO is ousted. This one could not. By the time it was clear that there were no deals forthcoming and that the product was way behind schedule, the company had burned through millions and the investors were ready to write it off.

This was definitely one of those cases where the right CEO could have made a difference and made this company a success.

In another case, a newly-appointed CEO came in and fired the accountant to “save money” by doing the books himself. He then proceeded to go and hire employees out of state — spending MORE on administrative costs, payroll processing, state unemployment insurance coverage, and tax filings.

The company eventually folded for a number of different reasons, but the actions of the CEO clearly should have merited a review by the board. While the CEO may not have done anything wrong besides being inept in the area of financial controls, his firing of the accountant should have been a red flag. It is NEVER a good sign when the CEO says he wants to do the books himself.

How well do you know your CEO?

If you are a technology entrepreneur seeking a business-minded CEO to take your company to the next level, make sure you know your prospective CEO. Competence and experience are absolute requirements for the job, but so should integrity.

Dig deep when doing your reference calls to see what this person is really like. Know your CEO.

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The other day, two entrepreneurs came to see me with an investor pitch they insisted was ready. Everything seemed in order until they reached the slide that said “Funding Requirements” — and all it said was $10M first round funding required. That’s it. No discussion of how they got to this nice round substantial figure.

I was stunned. These two had both worked for startups and were obviously bright. Did they honestly believe that investors would just agree to give them $10M without explaining to them what they would do with the money? (I was thinking myself that $5M each would make for a nice start in Brazil!)

At a minimum, your funding requirements should be backed up with a few words on use of funds, milestones, and any expected follow-up funding required. Show your work.

There were several other places in the presentation where this same poor attention to detail manifested itself.

On their Financial Projections slide, they showed me a classic hockey stick chart with projected revenues starting from the low hundreds of thousands in year one, rocketing to several hundreds of millions by year five.

Not seeing any references to one, I had to ask: “What’s your revenue model?”

“We have several avenues to revenue, from OEM deals with major manufacturers to distribution deals with industry channels, to direct sales,” came the reply.

Which begged the question: “What’s your revenue mix?”

The exchange of looks between the two of them gave me my answer. They didn’t show their work because they didn’t do the work.

Can you imagine going to an investor with a seemingly half-baked business plan? Because that’s what an investor pitch is — an oral presentation of your business plan.

Don’t attempt to set up a meeting with an investor if you haven’t done your homework and can show all your work. You will only succeed in getting you and your team branded as amateurs or incompetents. And it is a reputation that will haunt you.

Do Your Homework. Show Your Work.

© Eye on Startups & The Startup Guidebook

Many first-time entrepreneurs often make the mistake of picking the wrong legal counsel for their startup. Not that there’s anything wrong with using the lawyer your father uses his for contracting business, or the firm recommended by the lawyer who handled your divorce, but not all lawyers are familiar with what startups need.

The right lawyer will know exactly the kind of issues startups face and can be an invaluable resource in getting your business going, from incorporating your business, to filing your patent applications, to reviewing the term sheets from prospective investors. Additionally, the right lawyer will have the networking connections to introduce you to the right folks that can help you succeed — from prospective investors to potential board members and advisers for your company.

Consider your lawyer to be part of your extended team and exercise the same diligence you use to hire your core team.

© Eye on Startups & The Startup Guidebook