Startup Key Assumptions: Step-by-Step Cheat Sheet

This is a step-by-step methodology for figuring a startup’s key assumptions. It covers how to determine minimum startup costs, how to project revenue for years 1-2, how to determine minimum expenses for years 1-2, how to determine the margins, and how to determine the breakeven date.

You don’t need an MBA to figure the key financial assumptions for a startup. Just follow this process:

1. Start with absolute, minimum required startup expenses:

A. Product design and development costs (MVP), V1, limited production run, packaging?
B. Inventory, domain name, website hosting, e-commerce, CC processing charges?
C. Incorporation fees?
D. Rent deposit, FFE, office expenses?
E. Salary?
F. Marketing, channel, shipping, distribution expenses?

Before we sell product 1 and make our first $, we will need to spend $x.

2. Estimate the number of units (clients) you expect to sell and the price per unit in the first 12 months of launch. Forecast sales for an additional 24 months.

A. Okay to have optimistic, probable and conservative scenarios.
B. How much you can sell depends largely on how much you expect to spend on marketing and sales. Assume YOU are the only salesperson.
C. How much can you reasonably sell to friends, family and early adopters? Do you have LOI’s or pre-orders?
D. Outline your sales funnel and each step in the process. Example of startup selling doggie vitamin water:

  • How many dog owners live in the area?
  • What percentage of this market can be reached through my marketing efforts and budget?
  • What percentage of pet owners exposed to my marketing will come to my website, or into a
    store that stocks my product, or walks by a vending machine?
  • What percentage of those people will actually make a purchase?
  • Of those who make a purchase, how much will they spend on average?
  • How many of those can be expected to be repeat buyers, how often?

E. As I generate sales (or raise investment capital), how fast can I grow this funnel over the next 2-3 years? 20%? 50% 100%?

At a minimum, we should be able to generate $x revenue in years 1, 2, and 3.

3. Figure absolute, minimum required month-over-month expenses for 12 months. Forecast expenses for an additional 24 months.

A. Product costs, COGS? (Assume minimal sales)
B. Marketing / sales costs?
C. Delivery, shipping, customer support costs?
D. Administrative / operational / legal / overhead costs, G&A? (Add 20%)

HINT: Try to keep ALL costs variable, ability to be adjusted quickly based on sales volume, investment capital, and other developments. People are EXPENSIVE, use contractors or commissioned people whenever possible.

In year 1, 2, and 3, we need $x to operate at a minimal level.

4. Determine your gross margin on sales.

A. Per-unit cost less cost of goods sold is your gross profit or margin. $100 sale minus $25 COGS = $75 gross profit. Divide gross profit by sales price to get margin: $75/$100 = 75%.
B. As a rule of thumb, you’ll need a gross margin above 50%. If you are selling trough retail, they will want a 40% – 60% mark up over their costs. You sell to retailers for $50, they sell to customers for $100.
C. Can you increase the margins in volume? Reduce your COGS?

Even at very low production levels, our margins are X.

5. Determine your breakeven point and capital needs.

A. In what month do sales exceed expenses?
B. What happens if you don’t hit breakeven when expected?
C. What “runway” is realistically needed? How much capital do you need to raise or borrow?
D. What is the critical timing for injections, if it is not all raised up front?

If we don’t raise (or invest) X by X, we don’t have a business.

6. BONUS: How do your assumptions and forecast compare to adjacent or competitive companies?

high performing teams

Three Criteria for High-Performing Teams

Every successful endeavor requires a good team. The bigger the endeavor, the bigger the requirement for a high-performing team. Startups flourish (or perish) on the performance of their founders and first hires. Corporations out-perform competitors because employees are their biggest assets. Sports teams become national champions because of the performance of their players. Non-profits and charities are only as relevant as the performance of their donors and volunteers. The military depends on soldiers to perform life-and-death missions.

What do all high-performing teams have in common regardless of the sector or endeavor?

The foundation for all high-performing teams is the organization. An organization is not a team, it is comprised of teams. The organization provides the infrastructure, training, discipline, support systems and, of course, the rewards and incentives through which teams come together in the first place. No organization, no chance of success. Some organizations do this much better than others, but that is a blog post for another day. There are many types of teams within an organization. Those that accomplish extraordinary things…those that perform at the highest levels…have three attributes that most other teams do not have.

1. Affinity. Members of high-performing teams like each other. They have similar interests, they are devoted to the cause they were assembled to advance. They usually know each other, they have a history together and good chemistry. They don’t always agree with one another, but they understand each other. Most importantly, they respect and trust one another.

If you have ever wondered why a particular “dream team” failed to live up to lofty expectations, look no further than a lack of affinity for one another. There was no bond, just disparate knowledge and experience peppered with lots of ego. They are often suspicious of each other. Exceptional people do not always make exceptional team members. In fact, more often than not, it is ordinary people with a great affinity for one another that accomplish the most extraordinary things.

2. Alignment. Members of high-performing teams all pull together in the same direction. Whether it is called vision or mission; whether it’s a plan or single objective, they are all crystal clear on where they are going. There is no ambiguity, no confusion about what they are trying to accomplish. The purpose is clear and so are the goals. Get them into separate rooms and ask them what they are doing there and where they are headed. They will all give you the same exact answer. They may debate the “how” and the “when,” but never the “what” or “where,” because they have the utmost faith in the “who.”

Most endeavors fail because the entire team is not pulling in the same direction. In fact, they are often working at cross purposes. The team members cannot even articulate the purpose or goals for why they were assembled. This is not only a failure of organizational leadership, it is a failure of team selection, because a high-performing team member would never join such a team. Those who were duped into joining such a team would soon enough call bullsh*t and insist on cohesive alignment, or take themselves off the team.

3. Accountability. Members of high-performing teams not only hold themselves 100% accountable for the entire endeavor – not just their roles – they also hold the other team members accountable. Everyone knows their roles and responsibilities. There are no over-lapping roles in high-performing teams. Each member of the team has one very specific role that does not compete against, or infringe upon, the role of any other team member. They each have defined responsibilities within those roles and they take them very seriously.

When an endeavor fails and every single member of that team does not step forward to take responsibility for it, you know right away it is not a high-performing team. In high-performing teams, no one is along for the ride, no one points fingers or shifts blame. They know that the mission and the team depends upon them. They know that if they fail to perform their individual roles and responsibilities, the entire endeavor would be in jeopardy.

A high-performing team is a rare and indispensable asset. Nothing great can be accomplished without one. If you’re on one, count your blessings. If you’re looking to join one or hire one, look for affinityalignment and accountability among its members.

The Heart of the Start: Falling in Love with the Right Idea

Most people want to have their own business but are paralyzed by fear of failure. They can all tell you why they want to have a business — control, wealth, purposeful work. Thousands of books and seminars teach people what kind of business to start, where to start, when to start and how to start. Colleges and universities have entire schools of entrepreneurship to teach students how to start and run a business. There are startup accelerators, angel investors and venture capitalists in every major city, creating an aurora of imminent startup success for those brave enough to venture it.

All of these teachings and temptations relay the context but rarely the subtext of acting on an idea. They seek to allay the fears of failure and reduce the risks of financial loss, but don’t address the heart of the start. Starting the right business is first and foremost an affair of the heart, not an intellectual exercise. As with human relationships, when one falls in love with the right idea, all fears wash away. All things become possible. The right idea is an extension of who one is becoming. The right idea will complete one’s life story. It’s a highly personal thing.

Love does indeed conquer all. The famous saying “Tis better to have loved and lost than never to have loved at all,” applies as much to starting and failing with a good business idea, as it does with human relationships. No regrets for good relationships gone awry. They are often the hardest to succeed at. But a good relationship is not always the right relationship. The same is true of a startup idea. A good idea can lead to the right idea.

The reason so many startups fail is because the founders fall fast and hard for the wrong idea. They start a business for the wrong reasons. They invest in the wrong things. They team up with incompatible co-founders. They expect a quick win. The relationship is one-way. It doesn’t give back. Their heart really isn’t in it; they were propelled by the promise of profit and prestige. Most live to regret the venture and quickly scurry back to the haven of a steady paycheck.

A few of these failed entrepreneurs become permanently love-struck. They felt it deeply. They want it again…can’t live without it. They remain undeterred. They have no regrets but live with a profound sense of loss. They were in love with a good idea, but know it wasn’t quite the right idea. The fact it did not work out was simply a prelude to a new and better love to come. They learned valuable life and business lessons. They learned more about themselves than they ever knew. They leaned how to be a true soul mate.

Some temporarily go back to the “working world” to hone their skills and bide their time. They find themselves better at their jobs than they were before they ventured out and failed. The most prized employees among wise employers are those who previously had their own businesses – and loved them. They can appreciate more what it takes for a company to succeed…to have gotten where it is today. Whether they eventually fall in love with another idea and venture out again, or learn to love and stay with the business they joined, they know they never have to settle.

The heart of the start is all about anticipating and crafting the “right” idea. It’s all in the subtext. It’s hidden in the heart and reveals itself slowly. Stay tuned for tips on how to fall in love with the right idea, or craft a good idea into the right idea (for you).

no clue

Admit It, You Don’t Have a Clue What You’re Doing

Okay, okay, simmer down. I’m not calling you out. I am simply suggesting that admitting you don’t have a clue is a good first step. Let’s face it, none of us have any clue when venturing something new. And the younger we are – just starting our careers – the truer that is. We learn primarily by doing. Until you have ‘been there, done that,’ you don’t know squat. Read about it all you want.

Wisdom is knowing what you don’t know and not deluding yourself otherwise.

There is a popular school of thought that says you should ‘fake it till you make it.’ Really bad advice. Those who have made it know you are full of sh*t and those who haven’t don’t matter. Amazes me how many people start believing their own bullsh*t. The absolute worst thing you can do in life is bullsh*t yourself.

This applies to everything you do in life, but allow me to pivot and apply this truism to entrepreneurs and business owners. This is the world I live and work in – some 35+ years now. Been there, done that. It cracks me up to see all these twenty somethings trying to tell other twenty somethings how to be successful entrepreneurs. Conversely, it’s somewhat pathetic to see old bureaucrats who have never worked in a business try to counsel aspiring entrepreneurs on how to start, build and sell one. Yeah, yeah, I know, it’s a gig. Fake it till you make it. Sorry to burst your bubble.

I run three businesses designed to address the start to exit value chain.

At StartupBiz.com, I invest in and mentor startups.

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At iREV.biz, I advise growing companies on how to create exponential value and position themselves for a successful exit.

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At SellBiz.us, I serve as an M&A Intermediary to help business owners cash out.

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Here’s the truth of it:

Most startup entrepreneurs don’t have a clue and they don’t know it. Youth is exuberant. Hubris rules over wisdom. I was one of them at one time.

Most business owners who are ready to sell their companies after many years of running it don’t have a clue (about how best to sell it), and they don’t know it. Experience is a fickle mistress. Arrogance often rules over wisdom. I was one of them at one time.

Most business owners of growing companies know they don’t have a clue about a lot of things necessary to build their companies and hire to compensate for it. They know what they don’t know. The successful ones are wise. I was one of them on and off at one time (having 4 wins and 3 losses).

In my book, A True Professional, I try to layout what it takes to get a clue – how to distinguish data from information from knowledge from wisdom. They are four very different things. And it starts by acknowledging what you don’t know and set about getting smart about whatever it is you need to know to get you from here to where you want to go.

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Source: Donald Clark, http://www.nwlink.com/~donclark/index.html

Here are a few strategies and tips for getting a clue:

First, associate with people who actually know, not those who simply have the job. The Peter Principle states that in every organization people rise to their level of incompetence. Lots of people hold jobs they are not qualified for, or which have out grown them. It’s important for you to recognize the difference, otherwise you will be learning the wrong things from the wrong people. How do you know if one actually knows? They have been there done that and failed at it a fair amount.

Second, true knowledge must be practiced to be gained. You can read about something all you want. You can listen to tapes and watch endless how-to videos. But to understand it, you must practice it. If you truly know it, you should be able to teach it. Studies prove that we retain 10% of what we read, 20% of what we hear, 30% of what we see, 50% of what we see and hear, 70% of what we share and discuss, 80% of what we experience, and 95% of what we teach others.

Third, be comfortable with the fact that you will never have all of the answers. Never be afraid to say, “I don’t know,” or “I’m not sure.” Separate fact from opinion. The path to knowledge often starts with a hypothesis. True knowledge is gained by proving or disproving the hypothesis. Disproving something is not failure, it is knowledge. Thomas Edison said, “I’ve not failed. I’ve just found 10,000 ways that won’t work.”

Fourth, you can’t become an expert at something that doesn’t hold great interest for you. You don’t necessarily have to “love,” your field, as some proclaim, but you do have to be keenly interested in it. If you find yourself bored, or not growing, for heaven’s sake change professions! Do not be afraid to jump into an entirely new career. Of course, you will want to test it first to make sure it’s a good fit. Then set about knowing everything you can about it.

Fifth, stay abreast of major developments in other fields. History is full examples of major breakthroughs that came from applying knowledge and insights from one field to a completely different field. Subscribe to publications dedicated to covering advancements in other professions. A good strategy is to follow startup news and the stock market. The generations coming up behind you are often the best spotters of new trends.

Sixth, keep up with current events. There are multiple sources which sum up local, national and international news. Browse the headlines at least once a day. Some services will also send you a daily briefing of the topics you are interested in. You should always have a working knowledge of what is going in the world and what your peers and associates are talking about. 

Seventh, take up a hobby not related to your work. Many successful professionals take up painting, story writing, playing a musical instrument, crossword puzzles, stamp or coin collecting, or a myriad of other hobbies. Find a hobby that gives you a break from your work, while stimulating your creativity and strengthening your thinking processes. Hobbies also relieve stress and bring you into contact with people you might not ordinarily associate with.

Finally, find a way to make a unique contribution to your profession. Once chosen, focus relentlessly on something you can invent or improve within your field. This drive will force you to learn everything about it. Get as much feedback as you can. Test it in the field, not just on paper. Figure out how to leave a lasting legacy within your chosen profession.

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With that, may you be less clueless tomorrow than you are today. Be a life-long learner. Share your knowledge and experience with others and defer to those who have ‘been there and done that’ where you have not. Knowing what you don’t know, and not trying to fake it, is the true path to business excellence, a successful exit, and personal wisdom. 

How Not to Kill Your Startup

How Not to Kill Your Startup: 7 Self-Inflicted Wounds that can be Fatal

A lot has been written about why startups fail. Most of the causes cited are external forces. Things like no market, competitive pressures, supply chain challenges, and lack of investor interest. Less has been written about how startups kill themselves. Internal missteps and self-inflicted wounds can be just as fatal as external forces.

Since a startup has all it can do to successfully navigate the external forces arrayed against it, there is little time or energy to deal with internal missteps. Here is a list of common self-inflicted wounds to avoid. If the startup has already suffered one or more of these wounds, the sooner it can treat the wound before it festers, the less chance it will prove fatal.

1. No intellectual property assignment agreements.

The people who have done ideation, research, planning, product development, marketing and/or creative work for the venture have not signed IP Assignment agreements. This includes friends, family, contractors, and the founders themselves.

If the venture does not have clear title to ALL of its intellectual property, it can prove fatal later. The people who performed work for the venture legally own it until it has been assigned, whether they were paid for it or not. Verbal agreements are not good enough. Good intentions are not good enough.

If and when the venture starts getting traction and raising capital, the startup should not be surprised at the number of people who come out of the woodwork to stake their claims. These wounds can be expensive if not fatal.

2. No legal entity to embody the intellectual property; expired legal entity.

The venture has not been incorporated, therefore, there is no entity to assign the IP to. A startup becomes a startup on the day it begins to create intellectual property. This includes the wireframes, features, and other plans and specifications for the product. It includes customer interviews, market and competitor research, business model canvas, logo, and other assets.

Waiting to create a legal entity that “owns” all the work the founders are creating can be fatal later. Number 1 and Number 2 go hand-in-hand. Legally protect the IP and embody it within a legal entity as early as possible, or risk losing claim to it.

The startup also needs to keep the legal entity in GOOD standing. Experienced startup investors are rarely surprised by how many startup entities have been involuntarily dissolved by the state because they did not file their annual reports or missed some other compliance requirement. IP agreements and other contracts made with a subsequently dissolved company are probably not enforceable. Good question for an attorney, but in any case, will cost the startup a fair amount of money to fix.

3. Large number of founder shares issued upfront. No vesting. No Buy-Back agreement.

Two or three buddies start a company and issue themselves one million shares of stock each (or other absurdly large number of voting shares). After a few months one of the founders leaves to take a job. Another one hangs around but doesn’t do much of anything except complain. There is no way for the remaining, dedicated founder, to claw back the issued shares from his former buddies.

Scenarios like this are common in startups and usually prove fatal. It becomes impossible for the venture to correct its cap table, attract needed talent and investors. It often ends up in a legal battle, fighting over nothing except pride.

All shares issued to the founders should vest over 3-4 years based upon pre-agreed performance milestones. The founders should have a buy-back agreement that gives the company the right to cancel unvested shares and buy back vested shares, in the event the founder leaves, dies, becomes incapacitated, or is otherwise unable to fulfill his or her role at the discretion of the board (which should consist partially of one or more seasoned professionals who are not founders).

4. No division of labor and/or accountability among the founders and other team members.

Two founders are co-Presidents. They both focus on marketing because that’s what they know. Everyone else is responsible for everything else and no one really knows who is doing what by when.

As silly as this sounds, it’s a common scenario in many startups. There is no one boss, driving deliverables and holding everyone involved in the venture (including contractors) accountable for accomplishing specific tasks on deadline. There is a lot of thrashing around and finger pointing. No one wants to have the hard conversations about control, management, and accountability. After all, no one wants to hurt anyone’s feelings.

Startups are not democracies. At best, they are benevolent dictatorships. ONE person must be in charge day-to-day and make decisions when there is not a consensus among the founders or extended team. Everyone in the venture must have a defined role and be held accountable for very specific deliverables (see the next item).

5. Strategy of the week. Working on the wrong things in the wrong order.

The founders spend most of their time working on their branding and pitch deck. Yet, they have no functional product or business model. They are looking to recruit a CFO. Yet, there is no money to count and won’t be for several years. They are interviewing sales people or outsourced sales agents. Yet, they themselves have not talked to any customers or made any sales. Worse yet, the team as a whole spends an inordinate amount of time on administrative tasks, unproductive meetings, and useless reporting (see the next item). The vision is murky. The strategy changes every week. There is no written plan.

There is a logical sequence to starting and growing a company. Call them stepping stones. It’s counter productive to jump from stone 1 to stone 10, then back to stone 3, and so on.

Not having a clear vision, good strategy, and workable plan (even though these things can and should change as milestones are hit or missed), is usually fatal. Contrary to popular myth, successful founders don’t make it up as they go.

Not knowing the most important and immediate issues to resolve every day is usually fatal. It leads to burnout. It leads to misalignment between vision and execution. It leads to reinventing the wheel and wasted effort. It leads to more serious internal conflict.

Vision, strategy, plan, and proper prioritization and focus are paramount in a startup.

6. No metrics. Measuring the wrong things.

The founders are obsessed by getting press and likes on social media. Yet, those activities are not producing a better MVP, new users or revenue. The webmaster is measured by how many views the website is getting. Yet, no one is tracking how many views translate into engagement, or engagement into leads, or leads converted to sales. No one knows the cost to acquire a customer, the life time value of a customer, or their average spend. No one knows what percentage of revenue comes from repeat customers versus all-new customers.

In any organization, what gets done is what gets measured and rewarded. In large companies, these things are often pointless and subject to the whims and vain objectives of the boss. Startups cannot afford to measure or reward the wrong things. Doing so can be fatal.

In a startup, the metrics can change very quickly as the venture develops. What should be measured also changes much more rapidly than in an established business. Closely tracking the right metrics and adjusting the vision, strategy and plan accordingly, is a key skill set all leaders and advisors of a startup need to acquire and perfect.

7. Sacred Cows. Un/coachable and un/scalable founder.

The CTO is a co-founder and in love with a particular product (or feature). The vast majority of customers don’t like the product, don’t buy the product, or don’t use the feature. The CTO refuses to kill it and keeps devoting resources to it. The founder has all the answers and is easily offended when someone suggests things be done differently. There is a complete lack of transparency about problems and issues between the leadership and the rest of the team, or the startup’s investors. The company’s culture is uninspiring or borderline toxic.

Most startups talk about being repeatable and scalable. They are building something that can be mass produced and sold to a very large market. It is not constrained by geography or human resources. But the most important thing that needs to scale in a startup is the Founder/CEO, and the rest of the leadership.

A scalable founder/CEO is one whose role changes, whose weaknesses can be balanced by other’s strengths, who delegates, can build a team, and attract good advisors. A scalable founder is one who can relinquish control, graciously accept and act on constructive feedback, and continues to grow as a person and professional.

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Mike O’Donnell is the CEO of StartupBiz.com and the author of Startup Stepping Stones: Actions and Resources for Launching a Viable Business. He mentors for The Venture Mentoring TeamThe Founder Institute, and SCORE.

Would I Ride Into Startup Battle With You?

I am a veteran of the startup wars. I was on the front lines of the PC revolution in the 1980’s, fought in the multimedia skirmishes in the 1990’s, and commanded fearless troops in the first Internet invasion. I have been in more startup battles than I can count, some on the losing side. Every battle was won or lost by people, not by the weapons at our disposal (technology or money). I learned how to choose who I would risk my reputation and financial life for:

1. Our cause is not your job, it’s your life and an extension of who you are. You are all in, you can’t see yourself doing anything else. You could be working less and making more money as a mercenary (consultant) or captain (manager) of another cause, but you truly believe our cause is where you will make your mark.

2. You are always on the clock. The battle is 24/7 and it is often a race against time. You know the enemy does not sleep. You’re usually too excited to sleep, can’t wait to engage the enemy and make their bounty (customers and employees) ours. I get calls and emails from you after working hours. When I text you an idea in the middle of the night, I am never surprised to get an immediate reply.

3. No task is too small, no mission unimportant to you. You do what needs to be done, when it needs to be done, whether you like the task or not. You are not concerned about titles or lines of responsibility and authority. When you don’t know how to do something, you figure it out and ask me for help when you need it.

4. You are curious as hell, always learning, always trying to get better. You make me better…smarter. You don’t horde information, creativity or insight. You share it with everyone on our team, push us to apply it quickly to advance our cause. Even with your considerable knowledge and domain expertise, you never think you have all the answers. You advocate for your pov passionately, challenge us to prove you wrong, and graciously adapt someone else’s pov if it is the will of the majority.

5. You are consumed by the righteousness of our cause, emboldened by the value proposition it offers the world, but never blind to its flaws and limitations. You know we must constantly make it better. But not better in the way we might want it to be better, but by how well it meets the needs and expectations of the people we are fighting for.

6. When it’s time to launch, you are on the front lines leading the charge, even though we are hopelessly outmanned and outgunned. You are proud when we capture a little territory, but will not rest until we control the continent, not content until we dominate the world. You measure success by whether we are winning the battle, not by how many parades and applause we get for waging it.

7. Our cause would die before you would quit.

May you pick your startup battles carefully…and the people you ride into battle with even more so.

Framework for Paying Startup Team Contributors in Stock

One of the questions I get most from startup founders is, “How do I pay people in stock?” In most of these situations the founder has met someone willing to work for all stock or part stock. The hard part is figuring out how to value the person’s contribution, how to value the stock, and how to issue the stock in a way that minimizes taxes and won’t screw up the company’s Cap Table.

Let me start with the usual disclosure: I’m not an attorney or an accountant. It’s always wise to seek advice and counsel from accredited experts. That said, allow me to relay a framework that I have used successfully in my own startups. I’ve also used this framework to get compensated for providing services to startup companies.

Step 1: Agree on the Contributor’s Market Rate

There is a wide disparity in what different people are worth in the market and to your startup situation in particular. Some people are worth $20 per hour and others are worth $200 per hour. A contributor that is worth $200 per hour should deliver 10x more value to the startup than a contributor that is worth $20 per hour. How do you figure that out in advance? Here are some tips:

  • How many years of experience does the contributor have?
  • What is the contributor’s area of expertise? Does he or she have certifications or specialized training?
  • What is the contributor’s success rate? Can you verify his or her performance in other ventures?
  • What was the contributor paid last year? Is he or she willing to share his or her pay stubs or tax returns?

With just a little bit of research and give-and-take with the contributor, you should be able to get a fix on his or her hourly rate. If the gig is going to be long term, you can agree on the contributor’s monthly or annual rate, based on the above inputs.

For the sake of this example, let’s say you and the contributor have agreed that his or her market rate is $100 per hour.

Step 2: Agree on the Minimum Time the contributor Will Commit to Your Startup

To arrive at this number, you should have a good idea of what he or she is going to do and over what period of time. Will his or her work be on a fixed project with a start and end date, or will his or her work be open ended and ongoing?

For example, a fixed project could be to write a business plan that will take approximately 100 hours, beginning on May 1 and ending on July 31. Alternatively, his or her work may be open ended and ongoing, like providing technical or marketing services that will take at least one day (8 hours) per week until terminated by either party.

For the sake of this example, let’s say the contributor is going to work at least one day per week, 32 hours per month, for your startup. The work will be ongoing. Given his or her market rate of $100 per hour in step 1, the compensation rate is $3200 per month.

Step 3: Agree on the Compensation Structure

The first thing to consider in this step is to determine whether the contributor’s compensation will be in all stock, or in part-cash and part-stock. Some startups want to preserve equity. Some people won’t work for just stock. A part-cash and part-stock structure is a good compromise. In my experience, 50/50 is typical.

If you don’t have the cash and the contributor is willing, the cash portion can be accrued until funding is raised. I’ve done this for startup clients who I believe have a good chance of raising capital, or at least becoming cash flow positive in the foreseeable future. If the cash portion can not be paid within a certain period (usually one year), it is converted to stock with a kicker (see below).

In most startups, however, the founders and the early team members are working solely for stock.

Now comes the tricky part…

People who will work for your startup for stock are taking the risk that they will never see a dime for their contribution, especially if no funding has been raised and the company is not cash flow positive. To induce them to take this risk, you can sweeten the offer by how you value the stock they will receive. There are a couple of ways of doing this.

a.      For every dollar earned, the contributor gets $2 or $3 worth of company common stock. In the example in Step 2, if the contributor is being compensated at $3200 per month for his or her ongoing contribution, he or she will receive $6400 or $9600 worth of stock each month. Whether he or she gets 2x or 3x depends on the relative value of his or her contribution to the goals of the company. This is the kicker. It’s negotiable.

b.      The contributor’s shares will be priced at the same rate as the founder’s shares, or slightly above the value of the founder’s shares. For example, it’s not unusual for founder shares to be valued at $0.01 per share. A contributor working for just stock should receive the lowest possible share price, as advised by company counsel.

c.      A combination of a. and b. The levers are share multiple and price per share. If a contributor is getting 3x the number of shares for every dollar earned, the share price could be higher. If a contributor is getting 1x the number of shares for every dollar earned, the share price should probably be as low as possible, if not the same price as the founder’s shares.

For the sake of this example, let’s say the contributor is earning $3200 per month for his or her work and will be paid solely in stock at a 2x multiple. The contributor will be awarded $6400 worth of stock each month for the duration of his or her tenure, when it comes time to issue the stock.

Founders often debate with me the kicker multiple. If they are familiar with convertible notes, where investors get a 20% discount (kicker) upon conversion to stock, they wonder why they shouldn’t use the same formula to compensate team members in stock.

My argument is that startup team contributors are exponentially more valuable in the early stages. They are often involved before there is a product, no less revenue. Convertible note Investors usually get involved later when the company has product-market fit – the venture has MVP, proof of market and some traction. An investor’s risk has been mitigated to some extent.

In any case, use your best judgement, just don’t be piggy. If your venture is further along and perhaps the price of the shares have already been established by a lead investor, than paying a 1.2x – 1.5x multiple for people working for stock may be appropriate.

My advice to most early-stage startups: you need the talent and their work product to get in business and to raise money, so be generous with your equity with those who can help get you there.

Lastly, this should go without saying, but it’s a common trap naive founders fall into: NEVER, EVER, give any contributor equity based on a percentage of the company. It’s ill advised for a lot of reasons. The amount of stock (or options) one is given in a startup should be directly proportionate to the value of their contribution.

Step 4: Have a Written Contract and Agree on the Contributor’s Performance Milestones Each Month

The last step in the framework is to have a written contract and agree in advance on what milestones the contributor is to achieve each month for the equity he or she is receiving. This is where the framework can fall apart quickly. If the startup isn’t getting results from the contributor and not cutting him or her loose, it will be on the hook for the equity. The founder and the contributor should review what has been achieved each month and whether the stock was earned. If there is wide disagreement, terminate the contract.

Founders need to manage people paid in equity as rigorously as those paid in cash. The worst thing that can happen – and I see it all the time – is to owe a bunch of people a bunch of stock for having done practically nothing. Worse yet, it was all done on a verbal understanding. It’s going to come out of the founder’s share because investors aren’t going to pay for it. Keep your Cap Table clean!

Final Word

There are a bunch of nuances in this framework regarding how many shares a startup should initially authorize and issue; the type of shares to authorize and issue; when to issue shares; how to price the shares; and how to minimize the tax consequences of paying people in stock. We’ll need to save that discussion for another post.

In the meantime, founders do NOT have to figure this all out in advance to use this framework and to engage team members using stock. Once the above parameters are contractually agreed to by contributors, the stock can be issued to them on a future date, coinciding with migration to a C-corp, the commencement of a Series A financing, or other triggers. This is also when a 409A Valuation should be done. Like a convertible note, where investors will get stock at a future date, the stock can be earned by team members now and issued later. But please don’t take my word for it. Consult a good attorney experienced in corporate formations and stock plans!

Equity is currency. Use your equity wisely, but by all means, use it to attract and keep the people you need to help build your product and grow your company.

When Your Startup is Fundable but You Aren’t

You may have heard that the most important criteria of investors is the founder and team. They bet on the jockey, not on the horse. Startup success is more about execution, less about great new products and untapped markets. What happens when investors like your venture but are leery about investing in YOU?

I’ve been there. I was told by a number of Silicon Valley VC’s:

We love the technology, we love the space, and we love the potential for a big return on our investment. We just don’t think you’re the right guy for the job.

I got the money anyway.

Allow me to share common reasons why investors might think you are not fundable, and how to overcome their concerns.

Why You May Not Be Fundable

1. Youth and inexperience. No breadth.

If this is your first venture and you have no significant work experience, most investors are going to be leery about your ability to build a business. Anyone can start a company — it’s easy. The hard part is turning a company into a profitable business. That takes know-how. If you are an aspiring entrepreneur right out of college and have no work experience, aside from summer jobs or internships, see number 5 below.

2. No track record in the space. No depth.

This is a big one and the reason I had trouble raising capital. Even though you might have considerable work experience, including management experience, most investors want to see relevant experience in the space you are competing in. The way to compensate for lack of practical experience in the industry and market is to “get smart” about the space and surround yourself with people who are experts. See numbers 4 and 5 below.

3. Poor vision, strategy, milestones and plan for taking the business forward.

How to get from A to B to C….to Z (exit) is the hallmark of a great startup team. As the founder and leader, you must be able to articulate a clear vision and the path to achieving the vision. Many first time founders are good at pitching a big idea, but are hazy about how to implement it. That makes investors nervous. They want to see a product roadmap and a go-to-market plan. They want you to identify the key milestones along the way. At a minimum, you should have a three year business plan with defensible assumptions and reasonable growth projections.

4. Unable to answer basic questions about the business model and the key metrics that drive the business.

Having ONE validated revenue stream is a key consideration of all investors. If you spew a smorgasbord of possible ways you might make money, investors will conclude you have no idea how to build a business. Non-fundable founders grasp for straws when asked this question. “We’ll sell subscriptions…and sell advertising…and have a trial version that upgrades later…and maybe do some data mining and lead generation.” Fundable founders have not only validated one reliable and predictable revenue stream, they also know which metrics are the most important to track, measure and improve.

(I’ll cover more on business models and key metrics in my next post because they are so fundamental to raising capital and building a successful business.)

5. No team; no advisors.

Solo Founders are not fundable. Teams are fundable. There is so much that needs to be done to launch a business, and so many different disciplines required to build it, every smart investor knows a balanced team is required. What a good founder does is to hire, align, empower and incentivize the team. A good founder also recruits good professional advisors (legal, financial, IT, etc.) and sometimes a separate board of advisors to facilitate specific strategic objectives.

6. Poor presentation; inability to inspire trust and confidence.

This one is hard to quantify but very real among investors. They think the product / technology is amazing. Good intellectual property; perhaps some early adopters who have validated the market potential. But the founder is just…well…blah. Investors don’t get a good vibe. It’s often poor personal chemistry, not business fundamentals, for why some startup founders fail to get funded.

7. Questionable past: background check reveals financial, criminal, ethical problems, or poor judgment.

Everything about a founder is discoverable these days. Most venture capital funds (and some angel investors) employ services that conduct deep background checks on the founder and other key members of the team. In one of the company’s I founded I almost lost funding after the VC discovered that one of my VP’s had been fired from a previous job for submitting a false expense report. I never knew that; never bothered to ask about skeletons in the closet.

The VP thought it would not be discovered. It was. It reflected poorly on me for not thoroughly vetting my team. The VP was let go, not for having made this mistake in his career, but because he lied about it when asked by the VC if there was anything in his past work experience that might reflect poorly on him. He said no. He lied. Not trustworthy.

This brings up a related lesson for why some founders aren’t fundable. Investors rarely ask a question they don’t already know the answer to. Don’t lie. Don’t try to bluff. If you don’t know, say you don’t know.

Key Strategies for Getting the Money When You Might Not be Fundable

Any of the above issues can put your deal at risk. Most of these issues can be overcome if you manage them appropriately. Hopefully, as was in my case, your gating issue is inexperience and / or a lack of depth in the space. You can counter this with a few smart moves.

First, if you are not an expert in the market you are entering, your number 1 priority is to “get smart” about the space and surround yourself with a team of people who are experts. This includes a board of advisors. Learn everything there is to know about the market and the competition. Find people who have lived it and know how to win. That’s what I did.

Second, you must communicate to prospective investors that you will never get in the way of the company’s success. Take your ego out of the equation. Never allow yourself to be the reason the company flounders. A Founder / CEO serves at the pleasure of the board, who in turn guard the interests of the shareholders (not the interests of the Founder).

In my case, whenever a VC said, “We like you Mike, but we don’t think you’re the best guy to lead the company,” I slid a piece of paper face down across the table.

It was my resignation.

“If ever you guys think I’m not doing the job, just date and countersign this and choose my successor.”

I got the money.

Third, consider the possibility that you may NOT be the right person to run your company. You might be better at product or operations. Lots of successful startup founders did not assume the CEO role. Don’t be the reason your startup doesn’t get funded.

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Postscript: In my venture, the VC’s did indeed accept my pre-signed letter of resignation after one year, and installed my successor. After 10 months she ran it into the ground and they asked me to come back. Which I did (with more stock and compensation), and ran the company for 10 years. After returning as CEO, I was able to raise an additional $20M.

It’s not where you start. It’s where you finish. You’ll have a better chance of finishing with the money. If you’re not fundable, install someone who is fundable.

Startup Score Card: Free Download for Founders, Mentors and Investors

Having scored hundreds of startup opportunities as an angel investor, VC, and mentor, I thought I would share my scorecard template. It’s how I determine the merits of a new business opportunity. I score startups on five dimensions:

  1. Product – how good/unique is the product or service?
  2. Market – are they targeting the right market segment?
  3. Team – does the team have relevant experience in the space?
  4. Strategy – how do they plan to go-to-market, capture share, and generate revenue?
  5. Economics – does the business model make sense and provide good ROI to investors?

Each dimension is comprised of 10 criteria, for a total of 50 data points. Each data point is rated between 1 and 10, with 1 being poor and 10 being very strong. After the scores are totaled in each dimension, the template will total and chart the score so you can visually see where the startup is strong and where the founders need to do some work to make it a better opportunity. In my experience, most startups rank between 5 and 7.

Here’s a scorecard I recently did for a startup looking for help in raising capital.

You can see that the startup scorecard template allows you to weigh the dimensions. In the above example, I weighed the team 30% of the score (because it’s hard to fix a team), and I weighed the strategy only 10% of the score (because I can help them fix those issues). Most startups, by the way, are usually weak on strategy. Thus the need for good mentors.

The nice thing about the template is that the scores are totaled and charted automatically as you enter a number between 1 and 10 for each criteria. You can even change charts to view the data in different ways, like this:

The best startup opportunities are those that rank above a 7 and the five dimensions are fairly well aligned, meaning they all rank 8 or 9. I’ve never seen a startup that ranks a perfect 10 in all five dimensions. If you find one, please let me know where to send the check. 🙂

The startup scorecard template also allows you to edit the dimensions and the criteria to suit your purposes. The criteria I use is for scalable startups planning to serve a multi-national market and would be capable of attracting venture capital. If you are scoring a startup that is a lifestyle business serving a local market, your criteria would be different.

Without further ado, here’s where you can download the Startup Scorecard Template:

Google Sheets:

https://docs.google.com/spreadsheets/d/14UV-cZCT-bBSd0VFu22s0lyb7dOFno9keZnT–kRUL0/edit#gid=1085124116

Who Will Find the Startup Scorecard Useful?

For Entrepreneurs

If you are an aspiring entrepreneur with a startup idea, it’s useful to know how smart investors, partners, and other potential stakeholders are going to evaluate your opportunity. It’s also helpful to have a reality check to gauge whether or not you should move forward, and how you might adapt your idea to make it more likely of being funded and commercialized. You don’t want to waste valuable time pursuing an idea that will be dead on arrival. This scorecard is your reality check. Use it to test the strength of your idea and how you should be developing it and executing on it.

For Angel Investors

If you are new to angel investing, it’s useful to know how experienced investors evaluate startups, so you can create your own system of evaluation. There is no one-all-be-all system of determining the merits of a startup. There are a lot of variables to consider, so it’s important to have a baseline. Don’t just rely on your gut. Startups can be seductive. They must have more than big ideas and entrepreneurial passion. They must be capable of maturing into viable, profit-making businesses. This scorecard can help you determine which startups have a good shot at becoming one of those businesses and provide you with a good return on your investment.

For Mentors

If you are a mentor assigned to assist and advise founders, this scorecard can help you advise them. We are all prisoners of our own experiences, so it is natural to push founders towards decisions and practices that worked for us in our careers, but which may not be well suited for them. All mentors have blind spots. We may be very strong on product development or finance, but weak on team-building and strategy. The Startup Scorecard can help you fill in the gaps and help you to guide founders to think more objectively about the key drivers of their businesses.

Enjoy! I hope you find the Startup Scorecard Template to be a useful tool.

Most Common Follies of First-Time Founders

So much has to go right for a startup to survive and thrive, it’s wise to know the most common, avoidable mistakes, made by first-time founders. Many first-time founders don’t know what they don’t know. Others are told, but they just don’t want to hear it and fumble. They lack the good sense needed to build a product people will buy, and to launch and grow a successful business.

I see these follies with many of the startups I mentor. I have suffered some of these follies in my own startups. Ignore them at your own peril.

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1. Thinking the idea is so good, everyone will want to steal it.

It is human nature to want to keep secret a thing that promises great fortune to the possessor, yet can be so easily taken by others if revealed. First-time founders think like gold miners who have discovered a new vein and must mine it before others find out about it. The reality is ideas are like gold dust in a big windstorm. They cannot be concealed, collected or controlled. They glitter but have no monetary value.

Most ideas are half baked and missing most of the ingredients to make something edible. Ideas must be refined and seasoned to taste by those they are being cooked for. Most ideas evolve into something quite different than what they were originally conceived to be. The founders set out to make a cake and end up with cookies, because paying customers would rather eat cookies than cake and they buy a lot more of them.

The value of an idea is created from bringing it to life with lots of input from those who will buy the finished product. To create this value a founder should speak with as many people who will listen.

Trust me, no one wants to steal your idea. Half the people you tell won’t “get it” or think it is stupid. The other half will be so busy gazing at their own gold dust storm, or trying to bake their own cake, they won’t give your idea a second thought. In fact, you will need to beg them to take a serious look at it and give honest feedback.

For more on this subject, see my post, What’s the Risk Someone Will Steal Your Startup Idea?

2. Wasting time trying to raise money from investors for an idea or basic prototype.

Classic rookie mistake. Newsflash: no one is going to give you money to make a product, or to do the work necessary to find out if people will buy it if you do make it. The possible exception is your mother, or rich aunt. Do not waste one minute of your precious time chasing investors until you have a product people are using. Better yet, wait until you have sales and revenue is growing month-over-month.

So how do you make a product and get customers when you have no money? Borrow the money from friends and family. Mortgage your house, sell your car, or take an advance on your credit cards. Convince or cajole people or co-founders who can help you make it and get the first customers, in exchange for equity in the venture. There are all kinds of ways to do it. It’s on you to create a real product and validate the market for it. That’s what makes a true entrepreneur.

3. No skin in the game. No real passion. No staying power. Chasing shiny objects.

People are not going to beat a path to your door. No one is going to believe in it or want to help unless you are “all in”. Don’t be a dabbler. Don’t be a wannapreneur. Don’t be flaky or distracted. Don’t chase every new shiny object dangled in front of you. I see this in many first-time founders. They thrash around endlessly, accomplishing almost nothing. Their heart really isn’t in it. They give up easily.

Crystalize the vision, clarify the “real” opportunity, research the hell out of it, then MAKE something people actually want. Put everything you have into it. Work it every day. Love it every minute even when it is failing. Serendipity will happen. The right path will make itself known if you keep at it; keep learning and evolving.

4. Failure to research competitive solutions or substitutes.

Nine times out of ten when a first-time founder pitches an idea to me, I check the app store and do a quick Google search and find a half dozen very similar solutions, or substitutes. When I ask them about these other solutions, they usually say they did not know about them, or they trivialize them. Acute laziness.

Blind faith in an idea with no thorough understanding of how the intended customer is currently solving the problem or meeting the need, is pure folly. You must know intimately the dragons you will need to slay. What their weaknesses and shortcomings are. Where they are vulnerable. How you will attack them and capture their customers.

5. No core expertise or co-founder to build the product; no specification.

This is perhaps the number 1 killer of startups. The founder has a good idea. He or she does the research and validates the market need. The founder sees a way to serve the market in a way that no one else is serving or is serving poorly. But alas, the founder does not have the skills to make the product.

These founders are adrift in a vast sea with no paddle and no navigation charts. They have no programming skills. They don’t fully understand the science. They are ignorant of the technologies required to make and market the product. They don’t know how the industry works, what the sales cycle is, or how the buying decisions are made. Worse yet, they don’t have a detailed specification to give to one who does have the skills to make the product. 

Startup Folly #5: trying to outsource to freelancers to build something with no blueprint, and no knowledge about how to manage the freelancer’s deliverables. Ancillary product development or support can be outsourced. Core product development should be in-house. If not in-house, it must be done by a trusted party with a detailed specification.

Non-technical founders would be well-served to find a capable and enthusiastic technical co-founder before wasting a lot of time on the venture. If you don’t have the expertise to build the product yourself, or lack the knowledge required to find and manage someone who can, you are wasting your time!

6. Not incorporating and securing IP protections.

This is an easy fix, but often comes later than it should. I continue to be surprised by how many first-time founders are six months or more into their venture and have not incorporated. The company has a name. A designer created the logo. One of the co-founders wrote a mini-business plan and made a deck. Another co-founder wrote some code or built a basic prototype. Who owns this intellectual property that has been created? No one. Everyone.

The chief assets of a startup are its intellectual property: name, logo, designs, drawings, specifications, code, plans, 3-D printed device, user feedback, collateral, etc., etc. This IP must be embodied within a legal entity that enjoys protections under the law. All IP created by the founders and others who have worked on it must be properly assigned to the legal entity. Otherwise, the startup is worthless or severely devalued because its work product is walking around with people who can do whatever they want with it.

Incorporate. Have all parties sign work-for-hire agreements and assign their work product to the entity. File a fictious name with the state. File trademarks, patents and copyrights in the name of the entity as soon as you have decided to go forward with the idea and make the product. 

7. Giving co-founders and contractors equity without vesting.

Categorize this one under “friendship follies” along side founder follies. Three friends start a company. They each get equal shares. One puts in most of the money. One does most of the work. One walks away, enticed by shinier objects, or because she has a falling out with the other two. What’s left? A mess that usually needs to be cleaned up by lawyers. It gets ugly. Happens all the time. Many startups implode as a result. No more friendship. No more startup.

The same scenario plays out with contractors given stock in lieu of cash compensation. Only they don’t perform, or what they deliver is subpar or not what was expected. Fights ensue. Arguments over who owns the IP. Back to the lawyers.

The founders should get a small but equal number of shares upfront to kick things off. The vast majority of authorized but non-issued shares sit in reserve. Founders get more shares by vesting them over 2-3 years. Vesting is based on what they contribute, pre-agreed milestones and other deliverables. Being committed. Being fully engaged. If they don’t deliver, they don’t vest.

Whenever founders have an equal number of voting shares, at least one tie-breaker voting share should be held by a non-founder – an advisor or investor. Founders should sign a Buy-Sell Agreement that stipulates what happens when a founder leaves, and/or the other founders want to buy him out.

8. No market, or poorly defined market.

You would think no one would be crazy enough to start a company and build a product for which there is no market…or an anemic market, or a dying market. Some are banking on a market that won’t materialize for another 10 years. Only the big boys can do that. This is a very common folly. The founder spends a lot of time to build a product because it’s cool, or because he wants one. No one else wants one, or if they do want one, won’t spend money for it.

Some startups can name a sizeable market but cannot articulate where they will play in that market. They don’t really know the target market – the demographics, geographics and psychographics of their most likely buyers. As a result, they try to be all things to all people in the market and end up being nothing to all of them. 

9. Unremarkable or unscalable value proposition.

I would have to put this as startup killer #2, behind having no core expertise. Too many first-time founders work on ideas that are quite frankly, blah. Yawn. When asked why anyone would buy it over alternative solutions, they explain their solution is a little bit cheaper, or incrementally better. They have no compelling, remarkable, or sustainable advantage. They are making a “me-too” product, destined to be lost in a sea of me-too products.

Investors apply the 10X rule to startups. The product or service must be ten times better than other solutions on the market. It must also have the ability to scale quickly. Founders who provide services, for example, don’t scale. They sell time for a living. They have to sleep. Investors like products and services that never sleep; that make money around the clock.

The lack of scalability is not a showstopper for lifestyle businesses, but even a localized lifestyle business should offer a superior value proposition to be worth doing.

10. Trying to boil the ocean.

With big ideas comes the temptation to go big immediately. This usually entails the need to raise big money. These are long-shot propositions. If your venture requires someone to invest $50M to make the product and see the first dollar, you should rethink it. A first-time founder has a better chance of winning the lottery. Scale the product way back. Break it down into small, doable stages.

An offshoot of this folly is over-engineering the product, or trying to build the end-all, be-all platform or user experience for the first version. When first-time founders with big ideas fail, it’s usually because they tried to do too much. Start small. Get a foothold then expand on it. Resist the temptation to jump too far ahead. Get to market ASAP with MVP, then innovate, iterate and optimize as fast as humanly possible.

11. No sense of urgency; no accountability.

Have you ever met someone who is working on a startup and when you see him several months later, he is essentially in the same place? No product. No customers. Still working on it.

I see this a lot. This is probably because the founder is also suffering from Folly #3 or #5 but doesn’t know it.

Speed is one of the few weapons a startup has. Not moving quickly is an early warning sign that the startup will likely fail (or has already failed).

The only way to make it as an entrepreneur is to have a “sprint mentality”. Meaningful and measurable milestones should be set each month. This is especially true of founders who have co-founders and other team members. Not holding yourself and everyone else accountable to the weekly tasks needed to achieve the milestones is gross incompetence…sheer folly. You might as well just call it a hobby, not a business.

12. No peer group; no community of like-minded and connected people.

This folly is counter-intuitive to most first-time founders. They believe in the lone-wolf myth. Entrepreneurs don’t flock, they have been told, they soar. Who needs a peer group? Some first-time founders think they are their own best counsel. Plus, other entrepreneurs might want to steal their ideas! See Folly #1.

In fact, a 2019 study by the SBA found that entrepreneurs who join a peer group, or go through an accelerator, are more likely to raise capital, attract employees and advisors, than those who do not. They are called “accelerators” for a reason. When you join one, you become part of the local eco-system…the entrepreneurial community. This is something seasoned entrepreneurs learned a long time ago, which is why so many successful entrepreneurs’ mentor for one or more accelerators to “give back” (Yours Truly included).

Going it alone as a first-time founder is sheer folly. You don’t have time to make and correct all the mistakes a peer group or accelerator will help you to avoid. Every founder you meet has at least 100 good connections who could be your customers, partners, investors or team members. If you have 10 founders in your peer group, that gives you immediate access to 1,000 human resources.

13. No beta customers, or the wrong beta customers.

Too many first-time founders develop their products in a vacuum. They think they know what customers want, because it’s what the founder wants. Then they get bummed out when they launch the product and no one buys it. This is what the whole `Lean Launchpad’ movement is all about.

To achieve product-market fit, you need to talk to lots of potential customers BEFORE you build. You should have beta customers lined up to test your product and provide honest feedback from Day 1. Give it away to beta customers if you must.

Building and launching a product that has not been vetted by real customers is sheer folly. A waste of precious time and money. You also need to make sure you have the right customers – those that fit the profile of your target market and are willing to pay for it when it is ready for prime time.

14. Sketchy business model.

This is not a fatal folly, but often overlooked by first-time founders. The ultimate business model might take some time to test and flesh out. That’s okay. You should at least have some high-level assumptions about how you will make money. What will it cost to make your product? What will you charge for it? How much revenue is possible over the next 3-5 years if all goes well? Is revenue recurring? What will it cost to acquire customers? Are you building a $1M a year business or a $100M a year business?

Don’t overlook expenses that can creep up on you, like shipping, taxes, tariffs, and merchant credit card processing fees. Be conservative with projections and factor at least 25% cushion for unknown expenses. Writing a basic business plan with financial assumptions and forecast is advisable.

15. Unfocused or focused on the wrong milestones and tasks.

What matters most in a startup is what gets done. After the thinking, brainstorming, researching, and planning (which are in themselves things that need to get done), rolling up your sleeves and working on the right things in the right order is what moves you forward. You need to advance the ball every week. Perfect is the enemy of good enough. Knowing how to prioritize tasks and manage your time and other’s time, is a critical skill of all successful founders. A good founder is above all else a good task master.

When meeting with a first-time founder I will often ask, “So what are you working on this week? What are the three most immediate and important things you need to do?” Most of them can not answer this question. They mumble a bunch of meaningless things that tell me they have no clue about what they should be working on.

There are two primary goals which should drive a first-time founder’s task list each week:

1. Finishing and launching a Minimum Viable Product (MVP), or

2. Getting customers and revenue.

Anything that needs to get done that does not directly advance one of these two goals should be delegated or outsourced. Alternatively, knock those other things out very quickly so you can focus substantially all of your time on the goals that matter. Time is the only thing in life that makes everyone on the planet completely equal. To win, use your time more wisely than your competitors do.

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So that’s my short-list of first-time founder follies. There are a bunch of others. If you are a founder that has fallen victim to other follies, or a mentor that sees others being repeatedly made, feel free to list them in the comments.

We all get derailed by follies from time-to-time. The most accomplished entrepreneurs are no exception. They just have fewer follies and correct them quickly so that none are fatal. 

The Startup Founder Imperative: Balancing the Important with the Immediate

The startup founder imperative is to decisively act on what’s most important and most immediate each week. What’s important and what’s immediate are two very different things. These two decision-drivers also change dramatically at each stage of the venture’s life cycle.

For example, what’s most important and most immediate in the conception stage (finding Product-Market Fit while avoiding confirmation bias), is very different than what is most important and most immediate in the MVP stage (getting to market quickly and getting honest customer feedback while avoiding feature creep, so the next best iteration can emerge).

A whole new level of trade-off decision-drivers then come into play in the funding and early-growth stage; then another whole set in the scale-up stage; and yet another completely different set in the profitability stage.

Few startup founders meet the imperative at each stage because they aren’t taught how to appropriately categorize the Important versus the Immediate.

“You will have two kinds of problems: The Urgent and the Important. The urgent are not important, and the important are never urgent.”~ President Dwight D. Eisenhower

SIDENOTE: Full credit to Dwight Eisenhower for drawing the distinction between the important and the urgent. I substitute the word “urgent” for “immediate” because I believe there is a practical distinction in emphasis. Urgent implies crisis-mode. When your job entails making life-and-death decisions and your actions have global consequences, then those problems are certainly urgent. When you are the founder of a startup, your problems are less severe, and your decisions and actions are unlikely to have dire consequences. A good founder is not always in crisis-mode, or he or she will certainly fail. Thus, the distinction between urgent and immediate for most startup founders.

So, with that basic definition, what’s the framework for balancing the Important with the Immediate?

As you can see from the illustration below, these two decision-drivers are about PRIORITY and SPEED. It comes down to knowing what problems, issues, and challenges are important — and how fast you should address them. Again, it will depend upon what stage your venture is in, but there are common attributes to consider regardless of stage.

The Important and the Immediate

Not Important and Not Immediate

The lower-left quadrant contains all the things that will be put on the founder’s plate, but their attention or resolution will have little impact on the venture’s success. This is not to say these things shouldn’t be addressed, but that they should be outsourced or pushed out for later.

For example, in the conception stage, a founder shouldn’t be writing a business plan or socializing the idea with investors while it is still unbaked. They shouldn’t be writing code or building product. But too many founders can’t resist doing so and end up working on things that are not important and not immediate at this stage. They are seduced into working on things that simply don’t matter or do so because it’s what they like doing versus what they should be doing.

Attributes of things that are Not Important and Not Immediate:

  • Routine things, administrative details
  • Busy work, fine-tuning and tweaking the unimportant
  • Things that can be canceled, automated, or pushed out
  • Things that can be outsourced because they are not mission-critical

These things are low priority and low speed. Let’s face it, there are a thousand little details involved in building product, operating a legal entity, and working with team members, but many don’t matter in the grand scheme of things. Don’t waste time, money and energy on these things.

Not Important But Immediate

The lower-right quadrant contains all the things that require immediate attention or resolution, but don’t advance the mission or goals of the venture. They must get done, for one reason or another. They can’t be ignored, but most can be dispensed with haste.

For example, in the funding and early-growth stage, a founder will have to deal with all kinds of advice and demands from investors – even after they get the money. Investors will want reports. They will want the founder’s opinion on other companies they are thinking about investing in. The company will need to file certain forms on deadline with regulatory and taxing authorities. It’s sh*t that has to get done right away or may create headaches. It’s easy for founders to be distracted by these things and confuse them as being important. They are not important, but they are necessary. Get them off your plate as quickly as possible.

Attributes of things that are Not Important But Immediate:

  • Things that must be dealt with; often personal (health, family) or important to others (board, investors, employees)
  • The consequences of not dealing with them are Immediate
  • Often created by other people’s drama, crisis or goals
  • Can often be delegated to trusted advisors or management team

These things are low priority but high speed. They should be dealt with quickly; not waste a lot of your time. They require decisive action. They may be important to others, but not to you or the venture. These things should be few or will derail “Your” Important. If you let these things consume you each week, the venture will get off track.

Important but Not Immediate

The upper-left quadrant contains the things you are working for. These are things that advance the mission, achieve goals, implement strategies, and bring you closer to realizing the grand vision and promise of the venture. These are the things too many founders forget. They take their eyes off the prize. Ironically, because they are not immediate and take years to achieve, they are less and less prioritized. The things in the lower quadrants begin to subsume the things in this quadrant.

For example, in the scale-up stage, a good founder should give up more control, empower others with decision-making authority, and ensure the institution of good systems and processes. This transition will impact the culture and bring pressures to hire more people and spend wisely on infrastructure. The consequences of taking or not taking thoughtful, decisive action, on these important issues will not be immediately apparent but will indeed have a significant long-term effect on the venture’s success.

Attributes of things that are Important but Not Immediate

  • Long term goals and aspirations; cannot be outsourced
  • Things that should remain top of mind; never lose sight of
  • Things that should always have high priority and focus; must make progress on each week
  • The achievement of these things brings leap-frog advancement toward the vision

These things are high priority but low speed. They take years to be fully realized. If you lose sight of them or fail to make steady progress on them, investors will lose interest, employees will become disillusioned, and competitors will seize what high ground you have captured. Remember, be driven by what’s important and guided by your values, even though gratification will not be immediate.

Important and Immediate

The upper-right quadrant contains the things a good founder and his or her top lieutenants should be focused on each week. They should be in alignment with the things in the upper-left quadrant but prioritized for quicker decision and implementation. These are the things that matter most and not addressing them quickly will have immediate consequences.

For example, in the profitability stage, meeting the expectations of all stakeholders instills confidence and strengthens the venture’s long-term position in the market. The company may have to lay-off non-essential employees with little notice, or make a quick decision to acquire another company before a competitor does. The stakes are much higher, and the decisions and actions of the leadership reverberate instantly.

Attributes of things that are Important and Immediate

  • Time consuming because the stakes are big
  • Demand immediate attention or the result is paralysis or setback
  • If not addressed with knowledge and diligence could derail the venture
  • Have big impact on stakeholder trust and confidence

These things are high priority and high speed because the venture itself may not survive them if not addressed successfully. These are mission-critical problems and issues. They are gating issues and bottlenecks that the failure to resolve will prevent just about everything else from moving forward properly. In some ventures, they are the defining moments for the founder at each stage: go or no-go; raise or sell; step-up or step aside; hire or fire, etc.

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In summary, no matter what stage a venture is in, the founder’s imperative is to know the most important and most immediate things to work on each week. These things require decisive action, not hope or wishful thinking. They can’t be delegated. Know the four differences between the important and the immediate, prioritize them accordingly, then decide and act. Don’t be derailed by the Not Important, especially the things that require immediate attention. Prioritize and focus on the truly important.

10 Guiding Principles for a Healthy and Sustainable Startup Community

Startup businesses are the life blood of every region they operate in. They create new jobs. They replenish jobs lost to technological and economical changes, and to the retiring work force. They attract talent into the region. They keep youth from leaving the region and provide opportunities for them to return to it.

Startups are the instrument of innovation and vision, and the engine for growth and prosperity in every region where they flourish.

So why then do so many startup communities struggle? From my experience, the main reason is because the participants have no common vision; no guiding principles of a healthy and sustainable startup community.

To address this shortcoming in full, I encourage you to read #BradFeld’s book, Startup Communities, and his new book, #GiveFirst: A New Philosophy for Business in The Era of Entrepreneurship. My purpose here is not to duplicate those works, but to summarize and build on the core principles Feld espouses, based on my own experiences working in startup communities in different regions of the United States.

My startup journey started in the coastal plains of Virginia, then took me to Eastern North Dakota, the Twin Cities of Minnesota, Seattle, Silicon Valley, South Florida, and now…the Gulf Coast of Florida. Yes, startup communities flourish everywhere — even in North Dakota.

Over three decades I started (or joined) nine startups and affiliated with hundreds of others as an angel investor, board advisor, accelerator mentor and startup resource provider. I’ve learned a thing or two about healthy startup communities versus those that are indifferent, or even hostile, to startups.

For those not steeped in Startup Community dynamics, allow me to first define what a Startup Community is and what it is not.

A ‘Startup Community’ is not a town, a city, or even a county. A Startup Community is not defined or limited by geographical boundaries. A Startup Community is self-selecting by the practicing and aspiring entrepreneurs that live in and around it. It usually includes multiple counties and is connected by interstate corridors like I-29 in Eastern North Dakota; I-95, I-75 and I-4 in Florida; I-5 and I-405 in Seattle; and the 101 and I-280 in Silicon Valley.

For example, when most people read or hear about the South Florida Startup Community, they think Miami. Some national publications even refer to this community as the ‘Miami Entrepreneurial Hub.’ In practice, the South Florida Startup Community extends to Fort Lauderdale and Boca Raton and all the smaller towns and cities that surround those larger cities – connected via the I-95 and Florida Turnpike corridors. The participants, especially the entrepreneurs and angel investors, do not limit themselves to one city or county.

Therein lies part of the problem because some participants in the startup community, like those affiliated with a university or municipality, do indeed try to limit participation to their geographic or institutional domains. That can cause friction and is one of the reasons why some Startup Communities struggle. Those within the community are trying to compete with one another and are working at cross purposes. This is much less of a problem in South Florida today than when I first arrived there in 2013 — thanks to good leadership.

A healthy Startup Community is a collection of interconnected organizations, programs, people and resources that collaborate and support innovations and startup businesses within the community, without regard to specific geographical or institutional boundaries.

With that foundation, allow me to suggest 10 Guiding Principles for a Healthy and Sustainable Startup Community:

1. No one owns or controls the community.

A healthy Startup Community is not controlled by city or county economic development agencies, university entrepreneurship or innovation programs, co-work spaces, independent accelerators, Meetup groups, venture capital funds or angel investors. Communities struggle when well-meaning but shortsighted people and organizations violate this principle. Startup entrepreneurs and those who invest in them do not want to be restricted or beholden to any one group. The community spurns those who have a zero-sum, ‘winner take all’ mentality.

2. The community is open to all who want to participate and contribute.

A healthy Startup Community welcomes all who want to participate in a positive and constructive manner. It does not exclude or discriminate on any level – gender, age, education, income, industry, profession, type of business or idea. Everyone has their superpowers. Note, there are smaller communities within the larger Startup Community that are “closed” or exclusive to a specific segment of the population, such as those that are university based, or main street based, or focused on a particular industry – like aerospace, retail or life sciences. But those mission-focused communities readily collaborate and share best practices with the larger Startup Community around them. They strive to support the missions of other groups. Communities struggle when the smaller communities within seek to operate in lieu of, or at the detriment of, other smaller communities trying to help startups.

3. The community is horizontal, not vertical.

A healthy Startup Community provides inspiration, support and resources across the spectrum of ideas, innovations and industries. Communities struggle when they have a bias for a certain sector or type of entrepreneur or startup. This usually plays out when a certain agency, business lobby or investor group pushes the community to give attention to some types of startups at the expense of others. This is a bad idea because it’s impossible to know where the good ideas are going to come from. A healthy Startup Community feeds all ideas and goes where ever it wants to go. It does not need to be told or directed where to go or who to support.

4. Entrepreneurs lead the community.

A healthy Startup Community is led by practicing entrepreneurs or those who cashed out successfully and are now investing in the next generation of entrepreneurs. Communities struggle when they are led by bureaucrats, non-profits, academics and retired corporate executives with no significant entrepreneurial experience. As Feld writes, “There are leaders and there are feeders.” The feeders are very important to the community, but the community must have leaders who know how to start, finance, build and sell a business – because they have done it – preferably at least twice. You can always tell a struggling startup community by its lack of participation by successful entrepreneurs.

5. Mentors and supporters are altruistic first, invested stakeholders second.

A healthy Startup Community embraces the people and talent who are first and foremost motivated by the desire to selflessly assist entrepreneurs and see the entire community thrive, not just benefit themselves personally. Communities struggle when they are surrounded by people who are there to line their pockets. It’s fine for people to make a living helping startups, or to see a return on investment from investing in them, but those motivations can not be the main thing that drives their participation. For example, in South Florida, the Venture Mentoring Team (VMT) pairs successful entrepreneurs with startup entrepreneurs and prohibits the mentors from getting paid or taking equity for the duration of the mentorship program. As Feld outlines in his new book, #GiveFirst and you’ll get much more later in many ways.

6. Failures, pivots and restarts are celebrated, and the entrepreneurs recycled.

A healthy Startup Community sees failure as an inevitable path to success. Very few entrepreneurs hit a home run on their first time up to bat. Communities struggle when they discard the entrepreneurs who failed to launch or get traction. In fact, most venture capitalists rarely invest in founders who have not failed before. Most startups need to pivot and/or return to square one – sometimes three or four times. A healthy Startup Community helps entrepreneurs to fail fast; to discard bad ideas but recycle the founders. Fail the startup, save the entrepreneur.

7. Seed capital is entrepreneur-friendly, not predatory.

A healthy Startup Community educates both entrepreneurs and angel investors on how to wisely fund startups. The community connects entrepreneurs with experienced startup company legal and financial advisors who have the entrepreneur’s long-term interests at heart. Communities struggle when startup financing is predatory and takes all the spoils or forces the founders into indentured servitude. While ‘Shark Tank’ may be the popular perception of how startups are financed, the most successful communities help structure deals and incentives that handsomely reward investors but don’t take advantage of the entrepreneurs.   

8. Service providers are properly engaged and not allowed to be pushy or trivialized.

A healthy Startup Community properly engages the local service providers in a manner that is good for their businesses but not a waste of time or a distraction to the entrepreneurs. Communities struggle when they are dominated by local service providers more interested in “milking” startups instead of nurturing them. Communities also struggle when the opposite is true. Local entrepreneurs so fearful of being preyed upon by every service provider in town, refuse to engage with them at all and ban them from participation. Many service providers are themselves startups and small businesses. Startups need them to grow. A healthy balance between selling and giving is required for the community to thrive. See number 5 above,  #GiveFirst. This balance can usually be achieved with the assistance of good mentors.

9. Innovation and disruption are valued as much as job creation or retention.

A healthy Startup Community supports potential disruptive innovations and value creation even if they may be contrary to some of its local interests. The fact is, some startups may kill-off some local jobs. They may indeed put some local businesses out of business in time. That’s a process known as ‘creative destruction’. In the long run, those startups usually end up creating major economic windfalls for the greater community. Communities struggle when they see those startups as a threat and prioritize short-term job retention over long-term value creation. Likewise, some startups don’t create jobs at all, or may create them overseas. A Startup Community that only wants to support local job creation or retention will eventually lose out to communities that embrace the future instead of the status quo.

10. The community prioritizes acceleration over incubation and weeds out do-nothings and bad actors.

A healthy Startup Community prioritizes acceleration over incubation; scalability over stagnation. Communities struggle when they drain resources on ideas that incubate for years without results and prop up dying businesses at the expense of those prepared to scale. When too many businesses are on life support, the community becomes stressed. If the community is pushed or seduced into being a hospice for sick startups, it will die caring for them. A healthy community will separate the talkers from the doers. It will also weed out the bad actors who are taking without contributing or preying upon the startups. A healthy community will cleanse itself of invasive species trying to infect the ecosystem.

Summary

These 10 principles have been proven to create and sustain healthy startup communities throughout the world. They are not mine or Felds or any champion of entrepreneurs. They belong to the community…every community. If you don’t like them, or they don’t apply to the community you are working to build, then by all means put forth your own principles. Then articulate them to all who want to participate. It’s important for all the participants in your startup community to know what it stands for. 

May you create a healthy and sustainable Startup Community!

Seal the Deal by Learning What People Value

Early on in my career I was sent on an important sales call alongside two senior sales people. 

Tom was very confident to the point of cockiness. He had deep sales training learned at Xerox. He carried himself with authority. 

Rick was an “aw shucks” kind of guy raised in the hills of Northern Virginia. He had no formal sales training. He slouched when he walked, had a weak handshake, and always seemed to have a silly grin on his face. 

As for me, I had no clue what I was doing, but hoped to pick up a few tips on how to sell our services. 

The prospective client was the VP of Marketing at a big bank. He controlled a budget that would easily make our quota for the entire year, if we could win his business. Tom had spent months trying to get this meeting with him. He was the lead dog and launched into the pitch after exchanging a few pleasantries. 

Tom’s pitch followed a format he had learned at Xerox: SPINS

Situation – have the prospect explain the current state of things at his company.

Problem – identify the major problems and challenges their situation posed.

Implication – play back to the prospect the implications of not solving these problems.

Need – set up the close by reiterating the prospect’s needs.

Solution – propose our solution as the best way to fill the need and solve the problem.

Tom was very good at this sales methodology. He was one of the top sales guys at Xerox, which is why my company had hired him away. But for whatever reason, the bank VP of Marketing seemed unimpressed, if not down right bored. He was ready to end the meeting and dismiss us, when Rick spoke up.

“Mr. Owens, you played football at UVA, no?” 

The banker perked up. “Yes, how did you know that?” 

“Well,” Rick said in his ‘aw shucks’ southern drawl, “I thought I recognized you, plus I saw the football there on the stand in your glass case. I went to Tech and you guys thrashed us in those years.”

The banker smiled broadly. “Yup, those were good years. Not doing so well these days.”

“Yeah, well, you gotta get a new QB. Your coach loves to run the wishbone when…historically, you guys have had more success with the spread offense.”

At this point, Tom and I sat and listened to the two of them dissect the UVA offense and agree on what it was going to take to turn the program around. After about 15 minutes, Rick says, 

“By the way, we just won some business at UVA and you might like to see the program we put together for their direct mail campaign to recruit top high school seniors. Maybe we can find you a new quarterback [chuckle]?”

“You guys are running a direct mail campaign to recruit kids to UVA?” the banker exclaims.

“Yup,” says Rick.

“Well, let me get my team together next week. You guys can come in and pitch your direct mail services to them. We are open to changing vendors.”

The following week we show up for the presentation and Rick presents the VP of Marketing with a fly-fishing lure that is supposedly hard to find. The banker goes gaga. I later asked Rick if he was a fly fisherman and how he knew Mr. Owens was one. 

“Nope,” never been fly fishing, “he says,” but I saw a picture of him fly fishing with some buddies, hanging there on his wall.” 

We got the account. Tom went on to have a successful sales career at the company. Rick went on to become CEO.

This experience taught me to mix and match the two approaches with people. Sales methodologies like SPINS do work, because they provide a framework to understand a prospect’s problems and how your solution can help them solve those problems and make more money or save more money – which is what just about every solution is designed to do. But sales methodologies often overlook the decision-maker…their professional and personal needs and wants…and what they value.

In the intervening years I learned that what people value is more important in their motivations and decision-making then just about everything else. It’s especially true if a solution they need or want is but one of several they can choose from. All things being equal, the decision goes to the provider who understands and plays to what the decision-maker values.

Whether I was raising money from top-tier VC’s, recruiting a key employee to join the team, or pitching a big account, my first imperative was to understand what the decision-maker valued as much as what his or her organization needed. 

So how do you learn what people value? It’s quite easy, actually. During the conversation, or with a Google search, look for these giveaways:

  • Are they foodies? What foods (and drinks) do they like? What are their favorite restaurants?
  • What do they read? What channels/news do they watch?
  • Who do they follow and/or admire?
  • Are they religious? Are they political? What religion? What party?
  • What social, political or economic issues rile them up?
  • Do they talk about sports? Who’s their team?
  • Where have they traveled? Where is their favorite place?
  • What are their causes, or hobbies?
  • Where did they grow up and attend school?
  • Do they volunteer, or sit on non-profit boards?
  • What other jobs have they held in their career?
  • Are they married, or divorced? Dating? Are their kids still at home, or off on their own?

In most cases, simply look around their office or home while visiting. People display what they value. What kind of car do they drive? What kind of clothes do they wear? People make a statement with what they surround themselves with. Those things are what they value.

Learn what they value and make a personal connection to those things by reinforcing their significance, and you will seal the deal!

The Power of Trusted Relationships (Podcast)

In this Podcast I share the most traumatic and defining moment of my life as an entrepreneur, employer, friend and father. Hadn’t thought about it in many years, but it came out in this interview and I thought it was worth sharing with you. Some other tips as well for all of you aspiring entrepreneurs.

“Weave your work into the family life and have your kids touch the business in meaningful ways so that they also feel a sense of ownership but also realize that sometimes you do have to disconnect, shut it down, and go on retreat with your family someplace, you have to make time for that”

Listen to the Podcast: https://simplecast.com/s/aa1410db

Getting from Proof-of-Concept to Minimum Viable Product

Most aspiring entrepreneurs start with an idea – hopefully, a BIG idea. They first set out to do a Proof of Concept. This can take many forms, from simple sketches to a rough prototype. Some join a startup accelerator, where they learn how to validate their ideas using methodologies like Lean Launch Pad, and tools like the Business Model Canvas. The dedicated ones do a lot of industry, market and competitive research. They often write a mini business plan and create an investor pitch deck at this early stage.

If they satisfy themselves and others that the idea is VIABLE, usually by demonstrating Product-Market Fit, they then must take a HUGE leap to build a Minimum Viable Product(MVP). Proof-of-concept is one thing, but MVP is another thing entirely. What looks good on paper or sounds exciting in an elevator pitch, rarely proves out in practice. For that reason, most investors won’t seriously consider investing in a new venture until the entrepreneur proves he or she can produce the product and start getting some traction with it.

Most investors will tell you they don’t invest in ideas, they invest in execution. They bet on the jockey, not on the horse. The most important criteria for most investors is MVP with traction.

MVP is perhaps the biggest chasm to cross in an entrepreneur’s journey. In my experience, most don’t make this leap. No matter how promising an idea looks in the proof-of-concept stage, it goes nowhere without a Minimum Viable Product. MVP is oxygen for an idea. It is what brings an idea to life.

There are several reasons why most aspiring entrepreneurs fail to get MVP. First, it typically costs money to build – more money than proof-of-concept. Depending on the nature of the product, this can be VERY expensive. Second, it’s exponentially harder to do. Talking about an idea and researching its potential is child’s play in comparison to making the damn thing. One must also make it in enough quantities to get useful data from a representative sample of the target audience. It’s this data from the MVP that prompts the necessary refinements or pivot. No idea ends up being exactly the thing it was conceived to be.

So….how do you get there? How do you cross the chasm and get from Proof-of-Concept to Minimum Viable Product?

Let’s first agree on what MVP is not. It’s NOT sketches or a PowerPoint or even a functioning prototype. An MVP is at least a small production run that real customers can use without you being present or having to operate it for them. For example, if I can only use your IoT thingy and app with you telling me which buttons to press and which actions to take – and most features don’t work, that’s not an MVP. That’s still a proof-of-concept. In the software world, it’s the difference between alpha and beta.

Having produced dozens of MVP’s for my own businesses and advised hundreds of other entrepreneurs struggling to produce MVP, I’ve learned a few things about how to finance it and how to organize the work that must be done. Here are a few tips:

1. Write a detailed specification.

Too many aspiring entrepreneurs want to skip this all-important first step. Some tell a virtual programmer they hired on UpWork what they want, then are disappointed with the results. If I don’t see a detailed spec, I know I’m going to see a camel when they were promising me a horse. Many “idea-people” do not have the expertise to write a good spec, which is another problem. It pays to contract with a pro to write it. This goes for industrial products and consumer packaged goods as well as for software and content.

2. Determine what size production run is necessary to test your assumptions about customer adoption AND will be a catalyst for securing growth capital. 

This can vary widely depending upon the nature of the product. A B2B product might only require 10-20 installations to validate adoption in the real world. A B2C product might require hundreds or thousands of users who are representative of the target audience. You should be able to solve the equation: If I get X customers to test my MVP it will be enough to validate Y assumptions and, if validated, will allow me to raise Z dollars.From this perspective, a good MVP is designed to start getting traction immediately.

3. Line up enough real-life testers BEFORE producing MVP.

Lots of potential customers will tell you the Proof-of-Concept looks good. Some may even say they would buy it. But FEW will commit to doing so ahead of time. You MUST get these commitments, or the effort will be for naught. Real-life testers (or first adopters) are what you are building the bridge across the chasm to reach. If they are not there when you get there, then you will be crossing the chasm into a great void and your MVP will run out of steam and starve the minute it steps on solid ground.

4. Determine what facility, equipment, tools, materials, human and financial resources are required to build MVP, with a 30% margin of error.

Most of the resources that will be required to build MVP should be detailed in the spec (see step 1). List all the resources, especially the human resources. People are generally the biggest cost and most uncontrollable variable. Nail it down and put a pencil to it. Now add 30%. If your MVP comes in only 30% over budget, you will be doing good.

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Good so far? You know exactly what needs to be built, how many need to be built, who you are building for, and roughly what it will cost and how long it will take? If you know this, you are way ahead of 90% of the aspiring entrepreneurs who have a proof-of-concept. What’s next? Money and execution, of course!

If you are not independently wealthy or can’t convince your rich aunt to lend you the money, you’ll need to raise the capital to build MVP. It’s highly unlikely angel investors will come to your rescue, but not impossible. There are a few groups that invest at this stage – IF the above steps have been completed and your proposition is for a BIG, under served market, or one ripe for disruption.

It’s also possible to raise money from angels and VC’s to build MVP if you have defensible IP (like a patent or trade secrets), and/or have done it before (not your first rodeo) and have assembled a killer team (with a track record in the space). If you have none of that, don’t waste your time on main street angels or VC’s. Do some research to identify “alpha angels.” Most of them are in Silicon Valley.

Here are some strategies for financing MVP:

  • Apply to an accelerator that will pay you to build MVP. There are several of them, but the entrance process is rigorous. Only 1%-2% of applicants get in. Doesn’t hurt to apply. For a list of the accelerators and their criteria, check out https://www.gan.co/.
  • Circulate a simple convertible note among friends and family. If you only need a few thousand dollars – no more than $25,000 – a convertible note is a good option. This is a micro-version of how some angels like to invest in startups, except most angels invest for ROI when the MVP is complete and friends and family invest out of love and support to help you get MVP.
  • Get a corporate sponsor. If your product is designed for a particular type of company, or will give it a significant competitive advantage, some will not only agree to be a tester of the MVP but will also invest. You just have to make them an offer they can’t refuse. Back in the day I worked with a startup that developed one of the first contact management systems (now called CRM). A large corp sponsored their MVP in exchange for some stock and FREE software for the entire enterprise for life.
  • Propose a joint venture or offer equity to the people needed to build MVP. If you are unable to find a corporate sponsor, you can organize a consortium of the key people (or their organizations) for a decent stake in the enterprise. This can be time-consuming and challenging, but I have seen it done successfully numerous times. One of my own MVP’s was a consortium between the company I worked for at the time, a UX/UI designer, a local software development shop, a prestigious law firm, and a major customer. It was a lot of work to organize but paid off handsomely for all.
  • Use crowdfunding or apply to a seed investment platform. Crowdfunding is perhaps the greatest source of MVP development funds in the history of startups. Most campaigns fail because the idea is not properly packaged and promoted. There is an art and a science to it. Retain a specialist with a track record of running successful campaigns. There are also a variety of seed-stage investment platforms. These work differently than mainstream crowdfunding sites. Some specialize in certain industry segments.
  • Beg, borrow, steal, promise and cajole. I know this sounds trite, but it’s the way many entrepreneurs get their MVP’s done. They know exactly what and who is needed, and they don’t take no for an answer. If the idea is powerful enough and the entrepreneur passionate enough, the entrepreneur will find a way to bring the idea to life.

In summary, Proof-of-Concept is only the first, and arguably the easiest step, in a new venture’s life. The entrepreneur must cross the chasm from Proof-of-Concept to Minimum Viable Product (MVP). Most don’t make the leap and their ideas never see the light of day. Getting to MVP as quickly as possible should be the focus of every entrepreneur once the idea is validated. It requires thoughtful, organized work and seed money. These tips and strategies can help you get there. Godspeed!