10 Dumb Things Entrepreneurs Say to Investors

1. We can share our deck and financials under NDA.

(investors don’t sign NDA’s, asking them to do so shows you have no clue what you’re doing)

2. We don’t have any competitors.

(yes you do)

3. We are raising money to build and test our MVP.

(investors invest in product and traction, not in ideas)

4. We don’t have a team, it’s basically just me, but when you invest I’ll find and hire the team.

(investors want to see a core team in place before risking their capital because all the risk is in good execution and that requires the right team from the start)

5. We are pre-revenue and don’t have any pre-orders or LOI’s, but everyone we talk to LOVES the idea.

(if everyone loves the idea then someone should be willing to pay you for it subject to delivery according to spec)

6. We are raising money for salaries so we can quit our day jobs and devote ourselves full time to the idea.

(investors don’t need employees, they need entrepreneurs who believe in their ideas enough to be already fully committed to them and are well on the way to executing on them)

7. The market is HUGE, there is a MASSIVE pent-up demand. Literally, every one will buy this product.

(in other words, you have no idea of the market size, the serviceable market, or the target market)

8. We’re like Google and Twitter, we’ll figure out how to make money after we get millions of users. It’s all about eyeballs!

(no, it’s about making money from day one, not wishing for people to beat a path to your door, or becoming a unicorn)

9. Our primary go-to-market strategy is social media.

(marketing is not sales and social media marketing is but one component of a viable go-to-market strategy that produces and tracks sales)

10. We’re raising $1M at a $10M valuation.

(no investor is looking to risk their capital in the most riskiest of all asset classes for a 10% stake, notwithstanding the fact your valuation is probably insanely rich and can’t be supported with business fundamentals)

GET SMART before engaging with investors. Join an accelerator. Get a good advisor. If you want to be taken seriously, don’t say dumb things or make rookie mistakes. You are only going to get one good shot at enticing investors to look at your deal. Time is money, after all.

Good luck! Join us at http://www.startupbiz.com for best practices, investor pitch prep and introductions.

The Devil is in the Dependencies: Part 1, Startups

You are no doubt familiar with the idiom, “The devil is in the details.” It’s a well-known truism that almost nothing is as simple as it seems. This is especially true in business. Starting, buying, building and ultimately selling a business is almost always more complex than it seems when looking in from the outside. This is ode to another well-know saying, “If it was easy, everyone would do it.”

The details are all-important. Most experts agree that starting and building a successful business to exit is usually the result of doing a lot of little things right, not the result of one big thing going right, unless that one big thing is luck and timing. Sometimes, nothing beats being in the right place at the right time – in spite of yourself – and recognizing it (which is itself an important dependency). But I digress.

The details are important, but not as critical as the dependencies. The devil is in the dependencies.

Details notwithstanding, one of the most important and overlooked aspects of starting, buying, building and selling a business, is identifying and knocking down the critical dependencies.

Many aspiring and seasoned entrepreneurs alike fail to understand the critical role dependencies play until it is too late. The purpose of this piece is to help founders, business buyers and sellers, recognize, prioritize, and knockdown the critical dependencies which stand in the way of their venture’s success. The dependencies, like the stakes, get bigger at each stage of the business’s life cycle.

In Part 1 of this series, we will look at some of the critical dependencies faced by startups. In Part 2, we will look at some of the critical dependencies faced by business buyers. In Part 3, we will look at some of the critical dependencies faced by businesses that are operating and trying to scale. In Part 4, we will look at some of the critical dependencies faced by business sellers in preparing the company for exit and negotiating a successful transaction.

So, what exactly is a critical business dependency?

A critical business dependency is one that threatens the business’s viability, valuation, or growth potential, and whose resolution is often out of the immediate control of the owners.

A business’s dependencies vary based upon the company’s stage. They are always changing. How well they are identified, managed and resolved determine the company’s viability, valuation, growth and exit potential. Let’s examine some of the critical dependencies faced by many startups.

Startup Business Critical Dependencies

One of the reasons startups are hard is because they have so MANY dependencies. All are important, and many are critical to their viability. It’s why so many startups fail. The founders are unable to knockdown the dependencies fast enough to advance the business before the opportunity is seized by others who don’t have the same (or as many) dependencies. Many of the dependencies are beyond the immediate control of the founders. The founders are almost solely dependent on the goodwill, resources, and time frames of others. Namely, prospective customers, contractors and investors.

Ask any startup founder what the critical dependencies are to successfully launch his or her venture and reach profitability, and s/he will likely stare at you like a deer in headlights. Almost EVERYTHING is a dependency. It’s overwhelming and infuriating, which is why you need to be a little crazy or desperate to start a company. It’s impossible to know what you don’t know until you experience it. This is why experienced mentors and investors are critical to a startup’s success — they understand what matters at each stage, the dependencies.

In the most recent cohort I mentor at StartupNOW, these are some of the critical dependencies faced by some of the founders:

1. A warehouse is needed to produce the MVP and is being donated by the landlord for the pilot, but the founder is having difficulty pinning the landlord down to an agreement and move-in date. The launch date and raise continue to slide as a result.

2. Industrial equipment is needed to produce the MVP, but the founder is dependent upon a successful crowdfunding campaign to raise the money to buy the equipment, or get it donated. So far, few people have donated.

3. A technical co-founder and outsource development team is needed to produce the MVP, but the founder is dependent on writing a comprehensive product specification and recruiting the co-founder – with no previous experience in doing either.

In each of these cases, the founders have little knowledge and experience with these type issues and are dependent on the goodwill and time frames of others to knock them down. In addition, they are being distracted with dozens of other tasks others are telling them they “must do”, in addition to maintaining their “real jobs” and generating income to live.

What’s more, in each of these cases, the founder’s have jumped through every hoop, each one progressively higher and smaller, over a six-month period. They survived the pruning gauntlet. They proved product-market fit. They wrote a solid business plan. They incorporated, built a web site and launched social media campaigns. They created pitch decks and presented their ventures to a panel of sophisticated investors.

Now, here they stand, on the precipice of failure. Their critical dependencies threaten to sink all their work, hopes and dreams. And those dependencies are largely out of their control and subject to the whims of others. So, what can they do about it?

Yup, startups are hard.

Key Milestones vs. Critical Dependencies

In my experience, every startup has FIVE key milestones to advance to the growth stage. Each of these milestones is wrought with a series of critical dependencies which must be knocked down to achieve. Milestones are what need to get done. Dependencies are the road blocks that must be overcome to reach the milestones. The five key milestones are:

a. A functioning product or service – Minimum Viable Product (MVP).

b. Customer traction, month-over-month adoption and growth of the MVP.

c. A good team (including advisors), preferably with a track record in the space.

d. A sales/distribution channel to propel the product into the market.

e. Operating capital. Debt or equity.

Smart founders are relentlessly focused on knocking down the dependencies that stand in the way of achieving these milestones.

Strategies and Tips for Knocking Down Dependencies

Here are some strategies and tips for startups facing do-or-die dependencies:

1. Good execution means focusing on the things that truly matter and ignoring or pushing off the things that don’t. The first strategy is to know the difference. Ask yourself every day, “What is the most important and most immediate thing I need to resolve to advance my venture?” Most startups die from distractions. Focus like a laser-beam on the critical dependencies.

2. Confirm with your team and advisors the most important and immediate dependency. Invite them to disagree and debate the gating issue. In my experience working with startups over 30+ years, many are focusing on the wrong things. Don’t debate a long list, agree on THE one or two dependencies. You must resolve A to get to B, and so forth down the line. If X doesn’t happen, we can’t get to Y.

3. Identify precisely WHO or WHAT is required to knockdown the dependency. Communicate the critical nature and timeline to the WHO or frame the steps and deadline for the WHAT. If the WHO wants to hold you hostage, move on, that’s a no-win situation. Most well-intentioned people want you to succeed and don’t want to be the bottle-neck. A landlord, partner, contractor, advisor or investor who enjoys standing between you and your milestones is the WRONG choice, and for some unearthly reason, too many entrepreneurs believe they have no choice but to continue the relationship.

4. Formulate a Plan B. If WHO is unable or unwilling to deliver by the deadline, identify another WHO. Wishful thinking is not a strategy. The only way to rein in dependencies that are largely beyond your control, is to have viable options and then not hesitate to forgo option A in favor of option B.

5. Do not take No for an answer. Do not wait for them to get back to you on their timeframe. Control the timeline. Never, ever, give up. Resolve the BIG, most important and most immediate critical dependency, then go to work right away on identifying and resolving the next critical dependency. Just keep knocking them down. Keep moving forward. Let nothing stand in the way between you and your key milestones.

In summary, achieving key Milestones is the path to success for every startup, and knocking down the critical dependencies that stand in the way of achieving those milestones, is what keeps you on the right path. The devil is in the dependencies. Vanquish those dependencies to breakthrough whatever is trying to stop your startup.

In Part 2 of this series, we will cover the critical dependencies encountered by people who want to BUY a business rather than start one from scratch. Stay tuned…

Raise or Sell? That is the Ultimate Question for Entrepreneurs Running Growth Businesses

Just about every week I get a call from an entrepreneur trying to decide whether to raise another round of capital for his or her company, or sell the company and get out while the going is good. It’s usually an emotionally-charged discussion. There are all kinds of personal considerations that go into that decision, as well as the fiduciary responsibilities to shareholders and employees.

The purpose of this piece is to help entrepreneurs approach the decision dispassionately, by looking at some industry benchmarks and doing the math.

Consider the following chart. Each round of funding will dilute the founders between 20% and 30%. The more money the company raises, the less ownership the founders will have at exit. Each raise needs to increase the value of the company commensurately. This is where the math often falls apart.

Last year I was asked to look at selling a VC-backed company that had raised $10M. The comps and multiples for the deal in the market would support an acquisition price between $12M and $20M, depending upon whether I could attract a financial buyer or strategic buyer. But in any case, after the preferred stock holders (the investors) got their liquidation preferences, there would be little money left over for the founders. This was a no-win for both the VC’s and the founders, based on the kinds of returns VC’s need. The company decided not to sell, but to keep slugging it out in the market and try to raise more money. It hasn’t gone too well and will likely be a total loss.

Conversely, I was recently asked to look at selling a company that had grown revenues 200% in each of the last three years. They have had some seed funding from angels, but no VC funding. The VC’s had now come knocking. It didn’t look like the company would have a problem raising capital if they wanted it. After much debate, the founders decided to sell to one of the bigger players in the space who had also come knocking. I honestly told them I didn’t think I could get much more for it than what they were being offered. They were happy and both walked away newly-minted millionaires after paying off their seed investors.

According to several sources I consulted for this piece, the median level of founder ownership at exit is 11%. The average is slightly higher at 17%. This is consistent with my own experience as a venture-backed entrepreneur.

In most of my deals, my ownership stakes at exit were slightly less than 20%. In each case, my co-founders and investors decided to swing for the fences. We were shooting for $100M+ exits. A 20% stake of a $100M exit is just fine, thank you very much. None of them turned out to be that big. Had we sold earlier and taken less VC money, the founders would have walked away considerably richer.

In his book, Early Exits, Basil Peters points to many examples where selling earlier was far more lucrative to founders and investors than raising capital and waiting longer, hoping for a bigger payout. Just check Forbes and Inc. for stories about founders who made millions on selling their companies for less than $10M – and those that made ZERO after selling their companies for $200M. Go figure.

So, here’s the top-level analysis entrepreneurs of growing companies need to do. Some of it is subjective; most of it is math:

1. What is the company worth if I sold it today, without taking any additional investment capital?

2. How much do I own and how much would I walk away with today, after selling fees, legal fees, taxes, and distributions to the other shareholders?

3. What is the likelihood and time frame for raising additional capital in the current market and what would I have to give up for that additional capital?

Side Note: raising capital is time consuming and will take you away from building the business, so another risk factor to weigh is the impact on the business to raise versus sell.

4. Would that additional capital all but ensure my ability to increase revenues and earnings to fetch a higher valuation than what I would get today, commensurate with the amount of ownership I would be giving up?

5. Assuming I take the capital and execute reasonably well, what is my valuation likely to be in 3-4 years?

Side Note: A good benchmark is a multiple of EBITDA. The larger the company and the better its performance, the higher the multiple. The vast majority of deals I work on are in the lower-middle-market and in the 3x to 5x range.

6. Am I in a growth market, with a unique and sustainable position that all but ensures I won’t be displaced by our competitors or by a new entrant, if I keep playing the game?

To be clear, I never advocate for one decision or the other. I am an investor in several startups and I want them to swing for the fences, not sell too early. It’s a personal decision for each entrepreneur, depending upon their objectives and circumstances, but one that should be made after a fair and dispassionately analysis. It’s not how much the business is worth, or could be worth, that matters. It’s how much you get to walk away with to start your next chapter. Here’s to your successful exit!

What’s the Risk Someone Will Steal Your Startup Idea?

Of all the things aspiring entrepreneurs have to worry about, the one that seems to worry them the most is someone stealing their idea. It’s an understandable but largely unfounded fear. After all, if it is truly a great idea, then everyone will want it. It’s a sure bet, a big money-maker. Unscrupulous entrepreneurs and would-be competitors alike will certainly steal it, no?

Not likely.

What stokes this fear are the stories people hear about others who were robbed of fame and fortune because someone ran away with their big idea. It does happen, but it’s very rare. Just about everything is a twist on something else – there is nothing new under the sun, so it’s easy to conclude someone stole an idea when they simply found a different path for making a similar idea a reality. How many times have you seen a new product and exclaimed, “I had that idea five years ago. They stole my idea!”

Ideas are nothing more than possible solutions to problems that many see and some are already working to solve.

Most ideas are not new, and very few are stolen. When you hear about foreign or corporate espionage, its not ideas that are stolen, it’s real products, or technology. The Chinese don’t knock-off ideas, they knock off real products that already have a market.

For the uninitiated entrepreneur, realize that an idea in-and-of-itself has no value. As we teach newbie entrepreneurs at the various startup accelerators I mentor for, “nobody cares about your stupid idea.” Ideas are a dime dozen, even billion-dollar ideas.

An idea is like oxygen. It’s a catalyst. It’s the spark, that when combined with certain other elements, creates a reaction. Some reactions fizzle and others explode. How you create an explosive reaction is what you need to worry about protecting.

It’s what you do about your idea…what you make it into, that counts. For your idea to have value, and perhaps more importantly, for it to be protected under law, you must create Intellectual Property (IP). Ideas can not be protected. IP can be protected. What is IP?

  • The name you give your idea.
  • The research you do to validate it.
  • The logo and tag line you use to brand it.
  • The domain name and website people use to learn about it.
  • The specifications and diagrams created to build it.
  • The code or physical components that embody it.
  • The business plan you write and pitch deck you create to fund it.
  • The processes under which it is produced, packaged and distributed.
  • The strategies used to price, market, sell and support it.
  • …and a host of other unique actions.

All of these “actions” can be protected by copyright, trademark, patent, trade secrets, and other forms of intellectual property protections.

If you ask me what I think the risk is that someone might steal your idea, I will ask you how much intellectual property you have created. If you say, “none,” then my answer is “zero.”

It is the actions you take to create positive reactions among those who will buy your idea that has value. This is what some people might want to steal. This is what you need to protect. No one can steal your idea, but they can take actions that create different reactions. They can execute on a different or better version of your idea.

The ultimate value of an idea is directly proportional to how well it is executed.

So, let’s talk about execution and how to prevent your idea from being stolen (or misappropriated) along the way.

First, you have to get over the whole notion that you can’t talk about your idea. Get it out of your head. You should tell anyone who will listen. Your only chance of creating a reaction and turning your idea into a viable business, is to get as much feedback as possible, especially from those who might want to buy it.

The feedback you get is the first intellectual property you create. It will inform and guide you. It will tell you if your idea is viable (it probably isn’t in its raw form) and what should be done to make it viable. You use this feedback to ask more questions, to test your assumptions, to refine…but you DON’T need to tell everyone what you learned from that feedback – what will likely work and what won’t likely work. It’s not your idea, but the data you collect about what people really think about your idea, that you should protect.

Second, realize that someone, somewhere, is probably working on a very similar idea.There are no truly original ideas. Every idea builds on other ideas and the problems they created. Many, many people see the same opportunity that you do. The difference between you and them is what you each do about it. Most people do nothing, they just talk about it, or conversely, they do nothing, tell no one, for fear that someone will steal their brilliantly stupid idea.

The prototype, strategy, plan and partnerships that you create to bring your idea to life is the second intellectual property you create. It’s not the what that matters, it’s the who and the how. Never tell anyone the “how.” The unique insights you gain from researching, interviewing, surveying, testing, and constantly iterating, are priceless. It’s very difficult for someone to steal the “how” unless you are careless.

Third, it is prudent in some situations, with certain parties, to use a non-disclosure agreement. I’m a fan of an NDA in the right circumstances. But again, only when doing a deep dive on the how, not the what. Investors won’t sign NDAs and neither will most corporations with a dog in the hunt, unless the discussion is about them partnering with you, buying in, or buying you out. (Note: There is a science to structuring these types of NDAs. A good business or IP attorney can guide you.)

And remember, an NDA is worthless unless you can successfully prosecute those who violate it. Unscrupulous people and companies (especially those in certain overseas jurisdictions) will sign your NDA all day long, because they know you can’t do squat about it. Always know who you are doing business with. The people I confide in about my brilliantly stupid ideas are never asked to sign an NDA. Their word and a handshake are golden and worth more than any piece of paper I could ask them to sign.

Fourth, IP is best preserved and protected when it is “owned” by a legal entity. If you move forward with your idea, and as you start creating intellectual property, you should incorporate and assign all the IP you and your associates create to the company. As you create and circulate documents, put the © symbol on everything, all rights reserved. As you hire contractors to do work, or even brainstorm, make sure they have signed a “work for hire” agreement that assigns their work product to your company.

Fifth, investors don’t invest in ideas. There is a myth around Silicon Valley entrepreneurs who pitch VC’s an idea on the back of a napkin over sushi and walk away with a million-dollar check to go develop it. Ha ha, jokes on you. Never happened. As one who has raised millions in venture capital in the Valley, investors there and everywhere do not invest in ideas. They invest in functional prototypes (MVP), experienced teams, letters of intent from real customers, and good business plans (though they don’t call them business plans anymore because that is “uncool” in the Valley these days, but essentially that’s what they are – a clear plan for how the team will execute on the opportunity).

Sixth, once you reach a point where you get a “reaction,” and you are confident you have developed the raw idea into a viable, sustainable venture, seek the counsel of a good IP attorney. A good IP attorney will help you file patents, trademarks and copyrights. S/he will instruct you on how to maintain trade secrets, and how to onboard employees and contractors with an IP Assignment Agreement. S/he will help you navigate interest from investors and corporate partners.

In summary, your idea has no intrinsic value, and no one will steal it. But they might execute on their own version of it. Get busy creating intellectual property around the idea. That’s how you protect yourself and that’s how you cash in on your idea.

The Two Most Important Factors in Building a Sustainable Business and Maximizing Valuation at Exit

There is no lack of startup business models. My friend and colleague, Dave Parker, writes about business models and their trade-offs. He taught me most of what I know about choosing the right model. In fact, it wasn’t until I took his course at The Founder Institute(Seattle) that I realized I spent 10-years of my life building a business that had a sub-par model. Dave describes 22 different business models in this piece: Startup Business Models

It should come as no surprise that the easiest business models to implement provide the least opportunity for building a sustainable business and realizing a high valuation at exit. Many aspiring entrepreneurs gravitate to these models because the cost to entry are low. Yet, when it comes time to exit, they are often shocked at how low their business is valued by shrewd buyers.

The smart entrepreneur understands these nuances from the get-go.

There are two very important factors that determine how sustainable a business will be in the long run and how attractive it will be to buyers when it comes time to sell:

1) Owning the Customer Relationships, and

2) Controlling the Money

Seems obvious, right? So why do so many aspiring entrepreneurs launch businesses that fail to do this? As I said, it’s because they are easy. The barriers to startup and growth are low, but the underlying value drivers are weak. This is especially true in the age of digital media and eCommerce.

Consider the matrix below. In which quadrant does your startup or idea fall within? If you own the customer and control the money, you have the best business model. If you fall within any of the other three quadrants – and many startups do – you may find it a challenge to raise investment capital or fetch a high valuation at exit. Let’s explore the tradeoffs.

Doesn’t Own the Customer: Doesn’t Control the Money

This is the most prolific business model in the age of the Internet. It is driven by Google AdWords and Affiliate Marketing. Entrepreneur launches a web site or mobile app. S/he creates unique content and builds a following. S/he monetizes the site with AdWords (or other advertising system) and gets paid a revenue-share through affiliate marketing (like having an Amazon Bookstore). In all these cases, Google and Amazon (and their like) own the paying customer (the advertiser) and control the money. The business is dependent on the ad-sharing and affiliate commissions – mere scraps in most cases.

I know some businesses that generate hundreds of thousands of dollars with this model. More power to them, but these businesses are not sustainable and can’t be sold at a high valuation unless and until they change their business model. Go on Flippa.com, for example. You will see thousands of these businesses and can buy most of them for a pittance.

Controls the Money: Doesn’t Own the Customer

These models include certain aggregators, lead generation businesses, marketplaces, exchanges, and payment processing gateways. They are classic “middle men” taking a cut between buyers and sellers. They typically collect and disperse the money between the parties, but they don’t own the relationships. Its nice to ‘follow the money,’ but money comes from customers, so if you don’t own those relationships, it can dry up quickly.

I ran a business like this, I know the model well. At iCopyright, for example, we processed reprint and eprint licensing transactions. We controlled and dispersed the money, but the agreements were between the publishers and the users. The publishers owned the customer relationships. The fact we held the money before taking our cut and distributing the balance to the publishers, made us attractive as an acquisition target for certain other aggregators, but at a low valuation. The challenge with all middlemen is they are replaceable, so the long-term sustainability of these businesses is questionable.

Owns the Customer: Doesn’t Control the Money

So, these models are on the other side of the aggregator, lead gen, marketplaces, exchanges, and payment processing gateways outlined above. Some middle-man takes and disperses the money, but the business owns the customer relationship. The problem with this model is the business can often wait a looong time to collect the money. And how do they really know they are getting what they are due?

I recently booked a hotel room at Marriott through what I thought was Marriott reservation central. Turned out it was a third-party booking agent that had created a reservation site that looked a lot like Marriott’s direct booking site. When I checked in, Marriott informed me I owed them for the room I had already prepaid for. Turns out, the third-party booking agent went out of business and, snap, just disappeared overnight. Of course, I told Marriott it was their problem, not mine, and because they owned the relationship with me they had to make good on it.

Owns the Customer: Controls the Money

This is the way business used to be done – before the Internet and e-Commerce. It’s still the best business model. These businesses own the relationships with all the customers and collect the money directly from them. No middlemen. No over dependence on advertising, affiliate marketing, lead generation, and marketplaces. These businesses are the most sustainable and fetch the highest valuations when they are ready to exit.

Don’t get me wrong. I’m not advocating a startup by-pass these other models. They have their place. Even well-established businesses leverage them. They just don’t abdicate their core business to them. Use whatever model you need to launch. Get a foothold, then adjust. If you want to build a sustainable business that fetches a high valuation at exit, own the customer relationships and control the money!

How to Create a Thriving Startup Ecosystem: 5 Tips for Leaders and Feeders of Entrepreneurial Communities

A lot has been written about entrepreneurs and what makes them successful.

A lot has been written about startups and why so many of them fail.

Less has been written about entrepreneurial communities and what it takes to create a thriving startup ecosystem.

I’d like to bridge these topics and share with you five very important drivers of entrepreneurial success, which I believe are often overlooked or misunderstood, by startups and the communities that support them.

To be clear, when I say entrepreneurial communities, I don’t mean towns, or cities, or even counties. Entrepreneurial communities are not defined or limited by geographical boundaries. They are a collection of interconnected organizations, programs, people and resources that collaborate and support innovations and startups within the community. South Florida is an entrepreneurial community in the same way that Silicon Valley is an entrepreneurial community. No one can say precisely where those boundaries start and end.

There are communities within communities, like those that are university based, or main street based, or organized around a particular sector, like retail or life sciences. Some of these communities are open and some of them are closed. But I am getting ahead of myself. Back to the five important drivers of entrepreneurial success. What are they, why are they important, and why do I believe they are overlooked or misunderstood?

The first driver is…

SPEED

Most Entrepreneurs know how important speed is – they are indoctrinated with the notion that speed is everything. It’s a race…be first to market…when you get a lead, stay ahead of the pack. Run! Run! Run! “It’s not a marathon,” they chant, “it’s a sprint!”

Entrepreneurs and their mentors like to recite the parable of the Gazelle and the Lion. They hang it up as a poster in their offices; they post it as a meme on social media.

You are no doubt familiar with this famous parable:

Every morning in Africa, a gazelle wakes up. It knows it must outrun the fastest lion or it will be killed. 

Every morning in Africa, a lion wakes up. It knows it must run faster than the slowest gazelle, or it will starve…

…it doesn’t matter whether you’re a lion or gazelle – when the sun comes up, you’d better be running.

Run! Run! Run!

Speed! Speed! Speed!

Eat or be eaten! That is the law of the jungle and a rule of the entrepreneurial community.

But speed alone does not determine whether the startup will eat or starve. When the Lion is just as fast as the Gazelle, another critical factor comes into play. During the chase, speed being equal, what determines if the Lion will catch the Gazelle, or if the Gazelle will get away?

Driver number 2…

TIMING

In the heat of the chase, if the Lion zigs when the gazelle zags, the lion will lose his footing; he will break his stride, and the gazelle will get away. At the critical moment when the Lion pounces, it only has one possible trajectory once it commits…once it is in the air. If the gazelle zigs or zags at that critical moment, the lion will miss its mark and the gazelle will live another day.

The entrepreneur is obsessed with speed, but often fails to account for timing.

Back to the marathon vs sprint analogy. Even if you are running a marathon, not a sprint, if you break out too soon you will run out of wind and lose the race. If you wait too long to make your move, you won’t catch your competitors and will lose the race.

In my humble experience, every startup should be run like a marathon, with intense focus, a sense of urgency, and a well-honed instinct for timing.

So, we see that both speed and timing are crucial drivers for entrepreneurial success; for whether you will live or die as a startup.

Now, what shifts the speed-time paradigm? What is the game changer in any startup scenario?

Driver number 3…

TECHNOLOGY

Neither the Gazelle or the Lion can outrun a bullet fired from a high-powered rifle with a good scope.

It does not matter whether you are the predator or the prey, the chaser or the chased, when technology comes gunning for you, you will lose no matter how fast you are and how good your timing is. You’re a lion or a gazelle, a corporation or a scrappy startup, technology does not discriminate. You are just out there one day prancing on the plains, enjoying the weather, nibbling on some bushes, frolicking with your mates…and…zippppt! A Bullet rips through your heart. You’re still walking, but you’re dead and you don’t know it.

You were oblivious, you probably didn’t even see it coming, but even if you did, you dismissed it. You saw it and concluded, “that doesn’t pose any threat to me…it’s irrelevant, it’s too far away.” You underestimated the unrelenting pace of change. You can’t outrun change, and it’s damn difficult to time if you are on the wrong side of it.

Technology is the game changer. It shifts every paradigm. Every startup and every entrepreneurial community needs to be on the right side of technology — and more specifically, adopting the right innovations. They need to embrace and leverage technology. They need to put it to work for them, not let it be used against them.

If you are not on the right side of technology, you will be road kill.

Take Uber for example. They created an awesome platform, but they did so by adopting and leveraging the innovations and technologies pioneered by others – smart phones, cloud infrastructure, high speed bandwidth, GPS and Geo-fencing technologies. It is the combination of leading edge, best-in-class innovations, PLUS a startup’s own unique adaptations of those technologies – that make a startup successful…that give it lift and momentum.

And here’s the crucial thing….

…after the startup finds a market, after it gets traction, it must have the courage to keep on innovating; keep on embracing the right trends and technologies. This is where many successful entrepreneurs eventually go wrong. Every successful startup becomes a successful business – a corporation. The entrepreneur matures into a corporate executive. He ceases to be an innovator and becomes a fortifier – driven to protect the franchise he built. He stops becoming the change he created and starts defending against further changes. He stops innovating. He gets lazy. He takes his position for granted.

Ask anyone who leads a corporation, and they will tell you they are under assault. And it is NOT from other corporations of their own size or makeup, or from government regulation, or overseas competitors. Those threats are predictable and manageable. They are under assault from a never-ending stream of aspiring entrepreneurs who have joined entrepreneurial communities; who are collaborating in co-work spaces; who are out innovating them – who are intent on replacing them…on becoming the next generation of corporations.

In the 20th century, the average Fortune 500 company was expected to stay on the list for 60 years. Today, their life expectancy is less than 15 years. There are companies on the F500 today that did not exist 10 years ago and will not exist 10 years from now. This combination of speed, timing and technology has dramatic implications for every startup, the people they employ, and the communities that host them.

So, to be a successful entrepreneur, you must master speed and timing, but you must also master technology – you must embrace continual innovation. You must be willing to tear down what you have built, disrupt yourself, put your own products and services out of business, in favor of all new products and services.

Why is Apple still in business today, when so many other computer and software companies have come and gone? How is it that Apple is still here?

·       Elegant, modern design

·       Non-stop Innovation

·       Creative destruction

·       The courage and ability to reinvent themselves over-and-over…

…to kill-off their own products and services and place bets on all new lines of business; to capitalize on the latest innovations.

Don’t be the entrepreneur buying out your neighbor’s farm, so you can expand your horse and buggy business, when Henry Ford is in town building automobiles — and an assembly line to mass produce them.

This leads me to the fourth driver of entrepreneurial success…

SCALABILITY

Every startup must be designed to scale, or it is doomed to fail. We can all debate what scale means, but we can all agree the essential ingredient is growth. Life is wired that way. It’s in the cosmos and in our DNA. Like the universe, great startups are born with a BIG BANG, and they keep expanding. You are either growing, or you are dying. A startup is constantly learning and improving and pushing itself to get better, or it is in a state of atrophy.

The problem with some startups is they don’t scale. The problem with some entrepreneurial communities is that they spend all their time and resources on caring for those in atrophy – who are dying a slow and miserable death – instead of empowering the accelerators and startups that are designed for growth. You can’t do both well.

If your entrepreneurial community wants to be a hospice for startups, it will die caring for them.

In Silicon Valley, the community is merciful. They call it “Fail Fast.” When I was raising venture capital for my startups there, they never asked me about my successes. They wanted me to talk about my failures and what I had learned from them. They wanted to know how I was going to grow my new startup. In fact, most VC’s will not invest in an entrepreneur who has not had some failures. Experience and growth through failure is the entrepreneur’s calling card. It’s a badge of honor.

In my humble opinion, most communities don’t fail their startups fast enough – and they punish them when they do fail. Instead, most communities nurse them along, keep them on life support. That is not mercy, that is cruelty! The entrepreneurs in some communities have been taught not to fail, or the community will banish them. Some of the organizations and programs in the community are afraid to have failures, because they think it will tarnish their reputations and threaten their funding. Neither the entrepreneur nor the community can win with that mentality.

You may say, Mike, that is unfair. Every startup deserves our care and feeding, even though they haven’t proven their value proposition or ability to execute. Every main street business is worthy of our attention, even though no one wants to patronize them anymore and they don’t scale. After all, it is the duty of every community to support all businesses equally, especially local businesses.

To which I say, “Nothing will suck the life out of an entrepreneurial community faster than startups and main street businesses that don’t scale.” A bullet has already ripped through their heart. They are the walking dead.

Every business today, even the main street business, is a scalable business by default. We live in interconnected economies – some are regional, and some are global, but NONE are local. The local restaurant that has a secret recipe for a great barbeque sauce, sells that barbeque sauce in every Publix in Florida. The local t-shirt shop with its own designs, sells those t-shirts globally on Amazon, Facebook, and their own e-commerce web site.

For example, when I was growing up in Cocoa Beach, Florida, I worked summers at a little local business called Ron Jon’s Surf Shop. You may have head of it. They had one shop. Today, they have a MALL and stores all around Florida and in other states. They sell a ton of product online. I’ve traveled all over the world and it never ceases to amaze me, walking down the streets of Paris or London or Sydney – somebody will walk by me wearing a Ron Jon’s T-shirt. I smile and think to myself with great pride, that’s my home town. You go, baby!

My point is….we cannot nurse dying startups or main street businesses at the expense of fueling the visions and the opportunities which will create the future – the jobs, the growth, the new wealth. And the future belongs to those who scale. It belongs to startups who are creating that future and to the communities that are empowering them.

This leads me to the fifth and final driver of entrepreneurial success…

COMMUNITY

There is this great myth around the entrepreneur as a lone wolf…a soaring eagle. They are misfits and geniuses and renegades that go it alone. They have no choice but to blaze their own paths. What a bunch of B.S! Nothing could be further from the truth. Just look at Silicon Valley. Why is it so massively successful? Why do they produce so many great entrepreneurs and startups that become household names? Are the entrepreneurs there smarter, and more creative than entrepreneurs in other places? Of course not! They are successful because of the community.

Let me make the point in a different way.

Every week I drive Alligator Alley. I live and work on both the gulf coast and the east coast. I am constantly on the alley – I know every mile like the back of my hand. A few weeks ago I was coming over from the gulf coast to teach for StartupNOW at Broward College. I am cruising along as always, at the speed of traffic, about 80, 85 miles an hour. All of a sudden, I’m blowing by the other cars. The other cars that were pacing me start falling back. Naturally, I brake to match their speed and fire up my Waze app to see what’s going on.

Sure enough, Waze tells me there are troopers running a speed trap about 10 miles ahead. Most of the other cars on the road obviously know it as well. This is the community – the wisdom of the crowd – the users of data and technology – empowering each other. We all slow down to the speed limit. We are informing one another of imminent danger.

Right about then a car goes whizzing by me – like 90 miles an hour. He’s a lone wolf…a soaring eagle…blazing his own path…not a member of the community. Sure enough, 10 miles down the road the troopers have him pulled over and are giving him a speeding ticket. We all wave to him as we drive by.

Entrepreneurs who are not part of the community go nowhere fast. They run into a lot of speed traps and most of them eventually hit the wall. Smart entrepreneurs use startup WAZE. And startup Waze is about leveraging the wisdom, the data and the support of the community.

So, how do thriving startup communities structure themselves? What role do they play?

1. First, and I’ve already touched on this – a tolerance for failure and access to best practices. Good communities put stupid startups out of their misery, but don’t kick out the entrepreneur. They invite the founder back…to get smarter, to pivot…to get it right. Kill the startup, save the entrepreneur! Show me an aspiring entrepreneur who has never failed, and I will show you someone who has never had a successful startup.

2. Second, affordable creative spaces. Whether in universities, on main street, or abandoned old buildings on the outskirts of town, good communities give entrepreneurs a place to come together – to collaborate, to collide with one another, and to find serendipity. Entrepreneurs slaving alone in isolation will find it difficult to succeed. They must have places to band together, online and offline, to build on each other’s ideas, and feed off their respective energies.

3. Third, access to talent. Good communities build match-making systems and host networking events that help startups fill their talent gaps. A good community catalogs all the technical, creative, marketing, operational and financial human capital it has — and matches it with the startups that need it.

4. Fourth, access to capital. Good communities mobilize investment sources and create incentives for investors to place high-risk bets in early-stage ventures. They help educate those investors and minimize their risk by spreading the risk. They also help their startups access that capital in a way that they won’t be taken advantage of.

5. Fifth, good communities create and recycle entrepreneurial leaders. When a successful startup is born in the community, that community grooms and recognizes the founders of those startups. They enroll them as leaders, they don’t let them leave the community. Good entrepreneurial communities are like Hotel California: You can check in, but you can’t check out. A really smart community will track down the leaders who came out of other entrepreneurial communities – who retired there with their knowledge and their wealth – and enroll them as leaders in their community.

A good entrepreneur never really retires, he or she becomes an investor and mentor for other promising startups. A good example is the VMT – the Venture Mentoring Team — that has recently been organized in Florida to assist and accelerate aspiring entrepreneurs running the most promising startups. It is up to the community to properly engage these leaders.

6. Sixth, good communities break down silos and weed out bad actors. As @BradFeld writes in his book, “Startup Communities,” every entrepreneurial community is comprised of leaders and feeders. The leaders are serial entrepreneurs and accomplished business people who had successful careers. They want to give back. They enjoy helping the next generation of entrepreneurs in the community.

The feeders are the organizations and programs chartered by some funding source to help startups, presumably by providing the resources listed above. The problem with some feeders is they see it as a zero-sum game. They think they are the ecosystem, when they are just one of the species in it. They become territorial. They tend to be closed communities. They build walls, they don’t play nice with other feeders, they try to keep the leaders and other precious resources all to themselves and within their little click.

A good community will spurn those feeders. It will also ostracize bad actors – those that are running scams and trying to take advantage of startups and preying on the good programs and people trying to build an all-inclusive community. A productive and healthy ecosystem will cleanse itself of invasive species trying to infect or control the ecosystem.

A thriving and vibrant entrepreneurial community is open and all-inclusive. It maintains a symbiotic relationship with all parties. It supports the entrepreneurs and protects itself against insidious outside influences, or those that may emerge from within the community to try and hijack it.

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So, there you have them, the FIVE drivers of entrepreneurial success for startups and the communities that support them. Remember, startups will come and go, but the legacies of entrepreneurial visionaries live forever. It is up to the community to nurture those visionaries. For all their ups and downs and risks and disappointments, startups are still the best way to create jobs, wealth, and healthy communities. Entrepreneurs are the future of our community, and the best hope for America and the world. May you have an amazing journey and enjoy great success and prosperity!

Top 10 Toughest Questions Asked of Startup Founders (and how to answer them): PART 1

Of all the roles a startup founder must assume, one of the most important is that of A.I.C – Answerer In Chief. Founders will field a never-ending barrage of questions from smart investors, as well as from prospective customers, suppliers, partners and key employees. How founders answer these questions will determine whether they will get buy-in from these important stakeholders. There are ten questions in particular that are tough to answer.

In my experience, most first-time founders either try to B.S. their way through tough questions, or simply stutter and stammer through bad answers. I was one of those newbie founders at one time. These days, I take a little perverted pleasure in watching startup founders squirm when I ask them these questions point blank. So, in the interest of soothing my guilt and contributing to the advancement of newbie startup founders, allow me to share some ways to handle some of the toughest questions.

Caveat: Theses questions and answers apply more to early-stage growth startups, which means you have a “real” business. You have a functional product, you’re in the market, and at least have a growing user base, if not real customers and revenue. If you’re still at the idea or pre-launch stage, you’ll need to answer a completely different set of tough questions. I’ll try to cover those in a future post.

Tips for Answering Tough Questions

The first tip is that you are not expected to have all the answers, or answers that you know will please the questioner. Tough questions don’t always have good answers. Acknowledge the validity of the question and let the questioner know you will need to think about it, or assemble the correct data. Whatever you do, don’t try to B.S., or worse, out-and-out lie. Smart people will out you in due time (called due diligence), and you’ll never get another opportunity with them again.

The second tip is your answers should be adjusted depending upon whom is asking. How you answer these questions with prospective investors will be different than how you answer them with prospective customers or employees. For the purposes of this piece, we’ll assume the questioners are investors. (By the way, it is not unusual for astute customers, partners and employees to ask these same questions. Don’t be taken aback or offended if they do. In fact, they are the smart ones – the ones you want on your team. They are in essence “investing” in you in a different way. Expect these questions and adjust your answers to them appropriately.)

The third tip is to provide short, concise answers to tough questions, then follow-on with a question of your own. Try to qualify the interest and relative value of the questioner. Try to ascertain what they are driving at. No need to answer tough questions with non-qualified people, right? Make them sell you that they are worthy of the answers.

With that, let’s layout 10 of the toughest questions asked of startup founders. I’ll try to give each a little context, so you can understand their intent and what the questioner is really snooping for. I’ll suggest some ways to answer these questions in a way that will be appreciated and, hopefully, well received by the questioners.

Top 10 Toughest Questions Asked of Startup Founders

1. How many customers (users) do you have and how much revenue are you generating?

Context: This gets right to the heart of your start. They want to know right out of the Shute whether you have a real business, or are still in the aspiration stage. They want to know if you have achieved product-market fit. They want to gauge how far along you are; your company’s size and traction.

Answer: If you’re crushing it, proudly give them the numbers and reiterate you’re still early and expect to continue to grow exponentially in the years ahead. If your numbers are sensitive and you haven’t qualified the investors as to their interest and appetite, simply say, “We don’t disclose our numbers until we have qualified an investor’s interest, but I can tell you we are generating revenue and our user base is growing. Have you previously invested in this space and what is the size of your typical investment?” Note how you turn the tables on the investor and you become the questioner!

If you’re post-launch, but pre-revenue, simple say you are still focused on creating referenceable accounts and refining the revenue model, but expect to start generating revenue within x months. Reiterate that building a large, sustainable user base, is more important than generating revenue at this stage. This is a good opportunity to summarize your long term revenue model. Is it pay-per-unit, subscription, advertising, data or lead generation? Relay how many customers represent critical mass and when you expect to achieve critical mass.

Not all investors expect you to be making money, or even generating revenue yet, but they want to know you are clear about how the company will capture market share and monetize those users in the long run.

2. What’s your cash position and burn rate?

Context: This is a typical follow on question to number 1 above. After they know how much revenue you are generating, if any, they want to know how much cash you have in the bank and how quickly you are spending it. They want to know when you are going to be out of money; how desperate you might be. Your burn rate also gives them an indication of the scale of your enterprise. A company that is burning $1M per month is a much different animal than one burning $100K per month. The answer will tell the investors everything they need to know about how early (and vulnerable) you really are.

Answer: Unless you are far down the path with an investor who is seriously interested in writing a check, the best way to answer this question is by stating your relative runway. You can answer something along the lines of, “We have enough runway for at least 12-months, based on our current burn rate.” Make it clear that the founders or current investors are committed to funding the company through break-even, or until closing a substantial funding round. Your answer should signal your intent to dramatically increase both your cash position and your burn rate.

3. How many full-time employees do you have and what do you expect your headcount will be this time next year?

Context: This question is often asked to test the veracity of your answers to numbers 1 and 2 above. You need people to attract and serve customers, and to generate revenue. Your headcount should jive with your installed base and burn rate. Smart investors will do the math in their heads. If your customer base and burn rate don’t match your headcount, they will be suspicious. The number of people you expect to hire also provides clues as to your growth rate and funding needs.

Answer: There is no getting around this answer, which is why it is asked. There is nothing sensitive about how many people work full-time at your startup. If the number is low, or might make the investor question your answers regarding traction or burn rate, you might need to explain extenuating circumstances: outsource talent essentially dedicated full-time to your project; founders not taking a salary; or people working double-time for you in-between their daytime jobs. It’s no secret that “team” is one of the most important criteria of investors. Make sure your answer to this question reinforces the fact that you have (or will have) the quality and quantity of people needed to win.

4. How do you stack up against X and how are you going to compete against them?

Context: They want to know how you are going to thread the needle. They are fishing for a sustainable, 10X advantage. They likely already know who dominates your space – who the gorilla is. They want to hear how you think you compare, one-on-one, and your unique strategy for scaling against them and ultimately winning. Even if you have no direct competitor, investors want to hear how you are going to win over customers who are solving the problem you portend to solve, in a different way.

Answer: First of all, never brush off any competitor as being too big, too slow, or too clueless. It’s a common and arrogant position of first-time founders. Recognize every solution, even inferior solutions, as legitimate threats. It often works to say, “Our biggest competitor is not X, it is apathy (or laziness, or indifference, or ignorance, or some other user behavior inhibiting adoption).” Your answer should offer a compelling strategy that neutralizes solutions from other companies, while overcoming or changing the user behavior that is causing inertia in the marketplace.

5. What’s your primary competitive advantage?

Context: In question 4, they were fishing for contrast with a specific, dominant competitor. This question is designed to surface your secret sauce. They want to hear your unique insight, your inside track, your special access to the market, or your trade secret or defensible IP. They are snooping for barriers to entry your solution might create, or high switching costs that ensure customers are likely to stick with you.

Answer: Whatever you do, don’t say your competitive advantage is a patent, or a pending patent. Investors will yawn, seriously. This is a common mistake of first-time founders (one I made myself, BTW). Patents offer ZERO competitive advantage in the startup phase. They are easy to engineer around and even if competitors can’t engineer around them and infringe, it requires BIG money to defend. The BEST answer to this question is: “Our big advantage is satisfied, loyal customers.” Second to that answer, having some sort of special access to the market – a great channel partner, will do nicely. Saying you have a deal with Verizon, who is going to bundle your solution for its 146M customers, is worth more than any patent or other IP you have.

A third answer, behind loyal customers and special access to the channel, is “team.” A mediocre product with a great team will win over a great product with a mediocre team any day. So highlight your team, including advisors.

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Okay, time for a break. Click here for Part 2, where we will address tough questions 6-10:

6. What are you going to do if X moves into your space?

7. How much capital has been invested in the company to date and what is your valuation?

8. What are you going to do if you don’t hit your revenue target and/or can’t raise capital?

9. Do you think you’re the best person to lead the company in the long run?

10. What keeps you up at night?

There are no tough questions if you are prepared with good answers.

Top 10 Toughest Questions Asked of Startup Founders (and how to answer them): PART 2

In Part 1 of this piece, we addressed the first five toughest questions asked of startup founders. In this piece, we will drill down on the second five toughest questions. With a little preparation and forethought, you can avoid getting stumped and communicate complete confidence in yourself and your startup.

6. What are you going to do if X moves into your space?

Context: The questioner wants to know if you know that you are but a guppy in an ocean of whales, sharks and big fish. Every early-stage growth company is swimming in a sea of predators, but have yet to become lunch. No matter what size pond you are swimming in, eventually the big fish will show up.

In my day, every single investor would ask, “What are you going to do if Microsoft moves into your space?” Because back in the day, Gates and team were relentless and ruthless in all things tech. If any player was getting traction in a space that might threaten their franchise, they could turn on a dime. Just ask Netscape (oh, they are not around any longer!)

Today, investors envision how Google, Amazon or Facebook might make your startup irrelevant in the blink of an eye. Every growth startup with its sights on becoming a $100M+ company, will eventually become a target. Investors want to know if you are thinking about this inevitability and how you will respond if or when it happens.

Answer: The worst answer is a dismissive one. When asked this question, lots of founders say that the big fish aren’t interested in the space, or won’t be able to compete. But investors know that whales like Google can compete with whomever they want. Hey, if your opportunity is as big as you say it is, then it’s only a matter of time.

So, the best way to answer this question is by saying how much you are looking forward to that day. You want to say that you are anticipating it, which is the same as saying you are executing so well, it will be inevitable. That’s music to an investor’s ear. And what you plan to do about it depends upon whether you want to partner, become a unicorn, go public, or be acquired. All those possible outcomes are perfectly fine with most investors. If you’re really smart, you’ll add, “We hope to have the right investors who will help guide us when that time comes.”

7.  How much capital has been invested in the company to date and what is your valuation?

Context: No investor wants to be the first money in. Some say they do, but they are lying. Every investor wants to know the founders, their family and friends, and possibly other angels or VC’s, have put skin in the game. The amount of money that has been invested to date in your startup says A LOT about its viability and future prospects. How much has been invested and the current valuation also informs an investor whether they want to play. The deal may be too early, or too late for their sweet spot. Why waste time on either side? The answer to this question also informs investors whether you understand how venture financing works, or have a pie-in-the-sky idea of your worth. I’ve literally had startup founders tell me that no capital has been invested (just sweat equity) and they have a $10M valuation. This is usually the place in the conversation where I tell them I hope they have a rich uncle, because no sophisticated investor is going to take them seriously.

Answer: There is no getting around telling a smart investor (or customer, or partner) how much capital has been invested. If you dance around this part of the question or refuse to answer it on some bogus confidentiality grounds, they will immediately write you off as a pretender, with no future prospects. Just state the amount, but also elaborate on the value of sweat equity and in-kind services your venture has received.

In one of my ventures, no capital had been invested (me and my co-founders had no money), but we were able to show that the value of the sweat equity and in-kind services we had received from vendors and advisors was at least $500,000. We were able to raise $1M at a $3M valuation. Most investors will discount sweat equity, so be prepared to make a solid case for the value your company has received in forms other than cash, and be prepared to defend a reasonable valuation based on team, traction, unique IP, and other “value” you have created.

Answering the part about valuation depends upon what stage you are in and how many rounds of financing you have closed. Early stage startups often raise capital using a SAFE or convertible note, so the answer is easy: “The valuation has not yet been set and will be done so by the lead investor in our upcoming priced round.” If you have already closed a priced round, simply state the post-money valuation, but qualify your answer by suggesting the lead in the current round might get a discount, or warrants, or some other sweetener. If you haven’t yet done a priced round, the best of all answers is this: “We realize the lead investor in the round will set the valuation.”

Smart founders never tell smart investors what their valuation is, they let the investors tell them – and then they accept it, argue for *slightly* higher, or walk away.

8. What are you going to do if you don’t hit your revenue target and/or can’t raise capital?

Context: This question is all about Plan B. It’s about probing to see if the founders have contingencies. The founder of Theranos, Elizabeth Holmes, was famously quoted as saying, “I think that the minute that you have a backup plan, you’ve admitted that you’re not going to succeed.” That’s total BS and perhaps the stupidest thing any startup founder has ever said. Things didn’t end well for her. EVERY company, from the lowliest of low startups to the mightiest Fortune 100 companies, should have contingency plans. Investors want to see what you will do when things don’t go according to plan (and they rarely do).

Answer: How you answer this question depends upon your stage and your options. The only wrong answer is saying “that won’t happen.” You can bootstrap, you can license, you can sell, you can offer customer incentives to drive revenue, or offer sweeteners to close a round that is lingering. You have all kinds of options. Lay them out as plan A., B., and C. Make it clear that one way or another, you will keep the train on the rails and steaming forward.

9. Do you think you’re the best person to lead the company in the long run?

Context: This question is designed to test your ego; to see if you know what you don’t know. It’s a very common question asked by investors. They want to make sure you are not going to get in your own way; that you will place the interests of the venture above your own selfish interests. They want to make sure that you understand that the minute you take outside money, the company is no longer yours, even if you control 51%. Every entity will protect itself, even from those that created it.

Answer: There is only one acceptable answer to this question: “I serve at the pleasure of the board and the shareholders. If at any time the majority of the board and/or shareholders don’t think I am the best person to lead this company, I will step aside.”

I got so tired of answering this question when I was raising money, I carried my letter of resignation with me. Whenever an investor asked it, I just slid the letter across the table to them and said, “All you need to do is sign it for it to become effective.” They all smiled and checked that concern off the list.

10. What keeps you up at night?

Context: Don’t mistake this for a throw-away question. It’s asked to test your temperament and thoughtfulness. It’s also asked to test your truthfulness and transparency. Smart investors will gauge how you respond, not just what you say. They are looking to see if you are being glib, or serious; dismissive or attentive. Your answer provides a clue as to your Emotional IQ and how self-aware you are.

Answer: There are no pat answers; no right or wrong answers. How you answer depends on how well you know the questioner, what’s going on in your personal life and what stage your venture is at. `What *really* keeps you up at night’ will always be changing based on your personal and professional circumstances. When I was asked this question, I liked to give both a personal perspective and one related to my startup. I would reply something like, “Well, my wife and I just had our first child, so middle-of-the-night feedings are quite common these days. In terms of my company, I toss and turn thinking about the next critical hires I need to make. But all-in-all, I sleep pretty soundly because I keep a daily `to-do list’ and feel like I have a good handle on what needs to be done every day — and in the right order.”

In summary, smart investors and other stakeholders will ask tough questions. In fact, it’s a good way to qualify them to see if they are serious and know what they are doing. You are not expected to have all the answers, or answers that the investors would like to hear. You are expected to have anticipated the questions and not be dismissive, or worse, make the answers up as you go.

Let’s turn the tables on this subject. Next up, we’ll discuss the Top 10 Tough Questions Startup Founders Should Ask of Investors. Stay tuned…

Tough Questions Smart Startup Founders Should Ask Prospective Investors

In my last post, I covered the tough questions smart investors should ask startup founders. In this post, we turn the tables and cover the tough questions smart start founders should ask prospective investors. It’s just as important for entrepreneurs to do their due diligence on prospective investors, as it is for investors to do their due diligence on startups raising capital.

In the sea of startup investors, there are fish, sharks and whales. They represent a very diverse array of species and they feed in different waters. Before a startup goes swimming with them, it is helpful to know which is which. I’ve raised money from all of them for my various startup ventures, or for my clients. It’s also helpful to know which investors swimming around are mere guppies, pretending to be big fish.

Take it from me, I’ve wasted a lot of time swimming in the wrong waters with the wrong fish, or being seduced by guppies who talked about being big fish, but were not even big enough to be bait. These days, it seems everyone you meet is a startup investor. In fact, crowdfunding has turned all of us into startup investors. Of course, there is a big difference between investors who pledge $100 to a startup on a crowdfunding platform, and a dedicated investor (or fund) who invests $1M or more into multiple startups. This post is designed to help you discern the difference.

To do that, ask some tough questions:

1. What was your last investment and how much did you invest?

This question gets right to the heart of the matter. The answer can inform you of how active the investor is; his or her comfort zone (sector) and appetite (large or small). A good follow up question is asking when the investment was made. Serious investors love to talk about their recent investments. Pretenders will be vague and evasive about when they invested and how much they invested.

2. How many investments have you made over the last three years and what was the average amounted invested in each deal? What was the largest investment you have made?

The answer to this question will inform you of whether the investor is a dabbler or a professional. There are a lot of dabblers out there. They nibble around the edges of investments made by the pros. They throw in $10k here, $10k there, on an infrequent basis. Frequency and consistency of investment are what set serious investors apart from hobby investors. You shouldn’t discount the dabbler, but know their process and timing are going to be much different. There is a big difference between an investor whose last investment of $25,000 was two years ago – and it was his or her biggest investment – and an investor who has invested $500,000 in five deals over the last two years and the largest investment was $250,000.

3. Do you usually invest as a sole investor (or fund), or as part of a group or syndicate?

The answer to this question will inform you of whether the investor can or will take the entire round, or whether they only invest alongside other funds or angels. Some investors prefer to spread the risk. Other investors prefer to be the only investor, or at least be the lead investor (see #8). If the answer is “part of a group or syndicate,” ask them who they have co-invested with in the past.

4. What industry sector(s) do you typically invest in? What sectors are you uncomfortable investing in?

Expect to get a fuzzy, touchy-feely answer to this question. Most investors will say something like, “We are not tied to any particular sector. Every deal is different. We look at the business fundamentals and the team. We bet on the jockey, not on the horse.” So that sounds great and all, and you will have a tendency to believe they could be a good match for you, only to find out later that they won’t do your deal because it is out of their comfort zone. The life sciences sector is a perfect example. Many investors will tell you they will look at the deal, but they really have no clue what they are doing in that space and will eventually pass. Harken back to their answer to question 1. Most investors will stick to sectors they have already invested in.

5. At what stage do you typically invest? What stages will you not invest?

This is another question where you won’t likely get a straight answer until you drill down on it. Most investors will say, “We look at deals in all stages.” The truth is, they typically only invest in Series A or Series B. Almost no investor will admit that they don’t invest in seed stage (pre-product or pre-revenue companies), for fear of losing out on a truly remarkable opportunity. But if you press them, you will find most have not made any seed investments. Now, there are a few angels and funds that specialize in seed deals – they are company builders, not just investors. Just make sure the investors are comfortable investing in the stage your company is raising for, and have made similar stage investments.

6. What is your primary criteria for investment?

If you have gotten this far in the conversation with a prospective investor, the answer to this question is the tell-all. Serious and experienced investors have a formal criteria and process for investment. Pretenders and hobby investors do not – they usually invest alongside a lead or a buddy who convinces them to throw some money into a deal. Almost all smart investors consider five dimensions, each with 10-20 data points, to determine whether a startup company fits their criteria. See my previous posts on “The Five Star Startup,” or pick up my handy little pocket guide for how serious investors determine whether a startup opportunity is worth their time and money.

7. What investment structure do you typically prefer and do you have any non-negotiable terms?

Some investors like SAFE notes, or convertible notes. Some angel groups and VC’s will only invest in priced rounds. No use wasting your time on investors who only invest in priced rounds if you are raising on notes. If it’s a priced round, expect them to say they will only take preferred shares, not common shares. Their non-negotiable terms may include things like pro-rata rights and at least one board seat. If they say all terms are negotiable, then you should conclude they have no idea what they are doing, or they are baiting you. A good way to learn how they structure their deals is to speak with the founders of other startups they have invested in and ask to see a copy of one of their latest term sheets with the name of the company redacted.

For more on this subject, I recommend the book, Venture Deals, by Brad Feld and Jason Mendelson.

8. Have you been the lead investor before? What was the amount you invested and the size of the total round?

This is where the rubber meets the road with most investors. A startup will save itself a lot of time and effort by securing the right lead investor. If you get a good lead, the lead will help you round out the round and get it closed more quickly. Not to disparage most angel investors (I have been one, after all), but most are followers. They are not going to lead. They want to follow the lead and piggy back on the lead’s due diligence. This is also true of some venture capital funds. They never lead, they only want to follow and join a syndicate after the lead has done the grunt work. So, ask this question to quickly qualify the investor as a leader or a follower, and spend your time with the leaders. Refer the followers to your lead investor. The lead is going to present the term sheet and will need to convince the followers to agree to its terms, not expect different terms.

9. What is your exit horizon and your target rate of return?

This is an immensely important question to align expectations between startup founders and their investors. Some investors want in and out within three years and are happy with a 3x return on investment. Other investors expect to be along for the ride for 6-10 years and expect a 30x return on investment. The size of the startup’s opportunity and the time horizon for exit of the founders should be aligned with the investor’s expectations, otherwise the two will be at loggerheads. Some related questions to ask: Have any of your investments had an exit? What was the biggest exit? How long did it take? The answers to these questions will help startup founders to focus on the investors whose expectations for exit and return are aligned with their own.

10. Do you have dry powder and what is your decision-making process and time frame?

By “dry powder,” you are asking investors whether they have readily available funds to invest. As a newbie startup founder in one of my first deals, I once danced with an investor for three months. I thought the fund’s reputation and fund managers were the best of the best in Silicon Valley. I wanted them in my deal above all other investors who had expressed interest. It never occurred to me to ask them if they had any money.

Stupid, right? As it turns out, many funds have been fully invested and the fund managers are scrambling around behind the scenes trying to raise the next fund. They don’t actually have any money, but they will never tell you that. In fact, they are actively soliciting new deals, which they use as fodder to attract limited partners for their next fund. Don’t be bait. Ask point blank whether there are still funds left to invest. Ask if they have capital calls, or whether the funds are in the bank. Finally, ask who the decision makers are, their process and timeline for a decision. If an investor can’t put a term sheet in front of you within 30 days of meeting them (which will be contingent, of course, on another 60-90 days of due diligence), you should stop wasting your time with them.

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In summary, startup founders should not be shy about asking prospective investors tough questions. It’s a two-way street. Knowing what questions to ask and how to interpret the answers will save founders a lot of wasted time and effort.

For more details on questions investors should ask startup founders and questions startup founders should ask prospective investors, pick up my handy (and cheap) pocket guide for determining whether a startup opportunity is worth your time and money, The Five Star Startup.

Anticipating the Dreaded Three D’s that Derail Startup Founders and Business Owners

Everything was going great, we were crushing it. After three years of hard work and sacrifice, our product took off like a rocket ship. Orders were pouring in. Retailers lined up to stock the product. OEM’s wanted to bundle it. And VC’s were knocking. A publicly-traded software company invited us to their headquarters in Silicon Valley to discuss their interest in acquiring our growing startup.

And then in an instant….everything fell apart.

My partner, the company’s CTO and product genius, was murdered. If that wasn’t tragic enough, I was the chief suspect and found myself undergoing police interrogation as the entire community wondered if I had killed my partner for the insurance money. (NO, but more on that sad tale in a minute. First, we have a company to save.)

Word spread quickly. Orders slowed to a trickle. The potential acquirer and the VC’s stopped calling. The conventional wisdom was, “founder dead, company dead.” In less than three months we found ourselves with twenty employees and only 30 days of runway left. It looked like it was going to be a total loss…another failed startup…a victim of bad luck.

Fortunately, we defied conventional wisdom and miraculously saved the company. We sold it three years later to a different publicly-traded company. The turn-around required us to relocate and completely reinvent the company – another story for another time.

The police caught the two low-lifes who murdered my partner. He was gay…they apparently found that offensive, so they killed him and robbed him. The police quickly eliminated me as a suspect after confirming the key man life insurance policies on both my partner and myself had expired. We had mistakenly neglected to renew them during our rapid expansion phase. A bitter-sweet mistake, to be sure.

1. DEATH (OR DISABILITY)

The first (and most serious) of the Dreaded Three D’s is DEATH (or Disability). Sh*t happens. Life happens. Bad things happen to good people. The best you can do is to anticipate the worst and take steps to mitigate the fallout. What happens to your company if YOU die suddenly? What happens if you lose one or more key team members? What actions can you take now to protect your family, partners, employees, and shareholders…and ensure your legacy?

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I divorced after 25-years of marriage. The decision was mutual and mostly amicable. The kids were grown and gone, nothing to fight about there. The biggest issue that was contested on both sides was the value of our respective businesses. Her lawyer said her business was not worth much, but the stock in my businesses was worth millions (not true). Plus, he convinced her, I was probably hiding money in offshore accounts and ventures I had not disclosed (not true).

How each business was valued would determine the ultimate settlement and could have significant ramifications for the bankers, shareholders and employees of both businesses. A witch hunt for phantom assets would be costly and protracted. When a couple divorces, they are also divorcing their long-term friends and business partners. It’s a no-win life event, except for the lawyers. They always win. And the more hotly contested the divorce, the bigger the win for them.

In the end, cooler heads prevailed. An independent valuation of both businesses convinced the mediator to push both of us towards a fair, final settlement. Good financials and accurate books won the day, not emotion or unsubstantiated accusations. She got 100% of her business and became a minority stock holder in my business. Both businesses were able to move forward with the least amount of disruption.

2. DIVORCE

The second most disruptive of the Dreaded Three D’s is DIVORCE. Most divorces happen between the ages of 40 and 60. Those are the peak earning years for most people – the absolute worst time, economically, to get a divorce. The emotional and financial impact on business owners going through a divorce can have dire consequences on the business itself, and its employees and stockholders. Many startups and growing companies end up being torn apart during a bitter divorce, if the business owners have not taken the appropriate steps to shield the business.

Source: Census Data

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My first startup venture ended in personal bankruptcy. I had maxed-out all of my credit cards to help fund the startup and pay for rent, food and other essentials during the period when there was no salary or income of any kind. My partner and I had a falling out after we merged the company with another startup company, and effectively lost control. I was forced out, broke, saddled with debt and no income. It was a great first lesson in the “take no prisoners” world of high tech startups.

I took a job in the “real word” and filed for Chapter 13 bankruptcy. I was ordered by the judge to pay $0.30 on the dollar to my creditors over a three-year period. After three years my lawyer and I went back to court to ask for permission to extend the bankruptcy another two years so that I could repay 100% of the debt I owed my creditors.

The judge said, “Son, you met your obligation under the bankruptcy agreement. I am ready to dismiss this and let you get on with your life.” I told him my life would never be the same if I left even one creditor hanging for less than what they were fully owed. He smiled, shook his head, and granted the extension. Two years later the bankruptcy was officially dismissed with 100% repayment to the creditors.

Several years later I was raising venture money for my third startup. The VC’s conducted a background check during their due diligence. They called me in and explained they would not be able to invest because of the bankruptcy in my past. I was too high of a risk. I produced the final judgment from my briefcase, slid it across the table and said, “Did your due diligence show that all the creditors were paid back 100%?” They looked puzzled and surprised, because that fact does not show up in a credit report. “I will never leave anyone hanging if I can help it,” I said. “That includes you!” I got the money and my new venture was launched.

3. DEBT

The third of the Dreaded Three D’s is Debt (or bankruptcy). Startup founders and business owners can rack up tons of debt during the process of building a company – and many pledge their personal assets and/or the assets of their businesses against those debts. This situation can make it increasingly more difficult to continue to finance a business. Banks stop lending. Suppliers stop extending credit. Even VC’s shy away from promising businesses where the founders or the company have taken on too much debt, or have a past bankruptcy. A manageable amount of debt is common and expected. Excessive debt can derail a business and send the owners back to square one.

Steps to Take to Anticipate the Dreaded Three D’s:

1. Get some professional advice. Ask your advisors these “what if” scenarios and what you can do about them now to mitigate the fallout if they happen.

2. Have a Buy-Sell Agreement with your founders and all key shareholders. That includes your spouse!

3. Have a succession plan. Don’t think about it as an exercise you undertake to plan for your death. Think about it as an exercise to allow yourself to go on a long sabbatical, ensuring your business will be in good hands until you return.

4. Clearly separate your personal assets and accounts from your business assets and accounts. Founders and business owners get into the most trouble when they mix their assets or accounts.

5. Structure stock agreements with your spouse, significant other, and children, to protect the long-term interests of the business and its other stockholders in the event of divorce or death. Be very careful about unintentionally creating a defacto controlling interest by your spouse or heirs should one of the dreaded three D’s befall you.

6. Try to avoid personal guarantees when borrowing money for your business. If you must give a personal guarantee, make sure it’s repayment has first priority over every other obligation in the event of a sale or dissolution.

7. Get a good Key Man Life Insurance Policy (and don’t forget to pay the premium when it is due!)

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Fate often has a jarring and sometimes downright maddening way of reminding us that life is unpredictable at best and devastatingly tragic at worse. We can’t control everything, but we can anticipate and mitigate some of the bad things that can derail us and our businesses. The fact is, most of us will be in debt at different points in our lives. Most of us will divorce at least once. And death, of course, eventually comes for all of us. Best to figure out in advance what to do about each.

May you live long, be happily married (or single), and debt free!

What to Look for in Job Candidates When Hiring for Your Startup

It’s no secret that your startup will only be as good as the people you hire to help grow and run it. The secret is knowing what to look for in candidates so you hire the right ones. Chances are, your startup will not be able to hire the best people unless it has millions of dollars in financing, where “best” is defined as the best educated, best experienced, best connected, and with the best track records. However, the “best” people are rarely the right people for a startup.

When I was hiring for my first startup, one of my role models gave me some sage advice. He said:

“Big companies hire extraordinary people and force them to do ordinary work. Startups hire ordinary people and give them the opportunity to do extraordinary work.”

In this context, “ordinary” does not mean average…blah…run of the mill people – because everyone is extraordinary in some way. He meant it to mean people in the job pool who don’t necessarily stand out on paper. In fact, he would emphasize, a startup founder should NOT hire based solely on a candidate’s skills and credentials, or worse, outsource hiring to a recruiter. A startup founder MUST meet each promising candidate in person and spend quality time with him or her other than in an interview setting, to ascertain his or her character and will.

And this leads me to relay the rest of his advice on what to look for when hiring people for a startup:

Look for that which cannot be taught.

Startups are a special breed of employers. They are not suited for most people. Startups can’t hire people like big, well-established organizations, hire people. They must hire them based on unique “fit” with the vision and the team. A startup can’t simply try to match each position to each candidate’s skills… even their soft skills. Lots of people talk about “soft skills,” but even most of those can be taught. A startup needs to hire people who have what cannot be taught and those things are uniquely suited to benefit the startup and compliment the team.

To set the stage for what “that” is, let’s agree on three broad criteria for every single hire:

1. Can she do the job?

2. Will she do the job?

3. Can we stand to work with her while she does the job?

So, number 1 is the criteria by which most companies hire against. Well-established companies have recruitment down to a science. They are very good at assessing how competent a candidate is and his or her track record. They also look at certain soft skills, like how well the candidate communicates, if the candidate is a team player, and how likeable the candidate is. These are all teachable things and, by the way, easy to fake. Most companies rarely look at criteria 2 and 3, because they are too subjective – very difficult to quantify.

In a startup, recruitment is not a science, it’s an art…a feeling, a sense of a person. A person who will hopefully become family. So, a smart startup will consider criteria #1, but not give it as much weight as criteria #2 and #3. A startup cannot afford even one bad hire. Hiring someone who is eminently qualified, but doesn’t do the job for one reason or another, or is a pain in the ass, could be catastrophic.

To ascertain whether a candidate will not only do the job, but do it amazingly well AND be a joy to work with, requires knowing whether he or she possesses attributes which cannot be taught. Things like personality, disposition, motivation, drive, curiosity, trust, integrity, empathy, work ethic and enthusiasm. There are a number of ways to learn this with a fairly high degree of assurance that these things are indeed part of a person’s character and not being faked.

Personality and Behavior Assessment

I am a big fan of DiSC. In fact, I have found it so useful in my career for recruiting and team building, I became a certified coach and facilitator. I use it today with my clients to screen candidates and advise on improving company culture. You can learn more about DiSC here: http://www.disc.startupbiz.com/. Note: If you want a complimentary assessment on your own leadership style and behavioral dispositions, I would be happy to do one for you.

Non-Traditional Reference Checking

In my experience, the references a candidate puts down on his or her resume provide little insight. They check off certain boxes, like, “The candidate worked for me as a [blank] from [blank] to [blank] and did a good job.” No candidate is going to list a reference that doesn’t say she did a good job. In most cases, traditional references know a person’s work history, but don’t know much about the person.

Ask the candidate to give you the name and contact information for a person they did not get along with at their last job. Ask for the name of a teacher or professor they had that they liked the least. Ask if you can speak with their best friend, or a sibling. First, their reaction to you asking can tell you a lot about them. Second, speaking with non-traditional references allows you to do a deeper dive into what really makes that person tick.

Empath Reading

I know people who are empaths. You may think it a black art, but I have seen it work firsthand. There are some people who have a gift for reading others and their energy. I have a person like this in my life and I have her meet my prospective employees and partners. Her instincts are uncanny and she picks up on things I am not able to read in a person. Learn more about empaths here: https://ed.ted.com/on/bmTx74ld

Try Before You Buy

The best advice I can give you is to hire people on a contract basis BEFORE hiring them for a full-time position. In my last startup we hired more than 100 people. In most cases, we required each hire to work on a three-month contract before extending him or her a permanent job. In about 20% of the cases, we did not end up hiring the people because we learned during the contract period they would not be a good fit. People can fake it for a few interviews, but no one can fake it for 90 days of high contact with the entire team, and highly scrutinized work effort.

Social Event

A person’s true personality and outlook on people and life often comes out in a social setting. At my second startup we had a social every Friday afternoon at 3 pm. Sometimes there was a theme and employees and their guests were invited to dress up. We always invited new candidates to these socials. They were great recruitment tools – what person doesn’t want to work for a fun company that throws a party every week – and the socials were a great opportunity for us to assess each candidate on a different level than can be assessed in interviews. After each social, my employees would confide how much they liked the person, or how much they did not like the person, at least for the position we were hiring for.

In summary, when hiring for your startup, don’t just look for how qualified a candidate is in terms of skills and experience, because you can teach almost anyone what they need to know to do almost any job. Look for the things that you can’t teach them, but are important for them to have for your startup to be successful. Happy Hiring!

Selling a Business Is a Lot Like Looking for Love: You Have to Kiss a Lot of Frogs

I sold several businesses after running them for many years. I now help other business owners find the right buyers for their companies. Finding the right buyer is a daunting process, not unlike finding love. I know a little something about that as well. I found myself single after 25 years of marriage and re-entered the dating marketplace. I found the perfect match after a lot of dates. There are some remarkable similarities between selling a business and looking for love. In both cases, you have to kiss a lot of frogs.

So, for you business owners thinking about entering the dating marketplace for your business, I offer these tips for kissing the frogs and courting the right buyers who will fall in love with your business:

The Players – these suitors love the chase and romance of buying a business, but have no serious intention of committing to one. They are attractive and sexy and know exactly what to say. They get off on sweeping business owners off their feet. They like to think of themselves as master acquirers. They will toy with you as long as you allow them to do so.

If you don’t want to find yourself on an endless number of dates and empty promises, call their bluff and move on quickly.

The Pretenders – these suitors are already married. They are not in search of a new, long-term relationship. They are feigning affection and pretending to be interested in a relationship for other reasons. They have a hidden agenda. They are looking for competitive intelligence. They are doing research and you are merely a data point. They are assembling comparables and multiples to aid their own company sale or to resell data to others.

If you don’t want to spend your time informing and educating a competitive business that might use your proprietary information against you, tell them to take a hike.

The Liars – these suitors will tell you anything you want to hear. There is an old, tried and true saying among business brokers: “Buyers are liars.” They will misrepresent their background and financial capability to buy your business. They will stall and obfuscate and go completely dark for weeks on end. They will feign righteous indignation when you call them on their lies and misrepresentations.

If you don’t want to get dragged into their seedy game, just say “bye bye.”

The Gold Diggers – these suitors are looking to mine your business. They either want to milk it or flip it. They want an instant source of revenue without putting up any money, or very little money. They will want you to finance their acquisition with no intention of making good on the loan or earn out.

If you don’t want to turn the keys over to someone who will rape and pillage your business, then not pay you for it, steer clear. 

The Bored or Lonely – these suitors will give you plenty of attention and they will want lots of your attention in return. They will talk and talk, wine and dine, prod and discuss ad nauseam. They are suitors who previously sold a business or are semi-retired after long careers and now want to get back into the “game.” They don’t really have any idea what they want, but they will be happy to waste your time trying to figure it out.

If you don’t want to waste your time while they try to figure it out, tell them to come back when they do.

The Serious, Authentic, and Thoughtful – these suitors are worthy of multiple dates. They may not be right for you, or you for them, but you will both know where you stand and can decide quickly whether a long-term relationship is possible. You both want the same thing, but might not be quite sure whether it is with each other. The mutual chemistry and shared goals and aspirations will be aligned, or they won’t be, as you both do your due diligence.

Give these suitors fair consideration. Just don’t try to force it because these suitors look so much better than the other types of suitors encountered above. 

Looking for Love in All the Wrong Places

The odds of the ideal “partner” walking into your door are slim to none. You have to put yourself out there. Anyone who has dated or sold a business knows you have to cast a wide net. This means listing on multiple platforms. Don’t just rely on BizBuySell – the Tinder of the business brokerage industry. Get listed on the more serious platforms, especially those targeted to the type of buyer you are looking for. It also helps to retain a matchmaker – a good business broker or M&A intermediary. For more info on marketing your business, see my post, “If you want to Buy or Sell a Business, You Have to Know How to Fish.”

Breaking Up Is Hard to Do

If you are serious about finding love with the right buyer, you will likely end up engaged (or at least going steady). Be prepared for the relationship not to work out. It happens a lot when selling a business. As hard as it is, sometimes you have to walk away. As much as you want it to work out, it might not be meant to be. Dress up and get back out there. Don’t fret, don’t settle, true love is just around the corner.

When selling a business, be prepared to kiss a lot of frogs. Your Prince or Princess is out there somewhere. Put yourself in a better position to find him or her. May you find “true love” for yourself and your business!

What Does It Mean to Get a Good Opportunity?

The Roman philosopher Seneca said, “Luck is what happens when preparation meets opportunity.” It’s another way of saying we make our own luck. What surprises me is how many people prepare and prepare and prepare….and wait and wait…for the “right” opportunity. They wouldn’t recognize a good opportunity if it slapped them in the face. And then there are those people who see opportunity everywhere, in everyday situations and in every chance encounter. They are equally remiss. Truly good opportunities are not hanging in the breeze, free for the taking.

So what is a good opportunity? How do you recognize one and how can you test it for authenticity and upside potential against what may only be a fanciful whim? A good opportunity shares at least three of these attributes:

It is Limited to You or a Select Few – for a Limited Time
A good opportunity is not available to everyone, everywhere, anytime. Just about everyone has the opportunity to go to college, start a business, pitch an investor, or wait in line to meet an influential person. Those are equal opportunity opportunities. And while all those things could lead to some great opportunities in the future, they are not in-and-of-themselves limited or special. Recognize a window of opportunity that is only available to you, or a select few, for a limited time.

It Gives You More Control and Independence
A good opportunity puts you in charge. It gives you more freedom to become someone better, to pursue multiple options. Lots of people jump at the opportunity to take a new job or a promotion, only to find it is a dead end. If the opportunity gives you more responsibility, does it also give you the authority and “freedom” to succeed? The ultimate opportunity is to work for yourself…answer to yourself, spend your time as you wish, and never be limited in how much you can earn.

It Surrounds You with Remarkable People
A good opportunity puts you in the cross hairs of remarkable people. Their success depends partly on what you do or don’t do. It creates an interdependence that forces you to be on top of your game…to do your best work. They push you, and you them. Success is contagious, it does rub off. While it may seem intimidating at first to accept an opportunity that puts you in the inner circle, embrace it. You will only ever be as good as the people you surround yourself with.

It Stretches You, Gets You Out of Your Comfort Zone
A good opportunity puts you at risk. It does not just give you something special to gain. It could also give you something of significance to lose. You may already be the best at what you do – which is why you can no longer spot a good opportunity. If you’re too comfortable being comfortable, you will never spot it. If it doesn’t scare you just a little, it probably isn’t that good of an opportunity.

It Offers Exponential Gain
A good opportunity does not offer incremental gain, but exponential gain. Life is full of incremental opportunities. Incrementalism is the playbook of the well-meaning, but misguided: “keep your nose to the grindstone,” “save a little each month,” “don’t rock the boat,” “stay positive…” and on-and-on ad nauseam. These are fine and good platitudes, but they can obfuscate a good opportunity because they are often the antithesis thereof. A good opportunity dares you to reach for the big prize.

It Takes the Long View
A good opportunity positions you for a better future. It may require you to take a few steps back, in order for you to leap frog to the front of the pack. Few people see those opportunities because they only see what is right in front of them. Moving to a new city to pursue your passion, quitting the cushy corporate job for a startup, or jumping to an entirely new career, are all examples of the courage required to take the long view — in pursuit of a good opportunity.

A good opportunity is in alignment with who you are and where you are going in your career and life. It forces you to imagine yourself ten years from now and see where it has led you. If you don’t know who you are, what you want, or where you are going, then it will never matter how many good opportunities present themselves. When you do get a good opportunity — and you will — these attributes can help you test it for authenticity and long term potential. Enjoy the journey!

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Startup Waze: Peer Groups for Smart Entrepreneurs

Last week I was blazing across Alligator Alley, the long stretch that connects the east coast of Florida with the west coast of Florida. I was cruising at the speed of traffic – about 20 miles an hour over the limit. All of a sudden, as if a switch had been turned on, most of the cars in my vicinity slowed down to the posted speed limit.

“H’mmm,” I thought, “something is amiss.” I loaded my trusty Waze App and lo and behold, there it was: Two state troopers 5 miles ahead.

One of the drivers in our pack obviously did not get the message. He went blowing by us like we were standing still. Sure enough, by the time we closed the gap, he was being chased down by one of the troopers.

If you are unfamiliar with Waze, it is more than just a GPS mapping app. It is the world’s largest community-based traffic and navigation app. The other drivers on the road let you know where the delays, hazards and speed traps are. They let you know if there is a long line at the fueling stations, or if the rest stops are backed up. Drivers helping drivers to save time and money so that everyone gets to their destination more quickly and safely.

It occurred to me that the best startups I knew of were using a similar crowd-sourcing intelligence capability – a Startup Waze of sorts. Conversely, the struggling startups I knew of were haphazardly blowing down the startup highway without a clue to the hazards and speed traps. To co-op the Waze value proposition, every entrepreneur should: “Get the best route, every day, with real–time help from other entrepreneurs.”

There are a TON of resources that provide aspiring entrepreneurs with good road maps – accelerators, blogs, books, online classes, meet up groups and networking events. There are a TON of startup mentors and advisors who provide basic navigation tips. But these resources cannot replace real-time help, from real entrepreneurs, who are actually on the same journey.

To that end, here is a partial list of good organizations that entrepreneurs should consider joining. If you know of others, please feel free to add them in the comments below.

Entrepreneurs’ Organization
The Entrepreneurs’ Organization (EO) is a Global business network of 12,000+ leading entrepreneurs in 160 chapters and 50 countries.

FoundersCard
FoundersCard is a membership community of over 20,000 entrepreneurs and innovators who receive unprecedented benefits and networking opportunities.

Vistage
Each group is designed to help members help each other improve their businesses and their lives.

Young Entrepreneur Council
Curated networking and peer-to-peer support. YEC members can get insight and advice on their biggest challenges anytime through highly engaged 24/7 online support forums.

Young President’s Organization
YPO today provides more than 24,000 members in more than 130 countries with access to extraordinary educational resources, alliances with leading institutions, and specialized networks designed to support their business, community and personal leadership.

The best “waze” to be successful as an entrepreneur and navigate your startup journey: find a good peer group.

Balance of Trade: The Secret to Profitable Referral Relationships

Referrals are the life blood of many businesses. This is especially true in professional services. Ask any attorney, accountant, consultant, real estate agent, or other professional, and they will confirm that the majority of their new business comes from referrals. This is also true of most employers. Ask any HR pro where they source most of their new employees and they will likely say, “Referrals from our current employees and partners.”

Referrals drive business. If everyone knows that, why can’t most people tell you how effective or valuable each of their referral relationships are? It’s because they don’t formally audit those relationships.

Last week I had coffee with a wealth manager. His clients are high net worth individuals. Many of them are business owners – my target audience. Like many lunches, coffees, calls and emails that consume a significant portion of my time, the objective was to explore how we might cross-refer business. After discussing our respective services, current deal flow and client profiles, I asked him point blank: “You obviously know a lot of good professionals in my field, how do you decide which ones to refer your clients to?” His answer was Insightful and illuminating.

He said, “I do a Balance of Trade Audit at the end of each year.”

Curious, I asked him how that worked. He said it was quite simple. He tallies therelative value of the referrals he made, then compares it against the value of the referrals he received from those same people. If they made referrals of equal value, he considers their relationship as being a fair balance of trade. If the value of their referrals were lower (or non-existent) than the value of the referrals he made to them, he considers them as having a trade deficit. If the value of their referrals were greater than those he made to them, he considers them as having a trade surplus…and he makes a point of balancing that account in the coming year.

To be fair, he has an advantage that many professionals do not. He often knows the general value of the business he refers because he is managing his client’s money and knows what they paid for those services. When he doesn’t know the value, or he is not seeing any reciprocal value, he simply calls the people whom he made referrals to and discusses their balance of trade. If the referral partner is indifferent to the one-sided relationship, or is not sincere about closing the deficit, they stop getting his referrals.

He was quick to add that this BOT Audit only works when there are plenty of other good professionals to refer. The best interests of his clients always come first. If they have a specialty need and there are not many good providers, he refers his clients to the best provider he knows, with no expectation that he will maintain a balance of trade with that provider. It’s a one-off referral. In most professions, however, there is a plethora of very good providers and plenty of opportunities to make ongoing referrals.

One of my pet peeves about Linkedin, BNI, and other referral networks, is the poor job they do in helping their members track accountability and reciprocity among their connections. This is the age of technology and deep data. The tools exist to do this so much better.

Last year I designed a new App for LinkedIn called “Chit.” It would track all of the introductions, recommendations, skills endorsements, referrals, follows, views, likes, comments and shares, across all of your activity and connections. It would apply weights to each and every “touch point” you had with your connections. Every week you would receive a report showing who you owed “chits” to, and giving you ways to repay those chits with a few clicks. Conversely, the report would also show who owed you chits, so you would know who to call on when you needed an introduction or other favor of equal value.

Unfortunately, the app didn’t fly because LI’s API does not make that data available to third-party developers (yet). If you want this granularity you have to download your data, import it into Excel, sort the data by touch point, and then apply weights to each. It’s a manual, time-consuming process, but the results are eye opening. Having done this for my connections, I know the balance of trade and relative value of each of my connections on Linkedin.

In the absence of an automated app like Chit was meant to be, a manual BOT Audit like the one I performed on my LI connections is probably overkill for introductions and small ticket items. But a manual BOT Audit like the one performed by my wealth manager colleague, makes a lot of sense when referring business worth tens of thousands of dollars. In my field of M&A, a good referral could be worth millions of dollars.

Earlier this year I wrote a popular post entitled, Increase the Value of Your Professional Network by 10X, partly based on my experience trying to engineer a Balance of Trade Audit for my Linkedin connections. In any case, it’s worth doing manually to build a great network and maximize the value of your connections. Regardless of the methodology you use, a fair balance of trade is the secret to more profitable referral relationships.

And by the way, if you need a wealth manager, I can refer you to a really good one!