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First Impressions Matter

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We are in the process of evaluating the applications for Angel funding for our current round. Like most investor groups we use Gust as the platform for entrepreneurs to load their company information. Overall, I must admit I am disappointed in many of these applications. Many of the applications look strong in terms of idea or concept. Some apparently have traction. Some claim to have traction, but don’t support that claim. However, the real problem is that for more than 90% of these applications, it is the first time I am exposed to you. The application is my first impression. And first impressions matter! Here are a number of items that are problems.

Incomplete applications. Gust is a standard format platform. The executive summary, financials section, team composition are all fairly straightforward. Missing items or incomplete items leave a bad first impression on me. If an entrepreneur does not provide all the information by the deadline, then it requires substantial explanation. Leave a note somewhere on the document telling me when the document will be completed, and why you require the additional time. I understand, we are looking at a moving target, but at some point I need to review a snapshot.

Financials Section. On Gust, the financials section is where the entrepreneur asks for funding and offers a summary of projections. It includes a place to upload documents. Upload your documents. I expect to see a spreadsheet with details of the projections.

  • I don’t want to see a pdf file. With pdf I really can’t see the basis of your numbers. Load an Excel spreadsheet with assumptions and a polished look and flow.
  • One tab of sales projections is not enough. In addition to the assumptions tab, there should be at least tabs for a cover summary, a cash flow projection, hiring guide, balance sheet and revenue models. You need a minimum of five and don’t overwhelm me with 20. I don’t need that level of detail…yet.
  • Hidden tabs that include details I need to review are a minor inconvenience. Why should I work harder on your application? Make your data clear and easily accessible.
  • On the positive side, I have seen a few spreadsheets, that have a nice summary up front, a tab with an assumption table linked into the spreadsheet, a hire/HR table and clear, bottom up projections that go over time until past cash flow positive. The revenue projections are important and should not be overlooked.
  • Spreadsheets are a complete topic for another blog. For now, I will admit that spreadsheets are something of a work of fiction, because they are guesses. But the closer the entrepreneur comes to being correct about these numbers, the higher my confidence level in the venture.

Articulating the Value Proposition. Don’t make me guess what your real value is to customers. If you are not perfectly clear in articulating the product to the target market, then how will I know you will be able to effectively sell the product/service?

Proof Points – Gust does not ask for this, but it is important that you be very specific as to the stage of your venture’s development. This will come out in due diligence. But if you have a finished product or channel partners already lined up, that leads to a much better impression for investors.

Know the Rules of the Game. An understanding of how our Angel group operates will benefit the entrepreneur immensely. For example, if our average investment is $400,000 and you are seeking $900,000 then be certain how you can fill out the rest of the round. I don’t particularly like building piers. I want to build a bridge to the next round. If you have funding that supplements ours, then great. However, know that we prefer to lead rounds unless the terms of the other funding is sufficient. So, be careful uploading the other term sheet – know what we like.

Stage of Development. Don’t hide the point that customers aren’t paying or you don’t have any customers yet. Be honest and forthright and just tell us exactly how you will conquer the world. Make me take a bet on you through truth telling.

Traction. Traction is right. Traction works. Traction clarifies, cuts through, and captures the essence of the evolutionary spirit. Traction, in all of its forms …has marked the upward surge of saving the world (thanks to Gordon Gekko for the quote).

Traction is the basis of all that is good in a startup. Traction is the market validation of a value proposition with its target market. Traction shows proof points on its business model. Traction is based in real sales (not a give away product) and has evidence of other proof points – channel partners, a supplier base or existing value chain.

No Faith Based Entrepreneurship. I am really not interested in what you believe. Save that for church. Show me the proof. All that matters are evidence based startups.

Get these right and investors will be your friend.

Disclaimer: These are my own views and not those of any investor group that would have me as a member.

Managing Risk and Managing Decisions

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Early in my career I worked in investment banking and international banking. So, later on when I taught finance I reflected on the issue of risk, and the basic elements of financial risk that all business ventures should consider:

  • Understanding the types of risk;
  • The fundamentals of risk; and
  • Managing the risk.

The fundamentals of risk management involve:

  1. Identifying the risks
  2. Measuring the potential impact
  3. Deciding how each risk should be handled.

In a recent Harvard Business Review article on business model innovation, I noticed a commentary on marketing. This particular article contained a major section about when to make key decisions and identifying who should make those decisions. It occurred to me that the elements of risk are almost identical to the innovation model. Both focus on reducing risk in a venture.

In a past blog I discussed the garbage can model of decision-making, and focused on being novel in decisions. Today, I am looking at reducing the risk and uncertainty inherent in any startup.

Risk identification is a process that systematically and continuously identifies current and potential risks that might have an adverse affect on a startup. The impact of the risk is affected by both frequency (lots of events) and severity (potential big losses). Most companies don’t worry much about frequent small losses. Office supplies disappearing or the local candy store missing a few small low cost items are two examples of a small loss. However, with severe losses, many organizations take precautions to protect events from occurring. Examples here might include large ticket items missing in the isles of retailers or a few items being chained down so that only department managers can help you try on the expensive goods.

In decision-making, the risk inherent about when key decisions should be made is often due to the lack of sufficient information to reduce the uncertainty. Strategies to deal with this issue may include:

  1. Postponing the decision. Sometimes decisions appear urgent but are not.
  2. Splitting up the decision into a series of real options. Break the decision into small bite size pieces this reducing any significant investment.
  3. Changing the order of decisions. Sometimes a client may ask for customization that may not benefit the strategic direction or value of the organization. In response, the startup can change the sequence to only payment upfront or with proof of performance before investing in the customization.

The CEO may not always initiate all important decision-making. Empowering employees is a very effective way to deal with every day minor decisions. If the decision is too important to delegate, then another way to manage the risk is to consult with a board member or trusted advisor. Even then, always try to find the HIPPO (the industry’s Highest Paid Person’s Opinion). Delegating up or outsourcing may be the best option when dealing with risk issues.

Managing risk and decisions can also be accomplished through insurance, or outsourcing. Startups often hire distributors and/or transportation companies to take on the logistics of moving product not only because it is less expensive but also because these outsource companies have the know-how to manage these specific operational risk.

In startups there are other types of identifiable risk that may include market risk, supplier risk, default risk by clients and others that are usually addressed in the planning process. Managing risk and managing decisions travel in lock step with similar processes. However you manage risk, make sure the process is around a strategic framework and one that allows for continuous monitoring.

A Meditation on Entrepreneurial Strategy

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Most of contemporary strategy literature is based on big company strategy. Larger companies focus their strategies on a cost based model because costs are within their realm of control. They almost never think about the revenue side of the equation. After all, one can control costs, but the customer controls your revenue. This is where entrepreneurial training differs, and provides a winning strategy.

If you think of strategy in terms of costs you can win only half the battle. A recent Harvard Business Review Article by Roger Martin, calls this The Big Lie of Strategic Planning. Martin clearly sees the entrepreneurial view, to focus on the sources of revenue, i.e., customers as the key element of strategy.

Henry Mintzberg called this differential—intended strategies versus emergent strategies. Entrepreneurs work in the emergent section, because they are very opportunistic about revenues. Good entrepreneurs learn quickly that you cannot control the future, but you can try to reduce the uncertainty in getting there. Strategists would call this the resource-based view of strategy.

Resource based strategy states that an organization should use the strongest competencies of a firm to determine a strategy. Entrepreneurs think about what they could be doing with the resources in hand in order to find the opportunities. The planning school holds the thought about what the organization “should be doing” corner of the spectrum rather than the “could be doing” corner. Other strategists might view this as the Blue Ocean strategy. Swim to where no one else is playing; find a niche where there is no competition. Entrepreneurial strategy might also fall into the Michael Porter School of Positioning strategy, which is very analytical.

For information of the various schools of strategy read Henry Mintzberg’s book Strategy Safari. Unfortunately, the entrepreneurial school has changed dramatically since the book was published and it shows less relevance for entrepreneurs. However, this book is recommended as a great summary on the various strategic schools of thought and it is still relevant today as a great primer on the major thought patterns in the strategy discipline.

A good strategy (or whatever term is used – mission statement, mantra, culture) communicates behavior to employees. This strategy communicates what decisions should be made and the boundary limits for what should be the focus of the organization.

Another way to determine and validate a strategy, entrepreneurs may prefer the VRIO framework as popularized by Jay Barney. Are you building something Valuable? Is it Rare? Can it be easily Imitated? And can your Organization implement on the concept?

Possibly, the most important considerations for a startup concern (1) whether a strategy is necessary, and (2) at what point does a strategy become necessary for an organization. Should every company act like entrepreneurs and be opportunistic? Early stage startups do not necessarily engage in long-term strategies. For them, it comes down to tactics and execution. Execution trumps all organizational strengths every time.

The bottom line is that entrepreneurs should talk to their customers. Entrepreneurs have a venture. A business is created when the product or service of the venture can reach at least twenty customers who will make a purchase at a price that provides sufficient margins. If the entrepreneur doesn’t have a product and a price then they don’t have a business…yet.

Convertible Notes or Price Valuation: A Question of Risk and Alignment of Interests

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I am not a fan of convertible notes for entrepreneurs for a number of strategic issues. I also understand the reasons why convertible notes have become so popular with entrepreneurs and investors because of the simplicity of the closing. I believe series seed equity can close just as quickly and inexpensively as convertible notes.

For the uninitiated, convertible notes are debt instruments with an implied interest rate, maturity date and a convertible option to shares usually offered with a discount offered to the next pricing round. The intended purpose for investors is to avoid negotiating a valuation with the entrepreneur that might affect the follow- on round negotiated with the next group of investors. For entrepreneurs, convertible debt offers a faster option to close, and ergo cash in hand.

On the other hand, priced rounds offer each investor a price per share. Because of negotiation over valuation they can take longer to develop.

One of my favorite posts on why convertible notes are unfavorable to startups comes from Mark Suster. He offers significant details on the terms of the note and why they are not a good idea for entrepreneurs.

In addition to what Mark has written in detail, my take on this is much more strategic and focused on the alignment of interests between investors and entrepreneurs. First, by placing a maturity date on the convertible note, the entrepreneurs must strategically change their focus from company building to fundraising. Often the maturity date for the convertible note is set for approximately 18 months away. A better date for the entrepreneur would be 24 months, although sometimes they are set as low as 12 months, which is disastrous for the entrepreneur. Given the hunt for funds from new investors, due diligence and the negotiation of valuation—all of this activity can take time away from building and running a company.

The pro convertible funds side of the equation believes that that the time involved on a convertible round is much faster and settles quicker, ergo the whole purpose of a convertible note. My belief is that the function of the convertible note should not be necessary if the interests of the investor and the entrepreneur are strategically aligned.

In early stage companies, the best way to build a startup is through customer development and acquisition. What would an early stage investor prefer? Using their money toward the next fundraising round or focus on customer building? This leads to be an inherent conflict in strategy between the entrepreneur and investor on a convertible round. There is a specific imbedded date to obtain new funds. If that funding is not achieved by that date, the funds become a debt—and entrepreneurs sometimes need a longer runway to launch their companies.

The second issue regarding convertible notes revolves around the purpose of Angel investing. First or second sources of funding after the first formal funding round means to accept the significant risk involved with early stage technology financing. Angels understand that investing at this stage is inherently risky, and the reward is a significant uptick in pricing on subsequent rounds. Convertible notes are an attempt to hedge the risk by not pricing the financing round. Are the protections from down rounds or failures truly built into a note? Yes, a note may be higher in the pecking order of a fire sale in case of a failure. However, if a startup fails, what are the assets truly worth? If the round is not priced, the value cannot be determined easily.

What happens if the entrepreneur does not achieve the steps needed to get the next round of funding? The original Angel has a choice, put in a second round or let the company go broke. However, if the entrepreneur has been able to find another investor, the golden rule applies: “He who has the gold, rules.” The investor leading the next round may decide to offer to fund with the original note holders waiving a number of their protective rights.

Pricing a round allows the Angel to see the negotiating techniques of a founder and the founder to see how helpful an Angel is to the startup. They can begin to see whether their interests are truly aligned. Are both negotiating with the same sense of fairness and aligned interests? Why not have that difficult conversation about pricing, now? It shows the mettle of your CEO. It determines Angel alignment with company goals. If a valuation can’t be agreed upon fairly quickly then perhaps the deal should not have been done at all. Fred Wilson of Union Square Ventures said it well, “Equity is simple and you own what you own.”

As an investor, I attempt to understand the upside risk and prefer a clear valuation. After all, this is my risk capital portfolio. I want my entrepreneur to focus on building the company by creating a sound customer base, so that the next round is a growth round, not another marketing round.

Time Tips

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Time Killers

Time killers are things, processes, people or anything that diverts our attention to activities that are unnecessary and without benefit. Time Killers harm our effectiveness as entrepreneurs. I believe these tips may be credited to Stewart Levine and his book Cut to the Chase, but I was unable to verify the references. Nevertheless, they are excellent tips and worthy of repetition.

Tip 1 – I GOT IT

As soon as you understand exactly what someone is explaining, indicate in one way or another, “I got it.” Doing so frees them to move on and cover more ground. Similarly, if someone else says “I got it” to you when you’re explaining a point, stop.

If you’re not sure if someone got your point, listen carefully to the person’s responses. If it’s clear there’s still a misunderstanding, say “I’m not sure we’re on the same page. Let’s make sure we understand each other.”

Tip 2

YOU”RE KILLING ME

What happens if you have said, “I got it” to the person and they keep right on talking? You feel trapped. You know the clock is ticking. This is the third time you have heard the story. Everyone in the room is already in violent agreement. Instead of getting angry or giving up, look at the other person, laugh, and say, “You’re killing me. I’ve got the point. Let’s move on.”

By being both direct and funny about it, you do two things: (1) you break the tension that everyone probably feels; and (2) by keeping things light, you move the conversation forward without offending. Odds are that the speaker is so wrapped up in the point being made that he or she has stopped observing what was going on around them. You’re offering him or her, a graceful way out and helping to keep things moving.

If you’re not comfortable saying, “You’re killing me,” try “Time out.”

Tip 3

CLOSE THE LOOP

Have you ever had a test at your physician’s office, and the nurse said, “We’ll call you if there’s a problem”? Two weeks later—and still no call. You begin to wonder, “What if they lost the test? How can I be sure everything’s okay?”

When people don’t close the loop, they leave the other person hanging. Not only is it distracting, it can subtly erode the relationship.

Anyone can follow up. It’s a simple matter of being conscientious and disciplined.

When a colleague introduces you to a new contact, tell your colleague when you’ve reached out to the new person. After you’ve connected, tell your colleague how it went.

Respond to invitations and meeting requests promptly. It’s a lot easier for others to plan an event when they know who’s coming.

When you receive details or specifics, acknowledge them. When you receive a question by phone or e-mail, answer it or forward it to the person who can.

Acknowledge your action with the person who raised the question. A simple e-mail reply saying, “Got your message, see you there” will eliminate any confusion or uncertainty over whether you received the e-mail and were able to attend the event.

Never let yourself be known as someone who leaves other people hanging. Once that label gets applied, it’s hard to shake. On the other hand, when you consistently close the loop, you build a reputation as a dependable professional.

Tip 3

Never let your iPhone become iCrack

We’ve become obsessed with staying connected at all times. If not used wisely, these tools, instead of helping us cut to the chase, can usher in a relentless stream of interruptions in our professional and personal lives.

Do you ever find yourself irritated at a fellow commuter who talks nonstop on his cell phone, sharing private and privileged information, while you are attempting to catch up on industry reading? Have you ever been tempted to strangle someone at a meeting who checks his email while others are speaking or presenting?

These productivity tools should serve us, not the other way around. Turn them off when you’re in meetings or working on something that involves others or requires concentration.

You can check in and respond to e-mails when the meeting or work session is over.

Set an after-hours limit as well—one that works for you, your family, and friends.

Tip 4

Tell them the Baby is Ugly

When I asked a colleague to review my initial outline for an article, he agreed under one condition: “I need to know that I can tell you if the baby is ugly.” I told him that not only did I agree, I was counting on him to constructively challenge my thinking.

When someone has a new idea, he or she often loses objectivity. After all, the idea reflects on his or her creativity and quality of thinking. It’s hard to tell someone that you don’t like an idea. But it’s a lot easier to have that discussion before you launch a new product or service than after your company spends countless hours and dollars to develop it. In fact, the sooner you point out that the baby is ugly, the less time everyone wastes developing a flawed idea. A smart innovator counts on your honest feedback. That’s why he or she is asking for it.

An easy way to provide constructive feedback is to give or ask for: three things you like about the idea, three ways to improve the concept and if you dare three things not liked about the idea. This last question is difficult as many humans are programed to be polite and the politeness barrier is a difficult one to crack.

Tip 5

Know your weaknesses, but play to your strengths.

Most people focus on their weaknesses and try to improve them. But the most successful executives realize that this is a waste of time. Everyone has strengths and weaknesses, whether they are a CEO or a management trainee. While it’s important to be aware of your weaknesses, devoting time and energy to strengthening them will give you only limited gains.

You’ll become much more effective by building on the things you already do well.

Tip 6

Life is a negotiation

If you’re breathing, you’re negotiating. Every day you’re trading “this for that”—whether requesting a better compensation package from your employer, negotiating a deal with a client or vendor, or deciding where to dine that evening with your spouse. Make every negotiation a little easier by limiting your wish list to the two or three things that matter most.

Unless you’re negotiating a multiyear contract or a peace treaty, don’t bring a long laundry list to the table. You’re bound to lose something important if you do. Negotiation takes time. Invest it wisely in the important work—knowing exactly what you want, listening to what the other party needs

Tip 7

On it. Pending. Done

Develop a shorthand with your close colleagues. You’re all busy, so give each other permission to dispense with the niceties. On it, pending and done is one I like to use. Another CEO, when he wants someone to move on, e-mails or says “PAC.” It stands for “Point accepted. Continue.” His team knows it’s nothing personal.

Tip 8

Good Enough is the Enemy of Perfect

There’s nothing wrong with wanting to do your best. But striving for perfection when “good enough is good enough” is a waste of time. Don’t let unhealthy perfectionism keep you from cutting to the chase. Know when to let things go.

Tip 9

Take back the Weekend

It’s 4:30 on Friday afternoon. You’re ready to go home. After putting out fires all week, you’re the one who’s burned out. But you’ve got a pocketful of business cards, a pile of receipts to sort through, and at least three people waiting to hear back on something. You decide to go home anyway and “catch up” over the weekend.

Stop!

Unlike on weeknights—when your goal is to clean up quickly and respond to anything time sensitive— Friday afternoons are the time to close every open loop and catch up on those easy-to-put-off tasks that clutter your desk and mind.

Before you leave the office, make sure you’ve delivered on promises, reviewed everything that needs your input, and returned all calls and e-mails. Stay late if you need to. Better yet, set aside time earlier in the day so you don’t have to.

Tip 10

Know when to put the book down

If you’ve grown irritable or are snapping at people, if you’re exhausted or can’t focus, if you can’t fall asleep or are waking up in the middle of the night, take a step back. It’s time to do more than “turn the page” on a workday. You need to put the book down. Whether it’s a long weekend or a true vacation, you need a break. Things aren’t going to improve until you take some extended time off to reenergize.

Every one has effectiveness tips. Feel free to add yours.

No Golf Joke

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I finally picked up my golf clubs after a 10-month hiatus. I went to the golf range to hit practice balls, get the rhythm back and the swing in tune. Upon my return, my wife commented that I appeared much calmer and that golf is possibly better for me than my morning runs.

It was not until later that I truly understood the meaning of her comments. Both running and golf are solo sports where you compete against yourself. I have only been golfing for about five years, but nothing has worked to calm my mind other than golf. When I am golfing, I am only focused on the club, the ball and course management. Nothing else enters my mind – It’s just golf and me. While running, my mind is racing despite the music blaring in my ears from my iPod. Tunes are rocking, my feet are pounding, yet I am thinking about work. I have always had trouble calming my mind. I have tried yoga, meditation, focused imagery techniques; nothing seemed to work, except golf.

I realized that the calming influence of golf was good for my family and me. There, I have a place not only to relax my body, but also relax my mind. It is refreshing even when returning from a lousy round. My head is clear and focused, my body relaxed from the exercise. I am ready both for family time and for work time.

Every leader, every entrepreneur needs that special place, space, time or tool to refresh and renew. The benefits are worth the effort and your family will thank you later. My special thanks to Nike, Callaway, TaylorMade and all the other golf brands out there. And my wife thanks you, too.

The UnderTow

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Risk – Part 2

You never know when you will meet someone and how he or she can help you or your business. For example, I met a great mentor riding in an elevator and another on jury duty. All successful entrepreneurs know that attendance at networking events is an essential activity. Remember that networking is a two way street. You need to give something in order to get something in exchange. Information exchange is done through interpersonal networks, a convergent process that takes time and effort to establish.

Looking out over the ocean, we see beauty in the calm waters. In many popular bathing spots, there is an undertow, a strong current that flows out to sea. Undertows are near impossible to fight, but entrepreneurs must find ways to harness that energy. Smart CEO’s have a calm exterior and an inner undertow, a force and energy to push the startup through any wave.

Many entrepreneurs do not think about their channel partners early enough in their building process. Big buyers go through a series of stages from awareness to knowledge to adoption. Today, most entrepreneurs are thinking about their digital channels, and social media to reach their new clients. But, how are you really going to get the attention of your target audience?

Just like a great book, you can never tell what is inside until it is opened. Why will your customers and channel partners open your book and peek inside. What will satisfy their curiosity? And keep them hungry for more? What is the sticky factor?

How will you stand out in the morass of information bombarded at your target customer every single day? Most entrepreneurs believe social media works well, but frankly it is the interpersonal channels that have the best effect. Which of your friends or acquaintances influenced your last major purchase? Was it the distant Facebook friend or a live relationship? How did they help you visualize relatively abstract information into useable data about a product?

There are other basic risks that must be addressed. Is the targeted market big enough to support your growth business? Can you find and retain the appropriate talent? Is your intellectual property sufficiently protected? Can your team execute and deliver? Can you manage accumulated financial losses (the entrepreneur’s bet) until cash flow positive and know all the premises behind your financials, to survive the turbulent start? Do you understand where every dollar of your funds goes and how that spending action adds value?

Understanding the underlying processes, and flow of a company before embarking on the entrepreneurial journey will save significant time and energy (and money) when ready to launch. Knowing these key characteristics are all about reducing the risks and uncertainties inherit in a startup.

Your mentor can help, no matter where you met them. A mentors’ hindsight is your foresight. Go find those special people that can help reduce uncertainty in a start up and those can help the company grow.