Tag Archives: entrepreneur

How to Start a Company

Posted December 13 2010

First off, I’d like to setup some ground rules before I get started.

I really put people into two separate buckets.

There are entrepreneurs : These people are looking to develop an asset which provides a good or service which can eventually operate on its own. The primary job of an entrepreneur job is to build a business which grows and continues a success trajectory without them present.

There are small business people: These people are looking to start a business which they can run so they have discretion over their own fate and schedules without the oversight of a boss. If being your own boss and having more time to spend with your family is your top priority, you probably fall in this bucket.

Most all of my writings are directed towards the former as opposed to the latter, for no other reason other than I am more focused on building companies as opposed to small businesses, therefore if you are starting a pet store downtown, you are better off finding information elsewhere.

Now gentle reader, we will venture onward:

So, companies start all sorts of different ways. Many start with someone dreaming up an idea, while others start with dreaming up a way of improving someone else’s idea. The only thing in common with all of them is that they all have the same goal… to create a good or service that people adore / use and then to make money by providing that good to an interested party.

While people tend to do a good job dreaming up the newest “viral-social-shaping-pet-network” they do so without a good business model behind it.

“We’ll make money off advertising.”

Famous last words….

You have a better chance of taking your startup capital and investing in lottery tickets than making money off of advertising without MASSIVE critical mass.

And I mean.. Massive

So maybe I’m exaggerating a bit, but I’m not a huge fan of the “build something so popular and timeless that we’ll make a killing on advertising.” While being a successful entrepreneur already requires a lot of luck, I like to 20..1 odds as opposed to 1,000,000..1 odds, which are closer to reality in building a business model off of advertising that will stick.

Despite popular belief, even companies like Twitter, Facebook, and Google had a profit motive ( even though some of them, cough.. Twitter.. cough ) haven’t fully executed on their business profit model.

*(Footnote: Twitter will make it, and if timing is good, investors will make a bunch of money, but IMHO I’m long Facebook and Short Twitter. Sorry guys. )

The truth of the matter is, if you are looking to build a Twitter or a Facebook – good for you. You are probably smarter than I and should go read someone smarter’s blog. Lord knows there are 1000′s out there.

If you’re looking for mild mannered success, like being able to occasionally fly private as opposed to personalized 767, read on.

And these guys drive a Prius? Really? C’mon!

FIRST STEP: THE IDEA

So let’s first dwell a little on the first part of your brilliant hydroelectric cat toothbrush, how are you going to produce it? How are you going to take it to market? What are you going to do when the SPCA delivers you a special award for curing cat gingivitis?

Well, let’s take a step back first and put your idea into one of two buckets. – Patentable and non Patentable.

If you have a brand new product where a patent is going to be your protection, such as the toothbrush, then you need to work as quickly as possible to get a provisional patent filed and TELL NO ONE about your idea until that is done. You will have to solicit an NDA to talk to people about an idea where the patent IS the value behind the idea.  If you don’t, you potentially screw up the patent-ability of the product.  Before you go hiring a patent attorney, pay the USTPO website or Google patent

http://www.google.com/patents

http://www.uspto.gov/

Where you will depressingly find out that your idea was probably already patented. No problem, go think up another one!

Even if your idea is patentable to some degree, such as your “dog-social-network” I advise you to focus more on execution and getting your idea to production than focusing too much on patents. Legal wrangling sucks the energy out of an entrepreneur, and while your idea is a fledgling, execution should be the primary focus…. If you spend too much time in patent world, you’ll realize that everything is patented and go meandering back to your day job. It’s a dead end – this is why LAWYERS are RARELY good entrepreneurs!

So now what? It’s time to start talking to everyone. Talk with your friends, sisters, professors, mothers, EVERYONE!  Pitch every smart / stupid / ugly person you know. Go out and get feedback – the smarter the feedback the better. Expect a lot of people who will try and talk you out of the idea.

But hold on? Aren’t they going to steal the idea? But you’re in stealth mode right? Make everyone sign an NDA?

Well, chances are most people won’t think your idea is great, or even if they do, they won’t have the energy or chutzpah to properly execute on it… You see naive reader the secret of entrepreneurial success is not the “idea” per se but the execution on the idea.

Ideas are like assholes, everyone has one, it’s execution that wins the day.

So as you continue to PITCH everyone on your idea, insights will you will start to develop as people continue to ask you questions?

How are you going to develop the idea? Who is your engineer? Who is writing the software? Who is doing marketing?

What you will find as you continue to pepper people with these questions, they will actually have answers for you. Oh, well I used Mark’s firm for software development and they did a kick ass job. Joey is a great designer.. Joselyn is an amazing marketing gal… Et cetera…

It’s like stone soup! You’ll be surprised at how things come together.

This is a critical phase however, since if the idea sucks, no matter how well you execute, you’re screwed… What I like to do is called the 7 day rule. Once I think up an idea, ( and lord knows there have been many crazy ones — separate blog post, )  I let it fester for a few days then start talking to friends about it. If after 7 days I’m as passionate about it as I was in day one, I start the second step of the process.

SECOND STEP: EXECUTIVE SUMMARY

So once you’ve decided this is something you are going to work on, you need a 2-3 page executive summary for no other real reason to organize your thoughts into something coherent.

An executive summary shouldn’t be over 2-3 pages long. There are 100′s of resources out on the web to steal templates from, but generally speaking they all should include the following bullet points:

<complete theft from Guy Kawasaki’s blog>

http://blog.guykawasaki.com/2006/04/the_art_of_the_.html

1. The Grab: You should lead with the most compelling statement of why you have a really big idea. This sentence (or two) sets the tone for the rest of the executive summary. Usually, this is a concise statement of the unique solution you have developed to a big problem. It should be direct and specific, not abstract and conceptual. If you can drop some impressive names in the first paragraph you should—world-class advisors, companies you are already working with, a brand name founding investor. Don’t expect an investor to discover that you have two Nobel laureates on your advisory board six paragraphs later. He or she may never get that far.

2. The Problem: You need to make it clear that there is a big, important problem (current or emerging) that you are going to solve. In this context you are establishing your Value Proposition—there is enormous pain out there, and you are going to increase revenues, reduce costs, increase speed, expand reach, eliminate inefficiency, increase effectiveness, whatever. Don’t confuse your statement of the problem with the size of the opportunity (see below).

3. The Solution: What specifically are you offering to whom? Software, hardware, service, combination? Use commonly used terms to state concretely what you have, or what you do, that solves the problem you’ve identified. Avoid acronyms and don’t try to use this opportunity to create and trademark a bunch of terms that won’t mean anything to most people. You might need to clarify where you fit in the value chain or distribution channels—who do you work with in the ecosystem of your sector, and why will they be eager to work with you. If you have customers and revenues, make it clear. If not, tell the investor when you will.

4. The Opportunity: Spend a few more sentences providing the basic market segmentation, size, growth and dynamics—how many people or companies, how many dollars, how fast the growth, and what is driving the segment. You will be better off targeting a meaningful percentage of a well-defined, growing market than claiming a microscopic percentage of a huge, mature market. Don’t claim you are addressing the $24 billion widget market, when you are really addressing the $85 million market for specialized arc-widgets used in the emerging wocket sector.

5. Your Competitive Advantage: No matter what you might think, you have competition. At a minimum, you compete with the current way of doing business. Most likely, there is a near competitor, or a direct competitor that is about to emerge (are you sufficiently paranoid yet??). So, understand what your real, sustainable competitive advantage is, and state it clearly. Do not try to convince investors that your only competitive asset is your “first mover advantage.” Here is where you can articulate your unique benefits and advantages. Believe it or not, in most cases, you should be able to make this point in one or two sentences.

6. The Model: How specifically are you going to generate revenues, and from whom? Why is your model leverageable and scaleable? Why will it be capital efficient? What are the critical metrics on which you will be evaluated—customers, licenses, units, revenues, margin? Whatever it is, what impressive levels will you reach within three to five years?

7. The Team: Why is your team uniquely qualified to win? Don’t tell us you have 48 combined years of expertise in widget development; tell us your CTO was the lead widget developer for Intel, and she was on the original IEEE standards committee for arc-widgets. Don’t just regurgitate a shortened form of each founder’s resume; explain why the background of each team member fits. If you can, state the names of brand name companies your team has worked for. Don’t drop a name if it’s an unknown name, and don’t drop a name if you aren’t happy to give the contact as a reference at a later date.

8. The Promise ($$): When you are pitching to investors, your fundamental promise is that you are going to make them a boatload of money. The only way you can do that is if you can achieve a level of success that far exceeds the capital required to do that. Your Summary Financial Projections should clearly show that. But if they are not believable, then all of your work is for naught. You should show five years of revenues, expenses, losses/profits, cash and headcount. It might also make sense to show a key driver, such as number of customers or units shipped.

9. The Ask: This is the amount of funding you are asking for now. This should generally be the minimum amount of equity you need to reach the next major milestone. You can always take more if investors are willing to make more available, but it is hard to take less. If you expect to be raising another round of financing later, make that clear, and state the expected amount.

You should be able to do all this in six to eight paragraphs, possibly a few more if there is a particular point that needs emphasis. You should be able to make each point in just two or three simple, clear, specific sentences.

This means your executive summary should be about two pages, maybe three. Some people say it should be one page. They’re wrong. (The only reason investors ask for one page summaries is that they are usually so bad the investors just want the suffering to be over sooner.) Most investors find that there is not enough information in one page to understand and evaluate a company.

Please remember that the outline above should not be applied rigidly or religiously. There is no template that fits all companies, but make sure you touch in each key issue. You need to think through what points are most important in your particular case, what points are irrelevant, what points need emphasis, and what points require no elaboration.

Some other general points:

  • Do not lead with broad, sweeping statements about the market opportunity. What matters is not market size, but rather compelling pain. Investors would rather invest in a company solving a desperate problem for a small growing market, than a company providing an incremental improvement for a large established market.
  • Don’t acronym your own name. Sun Microsystems did not build its brand by calling itself “SMI.” (Of course, if you know where the name Sun came from, you understand this is an inside joke.)
  • Drop names, if they are real; don’t drop names if they are smoke. If you have a real partnership with a brand name company, don’t hide your lantern under a bushel basket. If you consulted for Cisco’s HR department one week, don’t say you worked for Cisco.
  • Avoid “purple farts”—adjectives that sound impressive but carry no substance. “Next generation” and “dynamic” probably don’t mean anything to your readers (unless you are talking about DRAM). Everybody thinks their software is “intelligent” and “easy-to-use,” and everyone thinks their financial projections are “conservative.” Explain your company the way you would to a friend at a cocktail party (after one drink, not five).
  • State your value proposition and competitive advantage in positive terms, not negative terms. It is what you can do that is important, not what others cannot do. With the one or two most obvious competitors, however, you may need to be very explicit: “Unlike Cisco’s firewall solution, our software can operate ….”
  • Use simple sentences, not multi-tiered compound sentences.
  • Use analogs, as long as you are clarifying rather than hyping. You can say you are using the Google model for generating revenues, as long as you don’t say you expect to be the next Google.
  • Go back and reread each sentence when you’re done: Are they clear, concise and compelling?

Finally, one of the most important sentences you write will not even be in the executive summary—it is the sentence that introduces your company in the email that you or a friend uses to send the executive summary. Your summary might not even get read if this sentence is not well-crafted. Again, it should be specific and compelling. It should sell your company, not just describe it.

</complete theft from Guy Kawasaki’s blog>

THIRD STEP: PRO FORMA FINANCIALS

In the era of WEB BUBBLE 2.0/3.0/4.0 there are many people who will tell you to ignore the financials and focus on building a great company.

These people have MBA’s from Stanford, and can drive over to San Hill Road with a 3 page executive summary, some buzzwords, and leave with $10,000,000.

For you, my sweet under-educated, under-resourced reader – you need to focus on making profits and as quickly as possible. The faster you can develop a plan to make money, the better off you will be in dealing with any Investors or ideally reinvesting in your rapidly growing business.

Developing some semblance of a financial / business model in Excel is a key second step. My friend/associate Mark Manduca has a saying I’ve  borrowed “Everything looks easy in excel,” but it’s this model which gets the juices flowing and allows you to break your business development into little pieces.

Once you break things down into little pieces, it becomes much more digestible: If I could get 1 new customer a day, and make $100 per month off each customer, in 1 month I’m making 3,000. 2 months making 6,000. 3 months 9,000. Then x plus y plus x and I’m earning millions of dollars in 2-3 years from now…. hence the proverbial hockey stick.

That being said, much of my success has been based on “dreaming it, then doing it.” To be successful, you need to have a clear path of what you are dreaming of. I’ve included a template I always use. It’s a super simple starting position –  a one-size-fits all spreadsheet, but if you’re smart, and since you’re reading this blog I know you are - you can modify it for your advertising/service/sales/manufacturing/global cloud based pet walking business.

In fact, if you use a better one, please email it to me, and I’ll update mine… Would probably save me a lot of work in the future.

FOURTH STEP: (NOT) RAISING MONEY

Initially many have a misconception that after they have an idea, a plan, and a financial projection, its time to go out and build a presentation to pitch to venture capitalists.

In fact, with most businesses what needs to be done now is execution as opposed to wasting time raising money. In fact, if you aren’t well down your execution path, there is a very low likelihood that you will successfully raise money. ( Unless you are the Stanford MBA, then disregard this and go get your money. )

More importantly, WHY are you raising money? Do you really need it, or are you just trying to take shortcuts.. Not smart short cuts, but just because you are lazy.  ( See prior post on – Looking for money, ask for advice instead )

Raising money creates dilution, and should only be a necessary evil in the event you reach a real roadblock with your business. Mindlessly accepting dilution is a fool folly, as you will regret it when the day of the sale of your company comes.

(Caveat: If you find someone who adds real value through relationships or skill and is eager to invest, that would be the exception. )

So you have zero savings to invest in your business? Home equity line lost in the foreclosure proceedings? Well, if that is the case, and you absolutely need a little seed capital, its time to visit the three F’s

( Friends / Family / and Fools )

Chances are you have a friend or know someone could pool together a little bit of money to see you through to your initial execution. Most good entrepreneurs I know have had a pretty easy time finding the first 10k or so needed to start their companies.

Whether you are getting ready for your meeting at Kleiner or Sequoia or going to sit down with the three F’s, it’s probably a good idea that you come up with a really simple presentation to pitch to your investors.

<Watch me steal from Guy Kawasaki again>

The best advice I’ve seen on building a presentation is once again from Guy Kawasaki in regards to his 10-20-30 presentation.

The concept is simple.

10 Slides

20 Minutes

30 Point Font

This prevents you from going off on a multi-hour diatribe, and makes you FOCUS. In truth, no one wants to sit through a multi-hour imbroglio of your most inner thoughts ( except maybe mom and dad – you can add extra slides if you are pitching them. )

Learn more here: Kawasaki 10-20-30

</More Guy Kawasaki Theft>

FIFTH STEP: MAKE IT HAPPEN

Get to work! You have an executive summary, a financial projection and plan, maybe a few dollars -  now its time to make magic happen.

Don’t dilly dally! 14 other people who are smarter and more motivated than you are working right now on the exact same thing! You need to out-execute them! Make Haste!

Couple good suggestions to keep focused:

Block yourself from Facebook / Twitter / Drinking / Internet “videos” /  all vices sans caffeine.
Leave your spouse, or maybe just separate for a good couple months.
Give the children away to the parents or inlaws for 3-6 months.

You have a LOT of work ahead of you.

Hold yourself to making small milestones!

Find a great task management software like:

http://www.rememberthemilk.com
http://www.appigo.com/

Or my favorite and what I use: http://www.toodledo.com
I know, the name makes me vomit too.

If you can’t get it together, read David Allen’s book – Getting things done…

Dec 23rd, 2010 revision – After numerous, legitimate complaints, I have to come back and give proper attribution to my GTD Guru Robert Strazzarino. (Strazz) While I always was a huge advocate of lists and breaking projects into smaller parts, Strazz introduced me to the GTD framework and Toodledo and since still is my GTD Mentor.. Happy Strazz?

Now go make magic.

This is what separates the charlatans from the hustlers who make a real go of things.

If it all works out for you, pick me up in your Gulfstream on the way to Fiji as a way to thank me.

I prefer 2005 Dom Perignon in the event you were wondering.

Cheers and happy executing! P.S. Expect many revisions/ updates to this post as the questions come rolling in!