Category Archives: Entrepreneurship

5 Secrets of Creating a Great Business Team

Entrepreneurship, Leadership, Starting a Business,

team working together

My favorite five secrets of a great business team? This list came to me first as an answer to the question how do you build a great business team on Quora.  These five points aren’t something from the business school curriculum. They come from the experience of actually doing it, recruiting a team and growing a business from zero to millions. (For more on that story, click here).

My list

  1. No skill or experience justifies lack of integrity. You need to trust the people you work with, and particularly, the people who become key team members to build on.
  2. Diversity makes better businesses. Not for fake political reasons, but for real business reasons. Teams of different kinds of people – gender, background, ethnicity, and so forth – have broader vision than teams of people who are all the same. Diversity has been given a bad name by bigots. It’s not just morally correct, it’s also better business.

What diversity does and doesn’t mean.

  1. Different skills and experience. You don’t want all developers or all marketers, you want developers, marketers, administrators, producers, leaders, and so forth. I see student groups that are three and four people who share the same major; that rarely works.
  2. Shared values create strong bonds. Palo Alto Software was built by a team that shared my founder values about good business planning, startups, and small business. Jurlique was built by a team that shared founder values about cosmetics with only natural organic ingredients not tested on animals. And don’t confuse shared values with diverse types of people, skills and backgrounds. They are compatible, not contradictory, ideas.

Avoid the all-C-level-officers team

  1. Beware of title inflation. Having the first four people all have C-level titles is usually a sign of youth and lack of experience. In the real world, founders are rarely all fit to be C-level officers for the long term. I recommend vague non-committal titles in the beginning, like “head of tech,” “marketing lead,” and so forth. Leave room to recruit stars later on, as needed, with the big titles.

 

7 Things Wanna-be Entrepreneurs Need to Know

Entrepreneurship

What do entrepreneurs need to know as they get started? Of course there’s need to know, absolutely; and there’s ought to know.  I was asked to come up with a list, and here is my best guess.

  1. Know the difference between cash and profits. You Think in Profits, but You Live on Cash. Things like sales on credit, inventory, and waiting to get paid can make a huge difference. Profits are accounting. It takes cash to pay bills.
  2. Know that business owners have legal constraints related to dealing with employees, employees vs. contractors, copyright and intellectual property, and dealing with tax authorities and investors. You can’t just say “I don’t know” later on. You are supposed to know.
  3. Know that getting outside investment is the exception, not the rule. Be familiar with the pros and cons of bootstrapping. Read this: 10 Good Reasons Not to Seek Startup Investors.
  4. Know that bad behavior and selfishness, which seems to correlate with other people’s success sometimes, doesn’t often work out on the long term. Things like integrity and fairness matter.
  5. Know that good decisions sometimes have bad outcomes. Not every bad thing that happens is your fault. Bad things will happen. And you have to live with that.
  6. Know that you will make mistakes. We all make mistakes. You have to live with them. If you can’t deal with mistakes, don’t start a business. You Will Make Mistakes. Deal With It. Mistakes About Mistakes.
  7. Know how to live with uncertainty. Understanding Uncertainty is Vital to an Entrepreneur.

Note: This post is based on my answer to What should first-time entrepreneurs know that can help them on the road to success, a question posted on Quora.

Good Data Debunking Popular Startup Myths

Entrepreneurship, Starting a Business,

Contrary to popular startup myths and misunderstanding, tech founders aren’t mainly younger than 30. They are generally well educated, not dropouts. They tend to start up where they are, instead of moving to Silicon Valley or other tech hubs.

Here’s a summary of data published by the Kauffman Foundation:

We observed that, like immigrant tech founders, U.S.-born engineering and technology company founders tend to be well-educated. There are, however, significant differences in the types of degrees these entrepreneurs obtain and the time they take to start a company after they graduate. They also tend to be more mobile and are much older than is commonly believed.

Founders are in their late 30s, 40s, and older

  • The average and median age of U.S.-born tech founders was thirty-nine when they started their companies. Twice as many were older than fifty as were younger than twenty-five.

90+% have college degrees

  • The vast majority (92 percent) of U.S.-born tech founders held bachelor’s degrees. Additionally, 31 percent held master’s degrees, and 10 percent had completed PhDs. Nearly half of all these degrees were in science-, technology-, engineering-, and mathematics- (STEM) related disciplines. Onethird were in business, accounting, and finance.

  • U.S.-born tech founders holding MBA degrees established companies more quickly (in thirteen years) than others. Those with PhDs typically waited twenty-one years to become tech entrepreneurs, and other master’s degree holders took less time to start companies than did those with bachelor’s degrees (14.7 years and 16.7 years respectively).

  • U.S.-born tech founders holding computer science and information technology degrees founded companies sooner after graduating than engineering degree holders (14.3 years vs. 17.6 years). Applied science majors took the longest (twenty years) to create their startups.

Top-rank universities are over represented

  • These tech founders graduate from a wide assortment of schools. The 628 U.S.-born tech founders providing information on their terminal (highest) degree, received their education from 287 unique universities. But degrees from top-ranked universities are over-represented in the ranks of U.S.-born tech founders. Ivy-League universities awarded 8 percent of the terminal degrees to U.S.-born tech founders in our sample.

  • The top ten universities from which U.S.-born tech founders received their highest degrees in our sample are Harvard, MIT, Pennsylvania State University, Stanford, University of California- Berkeley, University of Missouri, University of Pennsylvania, University of Southern California, University of Texas, and University of Virginia. U.S.-born tech founders with Ivy-League degrees tend to establish startups that produce higher revenue and employ more workers than the average. Startups founded by those with only high school education significantly underperform all others.

They start closer to home

  • Nearly half (45 percent) of the startups were established in the same state where U.S.-born tech founders received their education. Of the U.S.-born tech founders in our sample receiving degrees from California, 69 percent later created a startup in the state; Michigan, 58 percent; Texas, 53 percent; and Ohio, 52 percent. In contrast, Maryland retained only 15 percent; Indiana, 18 percent; and New York, 21 percent.

 

 

 

 

Understanding Uncertainty is Vital to an Entrepreneur

Entrepreneurship

Pop quiz: what relationship factor is the single most common trait in the successful entrepreneur?

My answer: understanding uncertainty. Living with uncertainty

Why?

First let me say that I’m not sure. Second, that I might change my mind tomorrow. (Irony intended.) Third, that I know there are seemingly endless lists of traits of the entrepreneur, and I’m guilty of producing several (including my own top 10 list, which is one of the most popular post on this blog).

Today I’m thinking that the single most important trait of the true entrepreneur is establishing a good, healthy long-term relationship with uncertainty. As an entrepreneur, you don’t know for sure, but you act. You program, you contract, you create, you hire, you borrow, you spend, and you act, all like the explorer setting forth into unknown territory.

Planning helps. Research helps. But you have to be able to live with the educated guess.

(Image: dny3d/Shutterstock)

Do You Believe the Legendary Startup Failure Statistics. I Don’t.

Business Strategy, Entrepreneurship, Management, Starting a Business,

This recent piece on startup failure statistics caught me eye on Twitter first, and I followed the links to discover Startups: Conventional Wisdom Says 90% Fail. Data Says Otherwise. | Fortune.com. Here’s a direct quote from author Erin Griffith:

“I recently found myself carelessly repeating a statistic that I’d heard dozens of times in private conversations and on public stages: ‘Nine out of 10 startups fail.’ The problem? It’s not true. Cambridge Associates, a global investment firm based in Boston, tracked the performance of venture investments in 27,259 startups between 1990 and 2010. Its research reveals that the real percentage of venture-backed startups that fail—as defined by companies that provide a 1X return or less to investors—has not risen above 60% since 2001. Even amid the dotcom bust of 2000, the failure rate topped out at 79%.”

I was happy to see this because I’ve agreed, including here and here on this blog and also here in the bplans.com articles, that failure statistics are bogus. Overblown. Exaggerated. And taken for granted.

What drives the startup failure statistics myth

I’m not so sure about Erin’s explanation of why that occurs. She says, in the paragraph explaining the one above:

Yet the denizens of Startup Land continue to cite the 90% figure because it serves a purpose. It comforts failed startup founders who burned through their investors’ money, laid off staff, and shut down their companies. It supports the startup world’s celebration of failure. “Sure, you failed, but that’s the norm,” the thinking goes. “The odds were against you.”

I don’t buy Erin’s explanation there. She’s too kind. I think the 90% myth is driven by bogus would-be experts who clutter the web and even business publications spouting worn-out startup clichés to bolster their alleged expertise. I think it’s a side effect of our everybody-is-a-publisher society. People can get attention with certainty untempered by experience. I did a rant on that subject here, not that long ago: Bogus experts give bad startup advice.

An important clarification

Although it doesn’t quite support my point, I can’t leave the subject without pointing out that the data we’re looking at there is not for all startups. It’s just about venture-backed startups, which are the cream of the crop. Of course they do better than the average startup. They are the ones that get through the investment filter process.

And this also shows that so much of what we value in information depends on the definitions. What’s a startup? To me it’s a new business of any kind. To many other experts, the term startup applies only to high-growth new businesses suitable for outside investment. So we have to look, with any of these studies, on what they are really studying. All businesses, or just high-end tech businesses?

And then, before we leave the subject, there’s the obvious thought that not all businesses, startups, small business, or whatever, are equal. When you start your own business, if you do, your odds are not the same odds as everybody else who starts a business. Your odds depend on what you’re trying to do, how well you do it, how well you plan and manage, and what resources you bring with you.

Last thought: I can guarantee you that your odds of failure go way down when you run your business with good planning process. Start with a lean plan and review and revise it regularly.

 

 

A Two-Day Startup Fest at Rice Business Plan Competition

Business Plan Contest, Venture Contests

A portable device to quickly diagnose strokes. An additive that doubles the strength of fiberglass and carbon fibre materials. A new way to use magnesium to heal broken bones. Those are just a few of the dozens of startups I saw earlier this month at the annual Rice Business Plan Competition. This was the tenth year I’ve been a judge. It gets better every year. Two days of plans and pitches. I wouldn’t miss it. The picture here shows the finals, six amazing finalist teams competing for 300 judges in a very full Rice business school auditorium.

RBPC Finals 2017

More than $1.2 billion in funding

As a judge of this event, I read six business plans cover to cover. Then I spent two days watching and asking questions as several dozen startup teams pitch their startups. I do six of them on Friday and 10 on Saturday, which includes six finalists. The pitches take 20 minutes or so, and of course they include questions and answers. The 42 startups chosen from more than 700 applicants must have at least one student, and only the students can do the pitch. They come from all over the United States, plus Canada, U.K., Germany, India, and Hong Kong.

In the 10 years I’ve been doing this, the startups get steadily better. At least 80 percent of the ones I saw this year look like they should be getting angel investment, and all of the six finalists will get funded for sure, and launch. The statistics get steadily more impressive. Here are some numbers published by the organizers:

In 2016 we screened more than 750 applications. More than 180 corporate and private sponsors support the business plan competition. Venture capitalists and other investors from around the country volunteer their time to judge the competition, with the majority of the 275+ judges coming from the investment sector. 161 past competitors have gone on to successfully launch their businesses and are still in business today, with another 15 having successful exits. These companies have raised in excess of $1.2 billion in funding.

Serious investment possibilities

This year’s winner developed a portable device that identifies stroke victims fast. Although their pitch at Rice isn’t public, they link to a previous pitch presentation. This is Forest Devices, from Carnegie Mellon.

Forest Devices earned $635,000 in prize money and investment. Most of this is conditional, tied to angel investment that comes with fairly standard conditions including equity for the investors. Most of the teams end up accepting the terms and taking the investment, although that generally takes a few weeks of legal work before it’s final.

Medical Magnesium, which finished in third place, landed $709,000 in proposed investment with term sheets. It is developing bioabsorbable magnesium implants that turn into bone instead of being removed. It came from the University of Aachen, in Germany.

Palo Alto Software gives a prize for the best written business plan entered. This year that prize went to AIM Tech, from the University of Michigan. It develops low-tech, low-cost medical devices for emerging marketings, including an award-winning low-tech infant ventilator.

 

How to Protect Your Business Idea While You Build The Business

Business Ideas

How to protect your business  idea while you build your startup. I’ve been kind of hard-line in this space on the value of ideas. I’ve said they are a dime a dozen, aren’t owned, can’t be sold. My personal favorite is this one:

A good idea is like a beautiful day. Everybody owns it.

I’ve posted here on what you do with an idea to make money from it; and also here and here on how you can’t just sell it.

Companies don’t buy ideas. Investors invest in ideas.

Companies don’t buy ideas. You can’t just sell it. You say it’s great, but I say all ideas are brilliant before execution.

Investors don’t invest in ideas. So don’t share it with investors at all when it’s just an idea. It has no value at that point, and you don’t even own it. Real investors don’t steal your idea but resent that you’ve wasted your time with just an idea. Investors never invest in ideas alone. Rarely, they invest in a specific, known entrepreneur, as early as idea stage. But that’s a very special case. You know who you are. And if you aren’t sure, then you aren’t that person.

There are reasons to share an idea

By the way, later on, after you’ve done the work, recruited a team, met milestones, and gained traction, then you share it with investors because they don’t steal ideas. Real investors want the team in place so they can invest in execution, not execute themselves. Real investors don’t steal ideas and don’t sign non-disclosure documents. Make sure you do your homework, check backgrounds and history, for investors who are real and not conflicted with an existing investment.

Second, share it carefully only with people you trust and want on your team. The next step after idea stage is recruiting a team. Trust is essential. Having skills and experience you need is also essential. Bring them into it so they become co-founders and help you develop from idea to business, motivated by sharing the upside. And real people will sign non-disclosure agreements because they don’t have the same reason that investors have not to.

Here’s how to share carefully, and protect as much as possible

  1. Use a non-disclosure agreement wisely. It’s not inappropriate with potential co-founders and team members, or friends and family investors. Don’t depend on it, don’t make it a huge issue, but use it in every case that isnt a big problem.
  2. Patents are for inventions and formulas, not ideas. You can’t patent an idea. If you have something patentable, by all means, apply for the patent. Don’t do a ton of work on it, or spend a lot of money, without first checking with patent experts. (but I’m not an attorney; check with an attorney of course).
  3. Copyright is for creative works. Copyright your code if you have code. Copyright is relatively cheap. It doesn’t protect you against copying because only the code is protected, the actual words; not the idea (but I’m not an attorney; check with an attorney of course).
  4. Trademarks are for commerce. Trademark your logo, your tag lines, your images, your main selling points as quotes. Trademark is relatively cheap too (but I’m not an attorney; check with an attorney of course).
    Register domain name and entity. Neither protects you a lot, but both are a good idea.
  5. Registering the entity protects your business name to some extent, as long as you were the first in the world. It can cost as little as $50. Registering the domain name, if you have a good one, protects you for that domain but not against copycats with similar names.
  6. Write your idea down and mail yourself 10 copies via registered mail. This can protect you later, with sloppy problems that come up, showing legal proof of what your idea was on what date.

(Image: Flickr cc: Snail_race)

 

 

The Billion-Dollar Idea Fallacy

Business Ideas

What is wrong, you ask, with thinking your business idea is worth a billion dollar idea? That you have the next unicorn?

Nothing…

Nothing. That’s a dream. We all dream. We dream of writing a great novel, being a pro athlete, being a movie star, or being Steve Jobs, Bill Gates, Mark Zuckerberg.

The younger we are, the grander the dreams. We’re built that way. It’s one of the joys of being human. And dreams inspire us.

That’s why so many young entrepreneurs think their ideas are worth billions.

Unless the dream interferes with reality…

And there’s nothing wrong with the dream as long as it doesn’t interfere with reality. However, the billion-dollar-idea (BDI) fallacy does interfere with reality, and way too often. That’s the dark side. Too many young people delude themselves into thinking that the BDI, alone, has value without work, execution, and getting things done. They think they can sell an idea. They waste their time and energy trying to sell that BDI without realizing that it’s not something they own, not something other people will buy, and not something that has value. And that’s a shame.

<p”>In the real world, a good idea is like a beautiful day. Everybody owns it. Some people take more advantage of it than others.

Look at the big wins in history. Jobs, Gates, Zuckerberg and other people who created billion dollar businesses didn’t waste even a second trying to trade on the idea. Instead, they got going with actual execution. They gathered teams together and got work done. The work turned their ideas into billion dollar businesses. The people they gathered turned the idea into a billion dollar business.

(Note: this post started as my answer to a Quora question: Why do so many young entrepreneurs think their ideas are worth billions?)

True Story: Missing Assets Equal to A Year’s Sales

Business Mistakes, Business Stories

You don’t think finance and accounting matter in small business? Here’s a true story, and it’s about a small business like the ones I write about, in fact one I was involved in, not a large publicly traded company. $3 million worth of assets went missing, but nobody took them. Where do you think they went? Let’s hope this accounting nightmare doesn’t come up in your business.

This really happened

I know, that seems like standard large-company stock market stuff, but here’s a true story of Creative Strategies International, which was then a medium-sized high-tech research and consulting company owned by Business International and based in San Jose, CA. Call it CSI. I should add that this story preceded the change in ownership to the Creative Strategies that is now the brainchild of Tim Bajarin, still exists, and is still in San Jose, CA.

I need to emphasize this, because I like Tim Bajarin and he’s done a great job with the company since he took it over. I’m pretty sure the corporate entity even changed, I know the ownership changed, so I assume there’s no harm in telling an old story. And I think there might be a lesson here.

Shortly after I started to work there, the New York parent company audieted. And, as you suspect from reading the title of this post, assets were missing. In fact, quite a sizable chunk of assets. In a company of 20 or so employees, selling $4 million or so per year, roughly $3 million worth of assets had disappeared.

Needless to say, the parent company was not amused. But there was no theft, no embezzlement, just bad accounting.

What do you think happened? Of course you have no idea, but let me give you a hint first, then think about it. The assets were accumulated research, not chairs or tables or computers or gold bullion, but research. Does that tell you the answer?

Don’t Book Expenses as Assets

It turned out that CSI created what we called group studies, research studies that we’d design to cover some interesting new market in high tech, develop, finish, and then sell to multiple buyers. For example, a study in telecommunications would be created and developed and sold to 10 or 20 or more companies in the telecommunications markets. If you could sell a study that cost $25,000 to 20 companies for $5,000 each, they got a good study — market forecasts, competitive analysis, etc. — at a great price, and CSI made a healthy profit. Whoknows_istock_000000551118small

So have you figured this out? As the studies were created and developed, consultants were paid real money to research markets. They took real checks home and cashed them and paid mortgages and things. They also took planes to places and interviewed people, and purchased some secondary research, sometimes developed primary research, all of which cost money.

All of this spending should have been expensed as product development expense. It was just like computer programming in terms of tax treatment and standard accounting. You aren’t really building an asset, you’re incurring an expense. Product development is almost always an expense, even though it sometimes generates technology that goes into products that get sold for money.

Somebody doing the numbers assumed that since this would be cost of sales when the studies were finished and sold, and instead of calling this money development expense and subtracting it from profits, they’d call it assets, as if it were inventory, and subtract it from profits as direct costs.

It may have seemed logical at the time, but over time many of those group studies were started but not sold. If the sales were disappointing, instead of spending the full $25,000 and finishing the study when only two clients signed up for $5,000 each, they’d just dump the project.

And there’s the rub: nobody went back to those supposed assets, the accumulated investment in product, and wrote it off. It remained on the books as assets, for several years, until the parent company audited. Nobody had purposely or intentionally done anything wrong, there was no fraud, no charges, no money recovered; just several very unhappy people.

Business Numbers Matter

I guess I’m some kind of weirdo, particularly as I was a literature major and journalist-writer before I got into business, but I like the business numbers and I think they’re important. Maybe it’s from stories like this one. No, I wasn’t the accountant, I was one of the researchers, but I was also a vice president and those were bad times for all of us, not just the bookkeeper.

Do We All Undervalue Bootstrapping?

Bootstrapping, Business Planning, Business Stories, Business Strategy, Growing a Business

In business schools, in popular blogs, in business publications, and in general discussion of starting a business, we undervalue bootstrapping. We teach starting a business as if every new business requires sophisticated venture capital. I understand how this can be educational. It means teaching business planning, which is the ultimate business teaching tool, and investment analysis, ROI, IRR etc. Still, of the 700,000 or so new businesses launched every year, about 5,000 had VC money, and maybe 30,000 had angel investment. The rest were bootstrapped.
Kids with Boots

Outside investment is overrated

I think the investment option is overrated. It’s better to own your own than to land investment, at least if you can pull it off. As the old song says, “God bless the child that’s got its own.” The opportunity itself should determine whether investment is required. lf it takes more resources than the founders can muster, then it needs investment.

The cliché asks which is better, a piece of a watermelon or a whole grape. But what if that comparison is skewed wrong? Which would you rather have, a slice of an orange or a whole tangerine?

I have good associations with bootstrapping. I was on the board as Philippe Kahn took $20K from his father, plus one $90k bundling deal from a PC manufacturer, and levered up Borland International without outside investment until he didn’t need it. He did it with a great product, strong demand, smart management, and cash-only sales instead of the mainstream, working-capital-hungry channels. Borland went public less than three years after it started. Palo Alto Software grew slowly without outside capital. We had to slipstream a larger vendor whose advertising budget was 10x ours. We ended up with 70% share in our niche and owning the company outright.

The luxury of owning it yourself

Bootstrapping isn’t just about owning the whole pie. It’s also about the luxury of being able to experiment and, at times, making mistakes. Philippe was unconventional. Could he have had that freedom if he’d had conventional VC financing?

A few years ago I was judging a major intercollegiate venture competition in which one team looked especially strong, it’s $5 million 3-year forecast seemed as likely as any of the others, but it didn’t need any outside investment. It was the best plan (IMHO) but it didn’t win. The judges, mostly investors, couldn’t figure out how to deal with that plan. It didn’t win the competition. It should have.

(Image: copyright Timothy J. Berry. All rights reserved.