All posts by Raymund Alvarez

How to Raise Successful Kids Without Overparenting

My video this week is somewhat like a compliment to my post yesterday, 5 tips on raising children as entrepreneurs. This is a TED talk from last November, Julie Lythcott-Haims: How to raise successful kids — without over-parenting. Here’s how TED summarizes:

With passion and wry humor, the former Dean of Freshmen at Stanford makes the case for parents to stop defining their children’s success via grades and test scores. Instead, she says, they should focus on providing the oldest idea of all: unconditional love.

She’s very concerned in this talk with the other side of the coin – not neglectful, uncaring parenting, but parenting that focuses on visible trappings of kid success:

But at the other end of the spectrum, there’s a lot of harm going on there as well, where parents feel a kid can’t be successful unless the parent is protecting and preventing at every turn and hovering over every happening, and micromanaging every moment, and steering their kid towards some small subset of colleges and careers.

And this:

What I’m saying is, when we treat grades and scores and accolades and awards as the purpose … What I’m saying is, our kids need us to be a little less obsessed with grades and scores and a whole lot more interested in childhood providing a foundation for their success built on things like love and chores.

She has a lot to say about defining kids and childhood beyond the kind of achievements that lead to admission to the best college. She has a good argument for including chores in childhood. And a serious plea for unconditional love instead of conditional success.

All of which makes me pleased with my post yesterday, about raising kids to be entrepreneurs. I suggested in that post that you don’t push too hard, live your own life instead of theirs, and let them study what they want, not what you want. Among other things.

5 Tips for Raising Children as Entrepreneurs

Megan_with_boots_1989_ish-croppedI’m an entrepreneur, founder of Palo Alto Software. My wife and I are parents of five grown-up children, all involved with startups (Curious? check out Palo Alto Software, Rebelmouse, and HavePresence.) Does this just “happen” by osmosis, or did my wife and I do something specific to raising children as entrepreneurs? Was it a good idea? And would I recommend other people do the same thing?

First, I should admit, we really didn’t plan it that way. I fell into entrepreneurship not because I believed in it in principle, but rather because I wanted to do what interested me and earn enough money to support the family. That became a software business in the heart of the Silicon Valley during the first PC boom; I was an entrepreneur with a Stanford MBA degree. And we never thought about raising entrepreneurs, just healthy, well-educated, happy, productive people.

So what happened? Have I learned anything about this that might help you? I’ve talked to my wife about it, as a reality check. And here’s what we think we’ve discovered, five pieces of advice for you as a parent:

1. Let them study what they want, not what you want

My wife and I believe in education. Period. Note we don’t say “business education”; I know just as many entrepreneurs with liberal arts degrees as those with business or technical degrees. So don’t push your kids into courses that promise to be the “hot fields” where opportunity exists — unless they’re already interested in one of those fields. Even then, by the time they’re out of school, the business landscape will shift several times, and what’s “hot” now will almost certainly have cooled down by tomorrow. Let them immerse themselves in learning they enjoy, subjects that already hold their interest, and they’ll find the way to learn what they need to succeed.

Of course, this approach to school pertains to higher education, not Mrs. Johnson’s fourth-grade reading class (basics are still basics)! Furthermore, I strongly disagree with the idea that kids be encouraged to just slide through school simply because a selected few of the richest entrepreneurs out there were dropouts. A handful of true giants in business lack a lot of “conventional” education, true — but for every one of them, there are a few hundred thousand others who’ve stayed the course and have the degree. Life, not to mention work, is just simpler with an education.

We practiced what I’m preaching here. We encouraged our kids to study whatever they wanted to study; but we also encouraged them to get all the way to the degree, and to study hard. All of them have college degrees now, two of them have grad degrees, and none of them studied business or entrepreneurship. Liberal arts was fine with us (not surprising, I suppose, since I’m a liberal arts first guy who started a software company).

2. Reject gender stereotypes

If your daughter loves tech, math, and science, let her study as much of it as she can handle. If your son loves art, music, or philosophy, don’t wonder if his brain just isn’t “sharp enough” for the nitty-gritty of “real life.” Stereotyping in either direction is unacceptable; don’t do it, and don’t accept it from others.

3. Don’t push

Resist the temptation to program your kids to enter any specific occupation, and especially don’t pressure them with expectations of following in your footsteps. If you invest the time and energy to encourage your kids in terms of being educated, don’t nullify all that effort by trying to shoehorn them into your own picture of what they should grow up to be. They’re supposed to do what they want, remember? Not what you want. Or are we still in the 19th century — when it didn’t work that well, either?

Doubt this? Try this trivia question: name a major movie in which a central character was supposed to go into his or her parents’ business but didn’t. Answer: tons, because this is more than a cliché: it’s an archetype. Kids have been doing this for thousands of years: witness Abraham trashing his dad’s store in the Bible! Come to think about it…Jesus didn’t end up a carpenter, either. In The Godfather, Don Corleone wanted Michael to be a senator, not the next don. And for a more recent example, take Hiro in Heroes.

Sure, it’s okay to hope they’ll want to get involved. It’s okay to dream. It’s okay to make some tentative plans to hand things off when the time comes. Maybe they will love what you do and want to do it, too. But freedom to choose is essential. Working in the business has to be their choice, not yours.

4. Trash the rose-colored glasses

I understand the strong thread in our culture of protecting kids, no matter what their age, from feeling anything but happy, positive, and enthusiastic about themselves all the time. It wants to eliminate the notion of “competition,” of winners or losers, or of failing. You’ll hear it in platitudes like “you’re all winners here!” And I coached kids’ soccer, so I went through the exercise of getting trophies for all and coming up with an award for every kid. And we were helicopter parents too, especially with our younger ones, hopping on a plane to console a daughter with a twisted knee.

Is that bad? I’m not sure.

So we didn’t harp on the cruel hard world. But every kid knows from a very early age who really won the race, no matter how many ribbons the grownups hand out — but that doesn’t mean kids need to learn to constantly hedge their bets, either. We didn’t coddle our kids or lead them to believe any false promises. Lemons happen, but lemonade isn’t always realistic, and they learned that. And some of the best ideas entrepreneurs ever get come from trying one thing, and then another, and then a third, until one “clicks” and they take off.

In our case, I’m not saying we were wise, or smart; maybe just lucky; and maybe even chronically broke, during all those years we were struggling with Palo Alto Software before it finally took off. Even if we might have wanted to wrap cocoons around our kids and buffer them from disappointment, trying, and struggle, it’s hard to actually do that when you’re bootstrapping a startup. All of our kids had to do their own homework and buckle down on occasion to do the hard things that came up.

5. Live your life, not theirs

Be an accidental, unintentional, role model. Let them see you enjoy your work when you do; and don’t pretend when you don’t. Show them where the money comes from, how your business works, how you grow it and adapt it. Let them participate in some of the details. Let them see you (and your spouse, if your spouse is so inclined) working the business goals, having realistic expectations, and dealing with setbacks. Let them see you as you are with what you do — and know it’s not the end of the world when things go wrong. From this, they’ll absorb something better than false “self-esteem”: they’ll know that it’s okay to try new things, it’s okay to experiment, and it’s okay if they don’t hit ultimate “pay dirt” the first time. They’ll still survive, and so will their parents!

People don’t always find their best place right away. Sometimes it takes one or two (or a dozen) false starts on the way to hitting one’s stride and finding the perfect fit. So don’t push your kids into corners. Let them work where they want, with whom they want, on what they want; let them learn by doing, and even learn by failing.

Entrepreneurism isn’t all there is to life, but it’s a great way to work…and live. Bottom line? In the best of all possible worlds, you’ll end up with well-educated, hardworking people who know where your business came from, and why, and have a good understanding of that when they figure out where they want their lives to go. And they’ll have what they need to go there.

(image: copyright Timothy J. Berry, 1989. Not for reproduction. This is our youngest, Megan Berry, now VP Product at Rebelmouse. Filling her dad’s shoes.)

(Ed note: does this seem familiar? I published it first on LinkedIn, then on Medium. I apologize for repetition. It came up in conversation and I wanted to bring it into the fold here, on this, my main blog.)

 

The Natural Intersection of Entrepreneurship and Meaning

Thanks for Why should you build your business around happiness? over at typeform.com for the fascinating image featured here, about the intersection of entrepreneurship and meaning. It comes from an interview with Laurence McCahill of The Happy Startup School.

Venn Diagram Entrepreneurship and Meaning

Normal people care about meaning

This matches my belief that making meaning or changing the world or having a reason why matters to people. And it matters to startups. And investors too. I can’t offer any sort of rigorous data to prove it. But my experience tells me that normal humans care about right and wrong, not doing harm, and spending their time on something that makes the world around them better. Do you agree?

The post I took this from cites research showing

“Workers with a Purpose-Orientation are the most valuable and highest potential segment of the workforce regardless of industry or role. On every measure, Purpose-Oriented Workers have better outcomes than their peers.”That means:

  • 20% longer expected tenure

  • 50% more likely to be in leadership positions

  • 47% more likely to be promoters of their employers

  • 64% higher levels of fulfillment in their work

That strikes me as completely credible. And it matches my experience. I posted along those lines on this blog with Build a Mission, among others.

Startups Make Meaning

I’ve seen this factor come up often in startup pitches to angel investors. Investors naturally give more weight to a proposed startup that does something the world needs doing. Founders are more credible, and more likable, when they grow the business from roots in entrepreneurship and meaning.

 

I see this same idea recurring in a lot of different places. One that comes to mind immediately is Guy Kawasaki’s use of “Make Meaning” as a driver of business ideas in his book The Art of The Start.

I also like to remind entrepreneurs – just as this image does – that success is not simply a matter of doing what you love and following your passion. It is also doing what other people need, want, and will pay for.

 

A Case Study on Startup Equity

I had an interesting exchange over the weekend. Shane Diffily tweeted:

Setting the Scene

Shane was referring there to a post on startup equity I did a while back, highlighting the problems that happen all too often as founders fail to define their own functions and ownership, in writing, in time. The situation I described was a hypothetical. Here’s a quick summary of that post for you:

Parker  comes up with a great idea for an iPhone application, and works on it for three months in spare time. … develops sketches and designs…

About three months into it, Parker has spent maybe 10 to 20 hours on it so far. [enter Leslie, programmer] … Leslie is excited, which rekindles Parker’s excitement. They agree to be partners in a new business based on this initial iPhone application.

Four months go by. Leslie … gets into the code … discovers Parker’s initial idea isn’t quite possible … revises the idea radically, makes it practical and develops a prototype. Parker meets with him three times, they talk, she accepts his changes begrudgingly. At this point Parker’s total hours have gone from 15 to 25, but Leslie has worked a lot, probably 120 hours, on the programming. … [they] … take the prototype to Terry, who has been through a failed startup, has a business education and is looking for a startup to do again … Terry does a business plan and networks with local business development groups to find angel investors. They win an opportunity to present to an angel investment group. Another three months have gone by. Parker has now put in more like 40 hours, Leslie 250 hours, and Terry 120 hours. Leslie wants to quit a current job and work full-time on the new thing but needs to get paid. Parker doesn’t want to quit a current job but wants to stay involved; she’s not quite sure how. Terry wants to lead the new company as soon as he can get financing.

I asked three questions at the end of the post. I asked, but didn’t answer them:

  1. How would you suggest that Parker, Leslie and Terry divide up the 100 percent ownership of the company now, before they go to the angel investors. Who owns how much?What do you think of the management team here?
  2. Leslie and Terry both want to work full-time on the business when there’s money to pay them. What titles should they take? How much salary?
  3. How much of the company should these three offer to the seed investor for $250,000?

Pre-money Valuation

It was relatively easy to answer the third for Shane. I put it into a tweet:

“Pre-money” means the valuation for the transaction with the initial seed round investors. To clarify, “post-money” would be the valuation after new investment funds are received. So if “pre-money” was $750K, then the angel investors’ $250K would buy 33.3% of the shares and the founders would end up with 66.7% of a business values post-money at $1 million.

I can’t get more specific than that without filling in some value judgments about the relative value of the application, the presumed product-market fit, and the credibility of the team. If all three factors are positive, then I’d suggest starting the negotiation with a valuation of $1 million. That would give the angels 25% ownership and the founders 75%. That leaves enough equity for future rounds. Otherwise, if the deal isn’t that stellar, then the three founders would have to go down to $750K or even $500K, hoping to get some angel investment to develop traction and increase the valuation later.

For the sake of explaining dilution, I’m going to go with the $750K valuation for the discussion on dilution below.

Startup Equity

Shane then asked the much harder question:

Keep in mind that I just made these people up and imagined an unspecified iPhone app without describing what it does for whom. In the real world it would take a lot more of understanding who these three people are and how credible their real skills. Here’s what I think:

  1. First, Parker can’t have much equity because she hasn’t done that much. Her initial idea didn’t work. She has put in only 40 of the 410 hours (less than 10%) and her hours weren’t all that useful. Still, she was the originator, she came up with the market need, and she set the wheels in motion. So she should stay involved as long as she wants. However – also very important – Parker doesn’t even want a full-time job. I’d ask her to take 10% of the pre-investment 100% shared by the founders. And I’d give her a seat on the three-person early board of directors, with the assumption that she’s going to go off to make room for investors.
  2. With Terry and Leslie, I’d put Terry in charge and at the top of the business, with a title like CEO or President or some such; and Leslie should be the technology/product development lead, reporting to Terry. I’d want both of them to take minimum possible full-time salaries as soon as possible, Terry’s a bit more than Leslie’s. Their salaries should be a compromise, enough to support them and their families, but less than market value because they have to keep the burn rate low. And I’d want to get their salaries up to their market value as soon as possible. In a real company, if it’s going to make it, the people it depends on get paid.
  3. I’d want Leslie to take 50% of the founders’ 100%, and Terry 40%, bringing the total, including Parker’s 10%, to 100%.

Why? Obviously I’m making some assumptions on the unknowns. I assume that Terry has a credible background in startups and holds up as lead founder. I assume Leslie has a credible background in tech and can run the technology, even as the business grows. I assume Parker has knowledge and experience beyond just the idea, and can contribute to the business even if not an employee. I assume all three are there for the long term.

I confess to some bias here too. I don’t believe the original idea has much value without ongoing contribution. I do believe in product-driven businesses, and technology-driven businesses, which is why I end up giving Leslie more equity than Terry. And I assume Terry’s MBA is a healthy number of years in the past, which means (to me) that it has been tempered in the field and has more value.

Valuation and Dilution

founder-shares-and-dilutionAfter angel investors put in $250K, they own one third of the shares. Usually the legal work is done with preferred shares and more subtlety, but, for purpose of illustration, let’s assume this is all done with common shares and the total founders’ shares, before the angel investment are 1,000. That’s a small number because startup attorneys usually write up the original corporate documents with more shares, such as 10 million instead of the 1,000 I’m showing. I’m using these simple numbers because it shows how the founders are diluted when the angel investors join the ownership. Each of the founders retains the founder shares he or she has, but the additional shares mean that they end up owning less of the company than they did before the deal.

 

Q&A: Winning Business Plan for a Competition

How do you do a winning business plan for a business plan competition? I’m glad you asked. I’m a frequent judge of these competitions so it’s in my interest to help you improve your chances by developing a better business plan, pitch presentation, summary, and elevator speech.win the competition

So that you know, I’m answering this question with reference to the mainstream high-profile business plan competitions I’ve judged many times, including the University of Texas’ Global Venture Labs Investment Competition, the Rice Business Plan Competition, and the University of Oregon’s New Venture Competition. I’ve done these three at least 10 times each. I’m assuming they are typical – but I could be wrong.

Here’s how the process works, with regard to what you deliver and how decisions are made:

  1. You submit either a business plan or executive summary to a steering committee that selects a few dozen entrants from hundreds of submissions. These committees vary. Many still use the full plan, but trends favor just the summary. This step takes place behind the scenes, before the visible portion of the competition begins. The entries selected are called semi-finalists. They are invited to go to the competition, at the site, which usually involves a Thursday, Friday, and Saturday, most often in April or May.
  2. Semi-finalists are divided into groups of four to six. Semi-final judges, mostly angel investors, venture capitalists, and executives from sponsor companies, read and evaluate the full business plans before the competition starts.
  3. An elevator speech round happens on the Thursday, in the evening. The teams do a 60-second elevator speech for prizes and awards. Winning that competition doesn’t formally help win the main prize, but informally, it affects the judges who see it. About half the judges will attend that first evening.
  4. The semi-final round takes place on Friday. Teams do pitch presentations and answer questions from the judges assigned to their group, who have read their business plans. Judges choose a finalist based not on the quality of business as a potential investment. The plan matters of course, and the pitch matters as well, but the choice is ultimately about the business. Judges try to make decisions based on investment criteria, including growth potential, defensibility, scalability, and experience of the management team.
  5. Finalists go through the same gauntlet on Saturday. Finals judges read the plans, listen to pitches, and ask questions. They choose the winner based on the same criteria they use to choose investments.

In all of these competitions, the judges are told to choose the best plan for outside investors, not the best-written or most attractively formatted business plan. So, a mediocre business plan for a great business will always beat a great business plan for a mediocre business. What you want from your business plan is to present your business well in a way that makes it easy for judges to see what you have. Your business plan alone isn’t enough to determine your fate in these competitions, but it does provide the first impression and the detailed background. In fact, all three of the competitions I mentioned above have special prizes for the best business plan, but those awards pale in comparison to the main prizes.

Therefore, the best way to help your chances with your business plan is to make sure the judges see the critical elements that make a business attractive to investors: potential growth and scalability, proprietary technology or some other kind of barriers to entry, and an experienced management team.

Here are some related tips that might also help:

  1. Make sure you cover the information investors want. Tell a convincing story about the problem you solve and the solution you offer, in a way that will interest the investors and let them believe your market story. Show whatever traction you have, and as much startup experience in the management team as you can. Show how your business will defend itself (proprietary technology, trade secrets, whatever secret sauce you have) from competitors entering the market. Show how you can scale up for high growth. Show that you understand how exits might work in 3-5 years.
  2. Keep it brief. Be concise. Don’t show off your knowledge, push your main points forward. Bullet points are appreciated.
  3. Show your numbers and your key assumptions. Numbers without assumptions and underlying story are useless. Forget present value and IRR games that depend on future assumptions. Show unit economics and build forecasts bottom up, from assumptions, not ever as some small percentage of a big market.
  4. Use illustrations that simplify and explain. Have the detailed numbers to back them up, of course, but use bar charts and line charts and pie charts to help readers get the idea quickly.
  5. Check your numbers against real world benchmarks. Investors will react negatively, not positively, to unrealistic profitability projections.
  6. Maintain alignment between the key points you emphasize in the business plan, the pitch presentation, and the elevator speech. Ideally your business plan is like the screenplay for the pitch presentation and the elevator speech.
  7. Don’t be afraid to revise numbers constantly, and don’t apologize if the numbers you show today are different from what you showed yesterday. Plans are supposed to evolve constantly.

(Image: shutterstock.com)