Category Archives: Business Mistakes

Q&A: The Perfect Letter to Potential Private Lenders

Angel investment, Business Mistakes, Q&A

This is another question received in my ask-me form on my timberry.com website:

I’m hoping you might be able to help direct me in finding the perfect letter that I need to send out to potential private (mainly friends) lenders for a start-up I’m involved.  I need this letter to spell out the details of the lending terms, conversion, etc.  I’m a numbers person (CPA) not a writer but I need this letter to be very appealing to convince them to lend us the start-up capital we are seeking.

My answer:

You’re focusing on the wrong thing. People don’t invest or not because of the perfect letter. Get the details right and the letter will follow. If you’re a CPA you’ve got an education and you can write the facts in correct English. Or, if you have money you don’t know what to do with, pay somebody to write a perfect three-paragraph letter.

The best a letter can do is communicate facts quickly and easily. The facts sell your deal, not the letter. what matters isn’t the letter but the startup, the team in charge, the product-market fit, the deal itself, and of course (as you suggest) the details of the lending terms, conversion, etc.

Start with a conversation, not a letter. Don’t ever think you can find startup investors by sending some letter out to a lot of people. You need to pinpoint the right people, and communicate well. A letter might be useful for following up, but think of it as a cover letter to a legal document. It should be no more than three paragraphs, hit the highlights legally, and that’s it. Then you have all the legal documentation your people will have to read and understand and, eventually, sign.

What you do need, by the way, is to check with an attorney about anything you say, or write. There are a lot of banking and fraud rules related to these deals. It’s pretty easy to break the law if you don’t know it. And the wrong terms on a letter to potential lenders can screw up your chance for angel investment or venture capital later. Now there’s an expertise you might really need for the letter, and, more important, the loan documents.

Q&A: How Do I Sell My Idea to A Big Company?

Business Ideas, Business Mistakes, Q&A, Starting a Business, ,

This is another email question I received via my ask-me-a-question form on my timberry.com site. I’ve edited it slightly:

I recently read your article protect your ideas and I have an idea that I want to protect and want to pitch to a company. I don’t know if I can turn my idea into a business without the business I created it for. I have an idea for a new revenue model for Facebook that uses their current model but gets more advertising and more potential … But my model would only work on Facebook; I don’t think I could start up a social networking site and get the same results. So my questions is do I try to patent the idea then go to them or what? How do I approach a successful company and tell them “hey you could be making way more money and revolutionize social networking!

And my answer:

  1. Find out about patents and whether or not your idea has a good chance of being patentable. I seriously doubt that your idea is patentable, but I don’t know what it is. Patents are for inventions, not ideas. There have been some business model patents issued, but to build a business around it you’d have to be able to not just have a patent but defend it. And you should worry that the patent system is no longer working, caught in a deluge of technology.
  2. If there’s a reasonable chance of a good strong patent that would be defensible against Facebook, explore that option. Plan to spend tens of thousands of dollars, so be honest with yourself. Start by spending a thousand or so dollars with a patent attorney really good, and really honest, who can tell you what the odds are, and be prepared to end the project there.
  3. If — my guess — the patent option isn’t realistic, then forget it. You’re wasting your time. Give it up. The following points are just so you understand why.
  4. Jump into the shoes of Facebook for a few seconds. They live and breathe their business model. How likely is it that they’re going to invite you to tell them what they haven’t thought of? How likely is it that you’ve got something related to some direction they’re already studying? And how much to they want to deal with some stranger saying what they’re doing is an idea they copied.
  5. To help you think of it this way, I’ll share that during the years I built Palo Alto Software I learned not to even respond to people who wanted to sell me an idea for my business. I learned it the hard way: every single time I listened, it was something we’d thought about, often something we tried, but didn’t work. In a couple of rare occasions it was something we were already working on, which led to “oh dear, now this guy’s going to think we did it because he suggested.”
  6. And then, to make matters worse, there’s the problem of ownership: even if you did think up that great idea, originally, you don’t own it. You can’t legally own an idea. Patents protect inventions, not ideas (see points 1 and 2 above); copyright protects creative works; and trademark protects commercial communications. You can’t sell something you don’t own. Tell it to Facebook and they can run with it for free. They pay you only if they want to, out of the well-known goodness of their huge corporate heart.
  7. Just to explain an apparent contradiction between points 4 and 6: legally the big company can take anybody’s idea and run with it, because nobody owns an idea; but big companies don’t want to deal with the accusation or even the bad karma of actually doing that. Who wants the negative press? It’s way better to just not ever respond to you.

So there you have it. Not what you wanted to hear, I’m sure, but if I save you a lot of wasted effort, then I’ve done you a favor.

True Story: But Nobody Moved In. They Ran Out of Money

Business Mistakes, Starting a Business,

Every day when I get to my office I walk by an empty office of about 4,000 square feet, that reminds me of the dark side of pollyanna entrepreneurship, acting on impulse and optimism, without planning.

I don’t know whether or not anybody is paying rent for that space, but it’s class A office space. More than a year ago that space was tailored and customized for a new tenant. The changed the layout, added walls, carpets, interior lighting, and signage. It must have cost tens of thousands of dollars.

But nobody moved in. They ran out of money. Nothing happened but the leasehold improvements. That space has been empty for more than a year now.

Somewhere there ought to have been a plan, with a rough estimate of funding required, and the wisdom of waiting until they got the funding before they started the spending.

(Image: stock photo, from bigstockphoto.com, not a picture of the space I refer to)

You Can Take Your IRR and Shove It

Angel investment, Business Mistakes, Venture Capital, Venture Contests,

In pitches and presentations everywhere, bright young entrepreneur tells cynical skeptical investors, usually with great pride and flourish, about their fabulous IRR for their great new startup. I get a gag reflex.

IRR stands for internal rate of return. You can check wikipedia or investopedia for what that’s supposed to mean and how it’s calculated. It’s supposed to compare cash spent on an investment, over several years, to cash that comes back, which spits out as a percentage. The higher the IRR, the better. They teach it in business schools. It’s kind of an MBA parlor game. It has some very limited usage in comparing past performance of investments, if you can hold all the definitions stable; think of it in a large company context, corporate investments, and corporate budgets.

IRR in a business pitch insults my intelligence. It depends on projected sales, costs, expenses, financing, investment, and some hypothetical valuation at some hypothetical time some years in the future. That, by definition, is a crock. Show me the projects, yes. Show me Sales, costs and expenses. Show me cash flow. Go ahead, guess at a future valuation, what the heck. I’ll look at how the assumptions come together and realism, or lack of it, on how the pieces mesh. But the IRR, which summarizing multiple layers of uncertainty as one single percentage number, is totally irrelevant at best, and downright annoying when entrepreneurs act like a projected IRR actually means anything.

And it gets worse, too: there’s the widespread misunderstanding that angel investors and venture capitalists have IRR targets. There’s the unspoken but felt thought: “jeez, what do these investors want? They turned down an IRR of 105%!” And you’ll see people, all over the web, asking what kind of yields they have to give to interest investors. What are the targets?

Talking of IRR if a projected shows me only that you’re too close to the academics. Investors will look at your plan, your team, your product/market fit, and your projections; and they’ll decide what they guess about your future. Stop sooner, before you get to IRR. Let it go.

A Hard Real-World Lesson About Getting It in Writing

Business Mistakes, , , , , ,

I just read American Express’s Small Business Saturday Event Spurs Backlash on WSJ.com. It’s sad but not surprising to see what seemed like a wildly successful small business promotion turn sour like this. Putting big companies together with small business and development organizations is tough. Compatible goals are a frequent problem. wsj.com

Here’s a quick summary:

Now, some small-shop owners including California’s Ms. Blanchard are boycotting the Saturday event. “The reason I’m not participating is because it’s not affiliated with the 3/50 Project,” Ms. Blanchard says. For American Express, “it’s a monetary boon if they can get more people to use the card,” she adds. “But there’s been no reciprocal kindness back to the merchants. The 3/50 Project looks out for the interests of the merchants.”

I think it’s a built-in problem. Is Amex’ marketing program compatible with the development organization’s socioeconomic goals? Does a big company spend money altruistically without getting marketing benefits from it?

The WSJ article refers to a blog post by Cinda Baxter, organizer of the 3/50 movement that was designed to boost sales for small businesses, explaining why she cut ties with Amex.

I think there’s a lesson for all in one of the 44 comments, by Ramon Ray, of SmallbizTechnology. In his comment he says:

From what I can read in Cinda’s blog post. Cinda was promised something by AMEX, during phone discussions and meetings. But as I’ve learned through many great relationships with big companies talking on the phone is GREAT. But until a contract is signed or something is in writing – talk means nothing. I think Cinda’s mistake was not presenting a formal proposal to AMEX and getting their written approval. That’s what I would have done. Small businesses (as I and Cinda are) might get very excited hearing from a ‘big company’ that they’ll do x, y, z. But keep in mind a ‘big company’ is made up of many teams of people and bosses. Hence once the ‘talking’ is over, it’s time to put ink on paper or words in an email. That’s the ONLY way to really know that the talk (intention) is action.

I get that completely. I’ve been exactly there, where Ramon suggests. I’ve made that mistake too. Sad, but it happens. Actually, I’d go simpler than a contract, just a letter would be enough. But something in writing.

And it’s a good lesson.

 

 

Stop. Don’t Do That Survey. Talk to People Instead.

Business Mistakes, Business Research,

Yes, there are some amazing tools for doing market surveys quickly and easy. I use SurveyMonkey myself, very happily. And I know of (but don’t have reason to use) cool tools to send surveys to selected groups of respondents.

conversations_bigstock_636914.jpg

But there’s a problem with that, especially if you overuse it. Most surveys are seriously flawed. I’ve posted my problems with surveys here and here, but for today, you could read the lingering question of the survey revolution for a thorough and thoughtful treatment of some deep problems. That was posted today over at questionpro blog.

I suggest that instead of the quick and easy survey, get on the phone, or better yet in person, and have real conversations with real people. I bet you learn way more about your business by actually listening to 10 live people than you’re every going to learn in a market survey.

Of course this only works if you listen. Talking is essential, yes, but what really matters is asking the right questions and actively listening, keeping your mind open, to what people say. And that they think. Otherwise, without the listening, it’s just more wasted time.

Ask yourself: do you prefer sending an email to talking to a person? Would you rather deal with your computer and keyboard than a live human person? Do you call a phone hoping to get voicemail instead of the person? Is this what you’re doing with the quick and easy market surveys? Avoiding real conversation?

(Image: bigstockphoto.com)

But Can You Run a Company Without Performance Reviews?

Business Mistakes, , ,

In my years in business I’ve seen performance reviews from several angles, good and bad. As my employee numbers grew past a handful to several dozen, the reviews seemed more necessary than they were when we were smaller.

One of my earlier employees took the job offer only on the condition of two reviews per year.

But I was never comfortable with them. My management style was working shoulder to shoulder with the people, when we were a smaller team. It was hard to suddenly get into a boss-subordinate mode and deliver a report card.

The people who worked for me would tell you, I often put it off, and I didn’t do that good a job when I did it.

On the other hand, people need and want reviews because they want to have some sense of how they’re doing. And as your company grows, it needs management too, as well as leadership. And reviews help people keep on track.

I caught an interesting post called Should Performance Reviews Live — or Die? posted by the Summers Hospitality Group earlier this week. It’s a good post on an interesting topic, listing some common problems with performance reviews, some advantages, and the predicable conclusion: it depends.

The disadvantages I relate to best to are the focus on what went wrong, the link to pay, and that they happen on an annual basis. They list others as well.

The advantages they cite are are accurate: the whole idea of feedback, consistency, keeping an organization focused on performance, and several other good ones. .

One thing that seems to work better than the formal reviews is a good management system identifying external, measurable, metrics for an employee and then watching those metrics together. I mean like calls, sales, expenses, emails sent, click through or conversion rate, subscribers, posts, tweets … a number we could watch together. When I was able to get that kind of system going, instead of the formal review, it ended up meaning regular collaboration. There was a visible objective metric and doing better or worse than planned led to discussion, and collaboration, without the stiff formality of a report card.

Do You Believe Your Analytics?

Business Mistakes, Business Research, Marketing

What I hate about analytics ia that sometimes numbers are wrong or misleading, but when they are numbers, we’re not supposed to argue. questions

I like analysis when it adds information and context to human decisions. What we have now as analytics available for marketing and web development is amazing, especially compared to the “olden days” in the 1980s and early 1990s when we used to just spend the money and guess. It’s a great luxury.

But not when it substitutes for human decisions. When we do A-B testing, or surveys, it’s too easy to get the research wrong because questions are posed wrong or because of other technical reasons. But so often the analytics are like gospel, not to be questioned.

Do it right. Use the analytics to help guide you. Don’t let them stifle your own creativity.

(image: shutterstock photo)

User Interface Dark Side: When Deception Works

Business Ethics, Business Mistakes, Weblogs, ,

No ambiguity with this one: the site is named darkpatterns.org…

a pattern library with the specific goal of naming and shaming deceptive user interfaces (aka “dark patterns”) and the companies that use them.

… and author Harry Brignull, in his List Apart post Dark Patterns: Deception vs. Honesty in UI Design, calls them “evil web designers. You can see the list in the illustration here: bait and switch, forced continuity, road block, all of them tried-and-false techniques to deceive users. He writes:

perhaps you’ve never thought about it before but all of the guidelines, principles, and methods that ethical designers use to design usable websites can be easily subverted to benefit business owners at the expense of users. It’s actually quite simple to take our understanding of human psychology and flip it over to the dark side.

“But it tests well,” he points out, as a good reason to use deceptive techniques.

Dark patterns tend to perform very well in A/B and multivariate tests simply because a design that tricks users into doing something is likely to achieve more conversions than one that allows users to make an informed decision.

Just reading the categories on the wiki-like dark patterns site, you recognize most of these techniques. Hidden costs, misdirection, forced continuity … we’re all exposed to most of them most of the time. Call them dark patterns, write about evil web designers, and your position on the ethics are pretty clear. It works for me.

I still believe that business ethics win over the long term. Good business practices keep customers loyal and tricks get caught often enough to impact business.

And we all say that, right? Are you doing it, in your business?

Would You Make A Stupid Corporate Move Like This One?

Business Mistakes, , ,

Well that’s dumb: This is a true story, although I changed the names.

Jack does sales and marketing for Acme Widgets. Acme’s a big company. Jack’s been there for years, he has clout, but he’s not a VP. He likes the product and lots of people in the channels, some of the people he works with. mistakes

Until recently he ran a blog about widgets and how to use them. He did it on his own time, under his own name, but his content focused on Acme products, how to use them, how to sell them, etc. He included tips, case studies, and related news, and all positive and upbeat.

No longer. Acme told him to stop it. They had him take off the logos and any indications that his blog might have been officially sponsored.

I think that’s a dumb move. I’m guessing they’re worried about controlling the brand, or maybe about somebody having a piece of the brand outside of the legal control. Maybe some higher-ups are nervous, maybe even jealous, or worried about who gets what credit. And maybe I’m wrong on this point. I have no idea what the corporate explanation was. I just saw the formal announcement.

I think it’s a great example of people wanting control instead of leadership.

I think they should have given him a bonus and a budget to work with, maybe at the same time establishing guidelines to keep the corporate branding people happy.

Is it really just big-company behavior? Be honest: would you do that in your business? You think not, but I posted here years ago where one small business was uncomfortable with an employee who was taking “too much ownership.” It happens.

(Image: bigstockphoto.com)