Category Archives: Starting a Business

What? Founders with Kids?

Entrepreneurship, Starting a Business

The question surprised me: “Is it a red flag for a founder to have a child while a startup is still in an early age?” It’s an odd view on startup founders with children. Enough to prompt me with this blog post. I could summarize my answer with simply, “absolutely not.”

But here’s my more complete answer:

No, of course not. It is in no way a red flag for a founder to have a child while a startup is in the early stage.

This question assumes several common myths about entrepreneurship. None of these is true:

  1. That entrepreneurs are more likely to be 18–25 than 25–50 (not true).
  2. That entrepreneurs are supposed to ignore everything else in life in single-minded obsession on the business (not true).
  3. That having a life is bad for business (not true).

Here’s a general reminder: building a business is supposed to make your life better, not worse. It’s business serves life, not life serves business.

True, many, maybe most, entrepreneurs work like hell for a while, especially at the beginning, seem obsessed, and sacrifice some other elements of life, temporarily. There’s no denying that. But most of those who do (I did) realize later on that having a life actually enhances your business, rather than detracts from it. People are more productive in 8-hour days than 14-hour days. People are more productive when they have the rest of their life, and their people, to provide balance. IMO.

The original came on Quora.com, the question-and-answer site. Here’s the link to that: Is it a red flag for a founder to have a child while a startup is still in an early stage?

Image by Neil Dodhia from Pixabay

The Best Place to Start Your Business …

Business Mistakes, Entrepreneurship, Starting a Business

… is where you are. Sure, there are exceptions. Maybe you’re young, and have no roots. Or maybe you just want to move to somewhere else. But, barring special cases, look around you. The best place to start you business is where you are.

In my email and on Quora I get a steady stream of questions about moving first to start a business. Today, specifically: “If LA is so expensive, why do people start a business there?”

And also today, what is the best country to start a business...?

To be fair, this may be a flaw in Quora, a question-and-answer site I frequent. They started paying people to ask questions that generate answers.

However, it’s also something that’s been coming up off and on for the four decades I’ve been involved with startups. Should I move to Silicon Valley? What are the best startup hubs? Is New York city a good place?

Myth and misunderstanding

What bugs me is that — at least in the US — the idea of the best location, or a better location, is so much myth and misunderstanding. The best place to start your business is where you already are. That’s where you have a home, roots, contacts, vendors, and a sense of local market.

And furthermore, in the US, the Internet is everywhere. Phones, couriers, libraries and airports are everywhere. While there may be more investors in California and Washington than in Idaho and South Dakota, the off-the-hub startups get investment too, when they are good investments. A few years ago I met two young entrepreneurs located in the woods about an hour from Talkeetna, Alaska. They’d go months unable to reach even Talkeetna, which is a very small town, four hours from Anchorage. The two of them were running several websites and making tens of thousands of dollars monthly.

I can think of three general exceptions:

  • Maybe you’re young, left home for college, and want to start your life somewhere else, a new home, not where you grew up. The catch here is that young people are the exception in startups. Research shows that the vast majority of successful startup founders are in their 30s or 40s.
  • Maybe you aren’t young, but you do want to move. I get that. My wife and I moved from Mexico City to Palo Alto in our 30s, and from there to Eugene OR in our 40s. There’s nothing wrong with that. But that’s not moving because your location is better for business.
  • Maybe you are in an exceptionally bad location. Generally the urban vs. rural trade-offs work reasonably well, but if you’re hours from an airport, or can’t get good broadband, then maybe your location is a disadvantage for your startup.

Otherwise, the best place to start a business is where you already are.

Think it through… have you ever moved?

Moving is a royal pain in the rear. It’s very hard to find a new place to live, home or apartment, especially from long distance. When you get there, you suddenly have to find a new bank, new restaurants, new stores, new organizations, new people. Nobody knows you. Your social structure is back to zero. Your business contacts, locally, are back to zero. It’s hard.

Starting a new business is also really hard. Doing it in an entirely new place makes it a lot harder.

The obvious conclusion

The best place to start a business is where you already are.

Startup Founder Compatibility is Vital

Entrepreneurship, Starting a Business

Please don’t ever estimate the importance of startup founder compatibility. It’s vital. And it may not be what you think.

The relationship among founders of a healthy business is like a marriage. Compatible goals, thinking, values, and decision-making styles is really important. Even if a well-run and successful business, there will be a lot of times when disagreements come up and compromise is necessary.

To start at the beginning with people who don’t agree on the very fundamentals of the business is a bad idea. It’s a recipe for a painful failure.

On the other hand, don’t confuse compatibility with sameness. It takes a mix of different skills and backgrounds to build a business right. Somebody has to mind the money and administration, and somebody has to create the product, somebody has to build it (or deliver the service), somebody has to get the work out, and somebody has to close the sales. You want complementary skill sets and backgrounds and expertise, not everybody all alike. And that, by the way, does support diversity. In genders, backgrounds, ethnicity, and other factors.

You Have to Know When to Quit

Advice, Entrepreneurship, Starting a Business, Work Life Balance

I recommend you read Nat Eliason‘s piece No More Struggle Porn. He’s attacking one of the more pervasive startup myths around, the idea that the struggle itself, the overwhelming and overpowering struggle that pushes everything else out of your life, is a good thing. He defines struggle porn as:

I call this “struggle porn”: a masochistic obsession with pushing yourself harder, listening to people tell you to work harder, and broadcasting how hard you’re working.

And his take on it, in a nutshell, is this:

Working hard is great, but struggle porn has a dangerous side effect: not quitting. When you believe the normal state of affairs is to feel like you’re struggling to make progress, you’ll be less likely to quit something that isn’t going anywhere.

The Myth of Persistence

I agree with him. Emphatically. I’ve posted here before on The Myth of Persistence:

Why: persistence is only relevant if the rest of it is right. There’s no virtue to persistence when it means running your head into walls forever. Before you worry about persistence, that startup has to have some real value to offer, something that people want to buy, something they want or need. And it has to get the offer to enough people. It has to survive competition. It has to know when to stick to consistency, and when to pivot.

So persistence is simply what’s left over when all the other reasons for failure have been ruled out.

Knowing When to Quit

And, with that in mind, I like Seth Godin’s take on quitting, which is the main point from his book The Dip (quoting here from Wikipedia🙂

Godin introduces the book with a quote from Vince Lombardi: “Quitters never win and winners never quit.” He follows this with “Bad advice. Winners quit all the time. They just quit the right stuff at the right time.“

Godin first makes the assertion that “being the best in the world is seriously underrated,” although he defines the term ‘best’ as “best for them based on what they believe and what they know,” and ‘world’ as “the world they have access to.” He supports this by illustrating that vanilla ice cream is almost four times as popular as the next-most popular ice cream, further stating that this is seen in Zipf’s Law. Godin’s central thesis is that in order to be the best in the world, one must quit the wrong stuff and stick with the right stuff. In illustrating this, Godin introduces several curves: ‘the dip,’ ‘the cul-de-sac,’ and ‘the cliff.’ Godin gives examples of the dip, ways to recognize when an apparent dip is really a cul-de-sac, and presents strategies of when to quit, amongst other things.

Don’t let the struggle porn startup myths get you down. I’ve been through startups. I’ve been vendor and consultant to startups for four decades, and I started my own and built it past $9 million annual sales, profitability, and cash flow positive, without outside investors. And I’ve never believed that anybody is supposed to give up life, family, relationships, and the future to build that startup with 100-hour weeks and forget-everything-else obsession. Here’s what I say:

Don’t give up your life to make your business better. Build your business to make your life better.

Pervasive Startup Myth: Don’t Work for Free

Entrepreneurship, Starting a Business

Startup myth: The one about founders having to work for free to impress angel investors. This supposedly shows passion. Don’t believe it. Investors want people committed to working their startups, and that usually takes getting them paid. I’ve been getting a lot of upvotes on my answer to this question in Quora:

How do entrepreneurs live without a salary to sustain their families and pay bills?

My Answer

That startup founders are supposed to work for free, and that investors want them to work for free, even as there is capital to work with. That’s just a myth. IMO.

As an entrepreneur, I built a business and supported my family at the same time by continuing to consult in the same field I was developing software for. That’s not unusual. I did not have the luxury of not making an income. When I started Palo Alto Software, we already had four kids and a mortgage. Not making money was not an option.

So that was a lot of work. It was hard. But it’s what really happens most of the time … entrepreneurs do a lot of work on the side, in between, to build their business without the luxury of working full time for free.

As an angel investor, I expect founders to work without formal compensation only during the very earliest phases, because they have to. I expect that to be temporary. And when I invest in them, I want there to be enough money to pay them. I don’t believe startup founders working for free is a sustainable idea as they grow a business. People have lives. They need money.

I don’t like it when founders promise to work for free over any extended period. It doesn’t work. They burn out. They need jobs and income so they quit.

(Click here for the original on Quora.com)

10 Common Mistakes with Startup Financial Projections

Business Plan Financials, Starting a Business
Business Plan Financials

I was glad to be asked about common mistakes with financial projections. I read about 100 business plans a year for angel investment and business plan competitions. Most show unrealistic profitability. More people doing business plans should realize that most startups are unprofitable at the beginning; and that high growth correlates with losses, not profits. High projected profits indicate lack of understanding, not reasonable expectations of profitability.

Profitability mistakes

  1. The most common mistake is with profitability. Most of the business plans I see project profits too high, or profits too early. In the real world, startups choose growth or profits, not both. The plans I see are aiming at angel investment. And for that, the investors win on growth, not profitability. Think about it: If a startup is profitable early on, it doesn’t need investors.
  2. The second most common mistake is underestimated marketing expenses. Many successful tech businesses, especially software and web businesses, spend 30% or more of sales on marketing.
  3. Don’t underestimate development expenses, testing, certifications, and expenses of regulations.
  4. If you are selling physical products, don’t underestimate the impact of selling through channels, as distributors and retailers take their margins and often demand admin and co-promotion expenses. And distributors often pay very slowly, like six months or so after receiving the goods.
  5. Never project sales by applying a small percentage to a large market. That doesn’t work. Nobody gets half a percent of a $10 billion market. Instead, sales forecasts should be built on drivers as assumptions. Drivers might be web visits and conversions, emails sent, paid search terms, or, for physical products, channel assumptions such as distributors, chains, stores, and sales per store.
  6. Don’t project big growth in sales with only small increases in headcount. If you are going to sell $100 million in the fifth year, get a clue: you won’t do that with only $2 million in employee expenses. Divide your projected sales by your headcount, and compare that to industry benchmarks. For most industries, $250,000 per employee is really good. If you are getting $2 million per employee, that doesn’t mean you’re going to be that efficient. It means you don’t understand the business.

Cash flow mistakes

  1. Having a profit doesn’t mean you’ll have cash in the bank. Good startup financial projections need to include cash flow. Always. For more on that, see points 4, 6,
  2. Another very common mistake affects cash flow. Businesses selling to businesses (B2B) normally sell on account. A sale generates not money directly, but money owed, to be paid later, which goes on the balance sheet as Accounts Receivable, or AR. Every dollar in AR is a dollar that shows up as sales in the P&L but not in cash.
  3. Many plans underestimate the length of the sales cycle and expenses related to selling directly to enterprises.
  4. Many plans underestimate the cash flow affect of inventory. Every dollar in inventory is a dollar that hasn’t yet shown up in the P&L but may have already affected cash balances.

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.

 

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.

 

 

 

 

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.

 

 

Startup Stock Options as Fool’s Gold

Starting a Business

Pot of GoldTerry had a good job with an established software company but left to join a startup. Why? “Because they’re giving me startup stock options.”

Too bad. Two years later that job ended. That startup was going nowhere, cutting costs, and fighting extinction. Terry needed a new job. Again.

What about those options? They had no value whatsoever. They were a ticket for a lottery that had no prize and no winner. As likely as the pot of gold at the end of the rainbow. And Terry, influenced by options to switch jobs, made a bad decision.

Terry’s mistake is way too common in the world of startups and people working with high tech. Options cloud judgment. They are almost always worth way less than the psychological value we give them.

 

7 hard facts about stock options

Here are some hard realities about stock options for startups

  1. Stock options for an early startup will normally only have value if the company grows, prospers, and has a liquidity event later. Options for shares that are never publicly traded can’t normally be sold. They are a chance to join in sharing the pot of gold at the end of the rainbow, but only for the small minority of startups that make it that far.
  2. Options usually involve vesting: you get them over time, as you stay with the company. Vesting often takes four years, but can be any specified time. In the most standard four year vesting, you get one fourth of your options for every year you stay. Vesting means they are yours – the company can’t take them back.
  3. The number of shares is only half a number, meaningless without the other half. You have to divide that number of shares by total shares outstanding to calculate what percent of ownership is involved. A thousand shares is 10% of a company that has ten thousand shares outstanding, but only a thousandth of a company that has a million shares outstanding.
  4. The number of shares outstanding generally grows as a startup gets more investment. That’s called dilution. So an option for one thousand shares might be worth one percent ownership at the beginning when the company only has ten thousand shares outstanding, but those ten thousand can easily become a hundred thousand or a million later.
  5. Options have trigger prices to exercise. You have an option to buy; you don’t own them. You need to pay attention to the trigger price because that’s part of the value. Options for a thousand shares with trigger price of $1 per share cost $1,000. If the trigger price is $5, that’s a $5,000 purchase price.
  6. There are tax implications related to exercising options. The difference between the trigger price and the market price, at the time of exercising the options, was taxable at regular income tax rates the last time I looked (but check with an accountant; I’m not an accountant or attorney, so check me on my understanding). If you buy the options early, before they have real market value, your tax burden will be lower, but your risk higher. If you wait until the company gets liquidity (if it ever does) then your risk is much lower, but your tax burden higher.
  7. Most startups that raise venture capital investment are subject to so-called ratchet clauses that protect the investors from losing money band hurt the founders’ and option holders’ value. If the company achieves liquidity but for a market value less than what the venture capital investors put in, then they get all of that value first, before the others get any. You could have one percent ownership of a company worth $50 million, but get nothing if investors put in $75 million.

Get the stars out of your eyes

Stock options started decades ago as incentives for managers working in big companies whose stocks were traded on major public markets. The big publicly traded companies use them as incentive and reward. They give a manager options to buy shares at the current market value, so if the market value goes up, those options are worth money.

Stock options for startups, on the other hand, will only mean money if the startup is very successful. Even if the startup survives, grows, and prospers, the options might still be worth money if it doesn’t get acquired by a publicly traded company, or register and go public. Small shares of a healthy company that will remain privately owned forever, without a liquidity event, have almost no value to employees. They are better off negotiating salary and real benefits such as health care and vacations. Some companies whose use options to influence employees are, wither they intend to or not, giving them something equivalent to false gold.