Category Archives: Starting a Business

Angel Investment Red Flags

Last week at an angel investment meeting one of our group members asked whether anybody had a list of red flag problems that would immediately eliminate a startup from consideration by angel investors. That seemed like a good idea to me then. And over the weekend somebody asked a similar question in Quora: what are some red flags for people new to angel investment when evaluating companies

This blog post is a compilation of my own items and a lot of others contributed to the Quora question. 

My big two: 

  • Issues around trust or integrity. Alternative truths don’t fly. Lies, gross exaggerations, hiding significant information. Fudging past financial data. Not mentioning about or grossly exaggerating their previous business history. Omitting significant facts. the pitch brags about a founder’s previous successful exits that turn out, later, to have been either grossly exaggerated. Founders holding back critical information for problems of perceived confidentiality or trust. Lawsuits that weren’t mentioned. Cap tables that hide things. Gaps in the history.
  • Issues around Leadership. For example, the scientist alone, instead of the scientist in a team with experience in the industry and business sense and experience. Or the team that lacks the CEO and is promising to get one after funding. Or the team of very young people that assigns all C-level positions to team members without realizing they need somebody else.

Four other good ones from Heather Wilde

  • Lack of domain expertise – Anyone can have an idea, but if the person you’re considering has no clue about what’s possible, what’s been done before, or even a tangentially related background – that’s a huge red flag.
  • Lack of Coachability – there’s a certain amount of arrogance expected in an entrepreneur (they need to beat down their competition), but if they aren’t willing to consider outside advice or suggestions, stay away.
  • Terrible Idea – I shouldn’t need to say this, but the majority of ideas are actually just bad, really, really bad. Yes, you are investing in the human, but that doesn’t mean you should throw money at a bad idea in the hopes that something they come up with later might be good.
  • “No Competition” – This is like one of those logic puzzles. Every time I hear someone say “we have no competition” it immediately is a red flag, for two reasons. One, it’s a sign they haven’t done their research, because there’s always competition, or at least something comparable. Two, it’s a sign they might be naive enough to actually think it’s true. Either way it’s a sign to stay away.

Four more from Greg Brown:

  • Awesome team in a small market can figure out how to expand the market opportunity. Mediocre team in a brilliant market will produce mediocrity. Bet on the team.
  • Legal and financing structures that violate the norms are non-starters for me. No need to reinvent the wheel.
  • If a company is pushing too hard to get your investment that’s a bad sign. If it doesn’t yet feel right hold off. It’s OK to miss out on something. There will be other opportunities. You cannot ride every unicorn.
  • Bad co-investors suck. Bad means fundamentally bad people or people who will provide bad advice or influence. Most founders will to some degree bend to the will of their board/investors. Make sure they will be getting good advice.

And a bunch from Terrence Wang

  •  No Deck/No Financial Model. Sending decks are standard unless you are a Siri co-founder working on Viv. VCs want financial models. If you are investing later seed then the startup should send you a financial model where you can see the assumptions and play around with the variables to test different scenarios and outcomes. If founders won’t send you both, red flag.
  • Finders/Brokers/Enthusiasts. At present the vast majority of finders, brokers and enthusiasts who connect founders and investors are working with non-great founders. Red flag.
  • Super Angel or VC Advising, Not Investing. Peter Thiel is advising a PayPay mafia cofounder-CEO. The CEO pitches fellow angel investors and me. We ask if Peter is investing. The CEO says he wants to be careful about asking Peter to invest. So why are you pitching us then? Red flag.
  • Product Not Needed. If someone loves a startup’s product and service, that could be because the product is free and a good time filler. Doesn’t mean they will spend money on the product or service. Maybe they don’t need the product. Red flag.
  • Not Great Sales. A great product with bad sales is often a bad sign. For example, a startup might have a great e-commerce product but Amazon is going to out-sell them about a billion to one. If the product is easily monetizable and they haven’t even tested monetization, that is a red flag.
  • Incompatible Goals. Some angel investors don’t want VCs involved later. This includes at least a couple Harvard Business School Angels who invest in startups that should not need VC funding because the startup is in a smaller market and should get to break-even pretty quickly. But does the founder agree? If you and the founder don’t agree on the financing goals, that is a red flag.
  • No Grit. If the CEO does not have grit, the startup likely won’t work. Red flag.
  • Uncompelling Pitch. CEOs need to be persuasive, regardless of context. They don’t have to be high energy. Elon is more reserved but still charismatic and persuasive. Uncompelling pitches are a red flag.
  • Differing Visions Intra-Team. Talk to the CEO and other core team members individually. Are they on the same page as the CEO? If not, red flag.
  • Can’t Lead. Has the CEO built and led a team successfully before in anything? Sports, clubs, etc.? Her siblings? Anything? If not, red flag.
  • Unanswered Questions. If you have unanswered questions that are important to you about anything related to the startup, the team, the legal documents, etc., make sure the CEO or someone from her team who’s authorized (e.g., her law firm) answers your questions to your satisfaction. If you feel pressure to not ask too many questions, just ask this one
  • Legal and Ethical Issues. Does the CEO do things that are highly unethical or technically crimes? If so, you may have a Theranos or Zenefits on your hands. Red flag.

Startup Stock Options as Fool’s Gold

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.

 

7 Small Businesses Lessons From Tech Startups

Small Business Lessons from High Tech

What can every small business learn from tech startups? David Rose, founder of Gust.com and long-time leader of the New York Tech Angels, says normal businesses are different from tech startups, and offers small business lessons he’s taken from decades dealing with what high-end tech startups do as they start. He says:

One of the most valuable lessons I’ve seen proven true over and over again, is that many of the biggest obstacles that businesses face along the way can be avoided IF you take care to start things up correctly from the beginning. When launching a company, investing a little bit of time and money at the very start can pay large dividends later…but only if you have a solid foundation, a thoughtful structure, and a strong focus.

That’s from 7 Lessons Small Businesses Can Learn From Tech Startups, published in Forbes yesterday.

What’s a startup to you?

For the record, David’s view on startups is somewhat different from mine. I think of every business that starts up as a startup. He defines startup more narrowly:

While all businesses “start up” and start out “small”, not all “small businesses” are “startups”. Whereas a small business is founded to be profitable and create a good living for the entrepreneur and his or her family, a “startup” is founded with the intention of rapidly achieving exponential growth through scale, and either being acquired in a few years by a larger company, or becoming a “unicorn” and going public in an IPO…in both cases bringing in massive returns to its founders and investors.

The 7 Small business lessons

We come back together, however, on what David Rose recommends all businesses do. He’s recommending all businesses should take the same care that his version of startups do. That includes:

  1. Get smart. Read up on it. There’s so much wisdom available for a few dollars. Take the time to browse the essentials. David doesn’t mention it in this context, but his book Startup Checklist is a good one.
  2. Resolve your business model. Know how you make money. How will people pay you, and why.
  3. Get initial feedback. Talk to people about it. Find people you know who have experience. And listen.
  4. Analyze the market. “You must understand the landscape you are about to enter, inside and out.”
  5. The business plan. All businesses deserve business planning. I’m quoting him in detail in the next section, below.
  6. More feedback. Now you have market knowledge and an initial business plan. “At this stage you are looking for substantive comments about the business and market, along with specific critiques (don’t take offense; listen to them carefully!) and actionable insights.”
  7. Put it to the test. Launch. Do it. “The biggest test will be to see if customers really want or need what you are providing, and to understand if they are willing to pay for it at a price at which you can afford to supply it.”

The business plan we all need

And my favorite of David’s recommendations is the business plan.

“Many entrepreneurs draw up a complicated business plan as step one, but end up wasting a lot of time rewriting it as they work through their business concept. If you’ve done all the previous legwork and feel confident that your concept is marketable, viable and profitable, the next step is to begin to write it down. You’ll want to use a simple, structured format to note the various things that you are going to need to do to implement your business idea. For now, don’t worry about a long document for investors…just start by writing down bullet points outlining what is supposed to happen, a timeline, assignment of responsibilities, cost analysis, and revenue projections.

I strongly agree with him on this. We may not all need a that “long document for investors,” but we can all use the kind of business plan he suggests, “bullet points outlining what is supposed to happen,” and so forth, in that last sentence.

And then there’s this, my favorite part of David’s article, his recommendation.

There are some great resources available for this, and the best I’ve seen is the web site leanplan.com, by Tim Berry, the legendary author of Business Plan Pro. The site offers an online course you can purchase, as well as commercial online tools such as LivePlan, but it also includes the entire text of Tim’s book ‘Lean Business Planning’ for free. As you’ll learn from Tim, the most important thing about a business plan is not that it be long, but that it be live. An effective business plan is a living document, reviewed and updated every month, that adapts to the market, the field, and your actual results.”

Did I bury the lead?

 

Finding Dumb Investors is a Dumb Idea

Are you looking for dumb investors?

investor money
investor money

“How can I find investors who don’t take much equity?”

“How can I find investors who don’t interfere with my running the business?

I first posted my objections to this kind of thinking nine years ago in Dumb Investors Dumb Idea, one of the earliest posts on this blog. That was before I joined an angel investment group and became one of those investors. My objections then are a lot stronger now. And I still see a stream of this kind of thinking in blogs and at my favorite question and answer site, Quora.com.

Valuation determines equity

The equity share from investment is simple math. If your investors put in $100,000, that’s 10% of a startup valued at $1 million, and 50% of a startup valued at $200,000. So what’s the underlying valuation? Read up on that with 5 things entrepreneurs need to know about valuation and understand startup valuation. So with normal angel investment, the startup founders want a higher valuation and the angel investors want lower. It’s a lot like negotiating to buy a house or a used car. Ultimately, both sides have to agree, or there is no deal.

Angel investors normally care and add value

Angel investors are overwhelmingly amateur investors, investing their own money, investing in industries they know or local startups. They are successful entrepreneurs giving back. They believe in their ability to select startups well, study them well (it’s called due diligence) before deciding on a deal, and to offer valuable advice and experience. I’ve seen dozens of pitches that ended with investors not interested in startups whose founders knew everything and wanted no advice. People who don’t want interference with their business are not going to do well with angel investors.

Normal angels choose angel investment instead of leaving their money with an investment advisor, bank, or some other institution. They know that investing in startups is risky, but they trust themselves and expect to be able to help.

 

 

 

How to Make Money on Your Brilliant Business Idea

A Pile of CashSo you have a brilliant business idea that will be very successful. My congratulations to you. Now read all ideas are brilliant and nobody is going to pay you for your ideas. Are you still sure? All right then, let’s continue.  And – this is important – do not even think about getting investors yet. Do a lean business plan.

1. Gather a team

Can you execute on the brilliant business idea yourself? That does happen. For example, take your browser to KiddoLogic.com. That’s a venture built by one very smart woman, on her own. She used her own money and paid the providers she needed, to get going. If you can do that yourself, without help, then I applaud you. Go for it. Forget investors; just do it. You don’t need them.

For the rest of us, your next step is to gather a team of people who have the skills and experience you need to get going. Look for people different from you who can do what you can’t and who know what you don’t.  If you don’t know anybody, or don’t know the right people, that’s a damn shame; but it’s your problem to solve. If you can’t solve it, then keep your day job. Other people have solved that problem millions of time.

If you can afford to pay them…

If you can find suitable people, then  you have to convince them to join you. If you can afford to pay for their services with your own money, then maybe you don’t have to convince them of the idea. Just pay them. This puts you in the category of the smart person on your own. Just do it. You’re special, the sole entrepreneur with a great idea and the means to execute. Skip to the next section.

However, if you can’t afford to pay people, then you need to convince them to join you as co-founders and work on this idea for free. Don’t feel bad about that; that’s what most successful entrepreneurs had to do. And if you can’t convince the right people to join you, then get a clue. Your idea was one of the many ideas that seem brilliant but won’t work. Keep your day job. Revise your plan. Focus on a subset you can do yourself. Or give up.

Get your people together and revise that early plan. Bring it up to date with what you’ve learned while gathering the team, and what your team members were able to contribute to the plan. Remember that plans are made to be reviewed and revised and kept live and up to date.

2. Execute. Get traction. Prove it.

You have a team and you have a plan. Execute on it. Follow your plan. Go as far as your team can take you towards early website, product prototype, discussions with potential buyers or distributors, so-called minimum viable product. Maybe you go on Kickstarter or one of the other sites for pre-launch selling. Get traction. Prove to yourself and future investors that you idea will work. You’ll have to know what that means in your specific case. It’s different for every business.

3. Seek investment if and only if…

Don’t go for investment unless you really need it.  Never bring in investors unless you need them to address an huge opportunity that makes sharing your business ownership with outside investors good for you and them. Read the startup sweet spot.

Furthermore, don’t go for investment if you’re not going to get it. Only a few businesses are good investments. Read this self assessment will you get angel investment, 10 things angel investors ask about your plan. And be aware that the advice in those two posts applies to the U.S. market only. The realities of angel investment are vastly different in other markets.

(Note: I have no association with Kiddologic. I saw her pitch for local angel investors and was very impressed.)

Startup Culture is as Leaders Do

The question over on Quora was How should a new startup develop and sustain a strong company culture? I decided not to answer the essential how-to, but rather to share my experience in this area, which is more like a reality check on startup culture than anything else.  The following is straight from my Quora answer.

Culture is not what you say

Culture isn’t what anybody says, it’s what the leaders do. You can write mottos and pin poster on the wall, send memos around, write mission statements and mantras, develop tag lines, and repeat seemingly meaningful phrases at meetings … but what determines the culture is what leadership values – not what it says it values, either, but what it actually values with actions, policies, decisions, priorities, rewards, praise and everything else that happens all day every day.

Leaders, as people, rarely change who they really are. They will nurture new ideas or not, listen or not, treat their people fairly or not, depending on their values, their past, and who they are. Sometimes people can change over time, but that’s rare.

Leaders frequently believe their words and ignore or fail to realize that their actions contradict their words. This is why businesses are so full of hype and spin and meaningless drivel in mission statements and the like. Have you ever seen a company that doesn’t say they believe customer service (for example) is extremely important? But how many flow that thought into actual policies and performance. Similarly, is there any business that doesn’t say it values innovation? But how many businesses actually reward people for questioning authority or trying to do things differently? These are big-company examples everybody knows, but I use them to make a point about startups.

What’s a strong culture?

And your question itself offers an implicit example in itself. You say “strong culture.” What’s that? One leader could say a strong culture is when people compete with each other constantly, spend infinite hours in the office, and value stress. The next could say strong culture is one that develops a mission to make the world a better place, treats everybody fairly, and cares about its customers. Which is strong?

What matters is who you are and what you do, not who you want to be, or what you say you believe.

 

Does an MBA Help in Running a High-Tech Business?

Question (on Quora): Does an MBA help in starting up and running a technology-based business? 

My Answer on MBA for High Tech

I have an MBA degree and I bootstrapped a software company past $10M annual sales and was a co-founder of another software company that went public in less than four years. And the truth is neither yes or no, but somewhere in between. The value of the MBA depends on who you are, what you want, what other options you have, what you give up, and where you are in career and the more important rest of your life, like relationships, having children, etc.

MBA degree for high tech business

My case with my MBA and high tech

My MBA degree made a huge difference to me as entrepreneur. I would never have managed without the general business knowledge I got in business school. Having a good basic idea of finance, marketing, product development, and organizational admin was essential to me. It changed my risk factors from too high to acceptable. I set out to build my business on my own without any savings or any investors and while being the sole income for my family (at that point we had 4 kids). Knowledge, in my case, reduced risk. So that’s a direct link to this question of whether having an MBA helps. I’m just one data point, but still … my experience is real.

For the record, my MBA wasn’t easy. It was a lot of sacrifice and a lot of risk. I did it at Stanford while married with 3 kids and paying my own way by consulting, supporting my family, without scholarship help. I quit a good job to do it, turned down a transfer from Mexico City to Hong Kong, which I had wanted for years. And I’m very grateful to my wife, who encouraged me to do it, and promised me she’d stick with me even if I failed.

Two important qualifiers

One important factor for me, which might be relevant for others, is that my MBA experience was rooted in the objective of changing careers. I wanted to change directions, not continue in the direction I’d been going. I’d been a business journalist and I wanted to move out of Journalism to business. I didn’t want to write about it; I wanted to do it.

Another factor for me that might help others is I didn’t expect magic. I was already 31 years old, married 9 years, father of 3. I didn’t expect to learn leadership, when and how to take risks, or how to deal with people (i.e. empathy) in a classroom. What I did expect to learn was the intricacies of finance and cash management, accounting, marketing, some sales (ugh – I’ve always hated sales), some product development, decision sciences, and basic analysis.

However, please don’t misunderstand me – I’m not saying that the MBA is good for every entrepreneur or any specific entrepreneur or you, specifically, as you read this answer. I am saying that it was extremely good for me, in my case, and might be as well for somebody else in similar circumstances. Can you afford to do it? Do you have the time? Are you in a position to take advantage of it? Are you already full speed in a career you love or looking to pivot? All of these factors are important.

Three additional thoughts

  1. There’s no doubt that times have changed, and that the relative value of an MBA degree in 1981 is less than it is now. MBAs are much more common these days than they were then and it doesn’t take an MBA degree to understand supply and demand.
  2. MBAs need ripening before they get their full value. Some would say that it would be a good investment to buy fresh new recent MBAs for what they’re worth and sell them for what they think they’re worth. I’ve been an employer for 30+ years now and I like my MBAs much better when it’s their second or third job out of school, or a few years after school.
  3. I believe the MBA degree these days is a lot more valuable from one of the top schools – Stanford, Harvard, Wharton, Northwestern, Babson (for entrepreneurs) and the like – than from second or third tier. The supply and demand factor has heightened the perceived difference.

Business Pitch: Don’t Confuse Optimism with Business Potential

Chart_shutterstock_42227020_by_ArchMan (2)I listen to a lot of business pitches and way too many of them try to make something out of the entrepreneur’s attitude. Commitment is great, but who isn’t committed? Passion is great but who isn’t passionate about their business. Saying that adds nothing. It’s assumed. So too, with optimism. Business pitch optimism is vastly overrated.

Business pitch optimism

This comes up because I heard this the other day:

I love your optimism. What I don’t like is the complete lack of experience that’s causing it.

Ideally, a business pitch is exciting because the business potential is exciting. Optimism ought to be a combination of potential market, product-market fit, scalability, defensibility, and management experience. Better yet, early sales, initial growth rates, proof of concept in buyers or users or subscribers or signups or something equally concrete.

Don’t talk about it. It’s assumed.

Frankly, in a business pitch, I mistrust shows of undue optimism, passion, commitment and resolve. I worry that early-stage entrepreneurs are working towards some mythological promise that they have the will to succeed, as if will alone can make a business successful. I don’t want to invest in passion unless it’s tempered by experience and based on a solid business plan.

You’ll find people talking about showmanship in business pitches. Absolutely. Tell your story well. Tell the story of the market, the need, the solution, the steps along the way, and the team that’s driving it. But it’s about your business, and you fit in as the manager who will drive it. Angel investors will frequently talk about betting on the jockey, not the horse. In that case, it’s betting on the jockey’s skill and experience, not just optimism or passion.

It’s a fine line. Sell your angel investors your business, not your optimism. Not your passion. Not your commitment.

 

Don’t Just Dream Your Startup. Do the Work.

Dream Your StartupI’ve seen this in surveys several times: Americans dream of owning their own business. We’re a culture of startups. But don’t just dream your startup. Do it. Make it happen.

Just because you love it doesn’t make it easy

I really like this from Pam Slim, author of Body of Work, in Who says following your dreams shouldn’t be hard? She says:

I have come to the realization that we cause ourselves a lot of stress by believing that if we just choose the right business, or quit our loathsome job, or find the perfect Internet marketing system, or get that book deal that things will become easy.

She goes on to point out that most of what we get in life, most of the good things, are also hard. There are lots of clichés on that point. Pam suggests that there is good hard — such as “Meeting unexpected life challenges with both pragmatism and optimism” — and bad hard — like “Spending twelve hours on an administrative task that is complex, boring and not your strength when someone smart could do it in 30 minutes for fifty bucks.”

There was a scene in one of those old black-and-white movies in which the fabulously rich guy is asked the secret of success and he answers: “Choose rich parents.”

For the rest of us, it has to do with work. As in another old saying I like: “The harder I work, the luckier I get.”

Success takes a lot of work

Which brings me to one of the basic fundamentals of building a new business, or running an existing business: it’s a lot of work. You have to build it around a need that other people have, or something that other people want. It has to be not just what you want to do, but what somebody else will pay money for. You develop strategy, tactics, and of course the business offering. You gather a team and necessary resources. You make decisions. You take risks. You spend a lot of time. You do a lot of work. You make a lot of mistakes along the way

Be your own boss? Well, maybe, but the toughest bosses are their own bosses. The buck stops with you. You make the decisions. Even the work you don’t do is still your responsibility, so you have to develop tasks and measurements and accountability. You plan constantly, because you do a simple plan and revise it frequently.

Somewhere embedded in all this is that you work on what you love, because to be successful you’re going to work on it a whole lot, so you’d better love it.

And, also, that the opposite of hard is boring.

Which brings me to my title above. Following dreams isn’t enough. You have to build dreams.

True Story: Startup Addict, Chronic Failure

I believe that developing your own business is ultimately a matter of doing the work, getting the store open, returning the phone calls. And I fear that too often people fall into the myth and mystique of the startup and end up doing just the opposite. They are always waiting, never working. This is the story of a startup addict.

Ralph as startup addict

I haven’t seen Ralph (not his real name) for several years now. Rumor has it that he finally did get a company going. He built it to sales of a few million dollars a year. Then he fought with the programmer whose work got them started, and fell from grace.Gambling_business_planistock_000000

Ralph was a serial non-entrepreneur. We worked together off and on for about six years. During that time he was never not working on a business plan for a new startup. He was going to get financed. “Business Plan” to him wasn’t just planning a business, it was a lottery ticket to a carpeted office and big BMW and somebody else answering the phone and making the coffee. He spent years working on one business plan after another, none of which ever got financed. He was a business plan addict, living on the dream of hitting it big, always looking for the big win, but never actually taking small steps in the right direction. Nothing could happen until he “got financed.”

Like the gambler that never leaves Las Vegas, Ralph was always hoping that the next one would be the big one.

That phenomenon is the main reason for this post. There are people who constantly look ahead to when they get financed. They are always working on the next plan and the next pitch, but never actually do anything.

Ralph as mentor

On the other hand, Ralph was 10 years older and had more industry experience, so he did some mentoring. For example, at one point we worked up a  business plan for assembling generic business computers in Mexico City (that may sound random, but I had lived there for 10 years and was returning to live there again). He was to be my partner in the Silicon Valley, and I was going to build the business in Mexico. As part of that plan, he taught me, step by step, how to build my own computer. Do you remember the S-100 bus and the CP/M operating system? I built my own.

His best advice for me was extremely valuable: “Sell boxes, not hours.” Ralph liked pithy entrepreneur-folk wisdom like that.

Unfortunately, that one, like so many others, never launched. From what I heard later, Ralph finally did get something going after I had moved to Oregon. His business had several million dollars of annual sales back when that was a lot of money. We drifted apart so I don’t know for sure, but mutual friends tell me that the propensity for luxury offices and big-company perks hurt a lot. He turned his business into one of those Nova-star affairs that crashed and burned in three years. There was also a rumor that the crashing had something to do with questionable legal moves that were unfair to a partner who had done the programming to get them started.

Three business points

This true story is in this blog mainly for several actual business points:

  1. If you’re in the startup mode and working on developing your opportunity, don’t suspend business life until the plan is done (because it never is) or until you’re financed. If it’s a good idea, get going. Keep working the plan. If you need to get financed, keep at it, but take small steps in the meantime.
  2. If you’re working on a startup, take my advice (not Ralph’s) and think about cinder block offices and such in the more economical locations. If your business isn’t about receiving clients or customers, wait for the luxuries until after you have more revenue than costs and expenses.
  3. Sorry, this one is so obvious, but as your business rises in the world, make sure you bring along the people who got you there.