Category Archives: Starting a Business

Do You Think You Can Copy Silicon Valley?

Doesn’t it seem like every other place wants to be Silicon Valley? We call the New York tech scene Silicon Alley, Portland is Silicon Forest, somewhere in Southern California is Silicon Beach, Austin Texas is Silicon Hills, and so on. There’s job envy, and growth envy. Googling “the next Silicon Valley” generates 46 million hits. 

So I like the juxtaposition of two articles in MIT Technology review that contradict each other delightfully. 

Silicon Valley MIT Technology Review

The first, from MIT Technology Review on July 3, is Silicon Valley Can’t be Copied. Author Vivek Wadhwa subtitled his piece “For 50 years, the experts have tried to figure out what makes Silicon Valley tick. The answer is people.” He explains:

Note that from 1995 to 2005, 52.4 percent of engineering and technology startups in Silicon Valley had one or more people born outside the United States as founders. That was twice the rate seen in the U.S. as a whole. Immigrants like me who came to Silicon Valley found it easy to adapt and assimilate. We were able to learn the rules of engagement, create our own networks, and participate as equals. These days, the campuses of companies such as Google resemble the United Nations. Their cafeterias don’t serve hot dogs; they serve Chinese and Mexican dishes, and curries from both northern and southern India.

This is the diversity—a kind of freedom, really—in which innovation thrives. The understanding of global markets that immigrants bring with them, the knowledge they have of different disciplines, and the links that they provide to their home countries have given the Valley an unassailable competitive advantage as it has evolved from making radios and computer chips to producing search engines, social media, medical devices, and clean energy technology.

The second, published in the same MIT Technology Review yesterday, is Brad Feld on the Rise of Global Startup Communities. In which “startup scenes are popping up in cities all over the world.” That’s an interview with Brad Feld:

In his by-the-bootstraps guide, the 2012 book Startup Communities, Feld laid out a guru-ish, four-point plan for how to create a growing mass of startup companies. But his rules boil down to just one: entrepreneurs must be the “leaders.” Everyone else—universities, governments, investors—are “feeders” that, though important, can’t kick-start a startup community on their own. Feld says if even fewer than a dozen established entrepreneurs team up and get serious—create an incubator, for instance—that nearly any city from Detroit to Cape Town can create a meaningful startup sector.

Feld’s principles have weight because he’s lived by them. He is a co-creator of TechStars, which gives startups seed money and three months of intensive training. Conspicuously absent from Silicon Valley, TechStars instead operates in seven other American cities, including Boston, Chicago, and Austin.

To me it’s perfectly reasonably that both of these contradictory points of view could be true. That’s good editing.  What do you think?  

Willamette Angel Conference Invests More than $450K

Yesterday’s Willamette Angel Conference (WAC) 2013 event invested more than $465,000 in four Oregon startups, highlighted by more than $250,000 in Portland-based Sonivate, which has developed a fingertip-mounted ultrasound probe that enables imaging while leaving both hands free to do work with simultaneous tactile feedback. 

Willamette Angel Conference

Three other startups got WAC investment at the event: Amorphyx, a Corvallis company with innovative technology that reduces manufacturing costs and increasing the brightness, speed and efficiency of LCD and flexible displays; DesignMedix, a Portland company addressing the rapid rise in drug resistance in multiple diseases; and Green Zebra Grocery, an innovative chain of small healthy-food grocery and convenience stores, based in Portland.

The event concludes three months of study (called “due diligence”) by the group of more than 30 angel investors, about half and half from the Oregon university towns Corvallis and Eugene. This year’s event was held on campus at Oregon State University. The event alternates between Corvallis and Eugene. I’ve been a member since it started in 2009. 

Earlier in the day, keynote speaker Diane Fraiman of Voyager Capital noted that Oregon companies have received more than $600 million in venture capital funding, and challenged us, the WAC members, to continue investing in our area. That might have influenced us — our deliberations are strictly confidential, so I’m not saying — that afternoon as we added more than $200,000 to the investment amount originally planned that morning. That also doubled our previous year’s investment, and — we think — made this WAC event the largest investment of any of the Oregon angel investment groups. 

Hallspot, a Eugene company that started on campus at the University of Oregon, was awarded a $2,500 Palo Alto Software prize for the best concept-stage company. 

Some Hard Advice on Working for Sweat Equity

I just posted Why Sweat Equity Often Stinks on the gust.com blog for startups and angel investors. It’s quite cynical, I’m afraid, but it also reflects what I’ve seen for years.

istockphoto ball and chain

Sweat equity is a dangerous concept. It’s way too easy to misinterpret and misunderstand. And whether it’s intended to be or not, it’s way too often used as a lure to get people to work for less than they are worth. 

The good side of sweat equity is what startup founders earn by building their business. You create, work, develop, grow … and your business is worth more than it was. And you own the upside. 

The bad side of sweat equity is that it’s so often just thinly-disguised exploitation. 

Here’s my advice: if you’re getting paid less than your fair market value in a startup because you’re working for so-called sweat equity, understand that …

  • unless the equity deal is in writing somewhere, 
  • and defined with real numbers including percent of ownership, shares and total shares outstanding,
  • and real conditions such as vesting, and work expectations, what happens if you want to sell out and quit, what happens if they want to buy you out, and what about termination …

… then it’s probably not worth as much as you think. 

And what makes it worse, quite often, is that the people making the empty promises don’t intend to exploit you. They mean it when they say it, early on. But then the money starts flowing, investors come in, the board changes, and promises can’t be kept. Unforeseen circumstances are very common. So what you get is an apology. 

Some more advice: when I say get it in writing, I don’t mean a formal legal contract; at least, not necessarily. I’m a great believer in simple English signed by both parties, laying out what they think they’ve agreed to. Warning: I’m not an attorney. The attorneys are often valuable for pointing out all the issues to consider. But the big contracts usually end up in mediation anyway. Just make sure you have something written to remind everybody of what was promised. 

(Image: istockphoto.com)

On Trying to Start Two Businesses At Once

Do you recognize this question: “Do I start two businesses at one or just one at a time?” I received it over the weekend from my ask-me form on my website. And I have two completely contradictory answers and then an explanation. 

First, the question (leaving out parts of it that would identify the person asking it):  

I am about to start a business called [omitted] a digital marketing agency. But I also want to start another one, a mining research consultancy company called [omitted]. I am passionate about both but just wondering if I should start both at the same time or start one then use the profit from the first one to start the second one.

Before I answer, I have to enjoy the optimism there. How nice to be wondering whether to fund the second success with profits from the first. 

My answer: Focus. It’s going to take a lot of work to start up either one of these. Don’t dilute your efforts. Choose one. It’s going to be harder than you think. Do a business plan for it, then execute, and review and revise the plan constantly. 

The contradiction: I’m right now doing exactly the opposite of what I recommend. I’m working on a social media business and a mobile apps business, both of which I’m doing with co-founders, without staff,  and without outside investment.

The explanation: It’s dumb, but I get up in the morning, like the idea, and I can’t resist. I have patient co-founders. 

So I’m hypocritical, yes. Do what I say, not what I do. 

Image: Vlue, shutterstock.com

Sticky Questions on Startup Ownership and Buy-Sell

I received this interesting detailed question from the ask me form on my website. I’ve decided to answer it here. I think my answer might be useful for others with similar questions. I’m putting the question in quotes, paragraph by paragraph, and adding my response directly where it comes in the question. 

It starts like this:

A person ‘X’ owns 15% stake in a startup company – not by investing money but purely by virtue of having dedicating hours for building a product for the company. No salary was to be paid as per an initial agreement. The 15% stake was deduced by a simple calculation: (value of company) / (number of hours worked) x (dollars per hour).

Was it clear in the initial agreement that the formula here was to be used in future buy-sell transactions? Was that agreed to by all? 

The question continues: 

The value of company is therefore, sum of [(number of hours worked) x (dollars per hour)] and [hard cash invested by a person ‘Y’, also taking into consideration year-on-year appreciation of this hard cash]. Lets call that VC.

No, it’s not. The value of the company is what somebody pays for it when they buy it. And if nobody is buying it, then the value of the company is an estimated value. There are lots of formulas for estimating it, and estimates will vary widely. I’ve got more on that below, in my specific recommendations. 

However, it could be valued like you propose, for purposes of a buy-back transaction, if there was a buy-sell agreement that set that formula in the beginning. That’s if and only if. Issues like these are the reason experts recommend that partners and cofounders talk about the eventualities and agree, before the business starts, on how they’ll be handled. You have to agree beforehand or you’re stuck with arguing and negotiating the valuation afterwards. And when you try to pull it apart afterwards, without the benefit of an agreed-upono buy-sell formula, then many formulas might apply. 

And here’s the heart of the question: 

The company is not profitable yet. Person ‘X’ decides to give up his 15% stake of the company. My questions:

– How much is ‘X’ entitled to receive as the value for 15% stake? 
– Calculating backward, would X receive as much as [(number of hours worked) x (dollars per hour)]? 
– How does this change if the only buyers of the 15% stake are also two other stake-holders within this company, one of them by virtue of cash invested in the company, and the other by virtue of hours spent working for the company?

Normally, unless otherwise specified, owning 15 percent of a company means you own some shares that amounted to 15 percent of the total shares issued when they were issued. Ownership privileges are defined in company documents. You might have a seat on a board of directors, or not. You might get dividends when that’s relevant. And you’ll be able to sell those shares subject to securities and exchange regulations. 

Just hypothetically, as an example, say you agreed two years ago that you got 15% because you had put $15,000 worth of work on it for free and the founders agreed then that it was worth $100,000. If it’s launched and very successful now, with sales of $1 million annually, then it’s worth something like one or two times revenues, less a discount for debts, less a discount for not being liquid. In that case your 15% is worth something like $100,000. On the other hand, if it launched, has no sales, no profits, and has spent all its money, then your 15% is worth about zero. Companies are almost never worth a formula based on hours worked. 

So unless you have that buy-sell agreement stipulating the formula you’re using, then it doesn’t apply. Here’s what I recommend. 

  1. Agree on an estimated valuation. The formula you’re suggesting seems like it might be one-sided and self-serving. Good luck with it because it’s going to be hard. Expect disagreements. Depending on how much money is at stake and how severe the disagreement, you might need to work with an attorney and a valuation expert you can agree on. Here are some posts on this blog about valuation. This one is particularly relevant: 5 things business owners need to know about valuation. Sales, sales growth, profitability, and scalability and defensibility make it worth more. Debt, and not being liquid shares, low growth, and losses make it worth less. 
  2. Take 15% of that valuation and negotiate with your cofounders based on that value. I hope for your sake and the sake of your cofounders that things are going well for this business and they’re happy to buy you out. If they aren’t, then you’ll have to keep discounting until you get to an amount they’ll pay you. Or just keep your 15% of the shares, stop working for the company, and hope that someday they’ll be worth something. 

The moral of the story: please, the vast majority of business marriages (partnerships, startups with founders, etc.) end in divorce. Do a business pre-nuptial agreement, which is what they call a buy-sell agreement. 

 

 

Greatly appreciate your response and all your help!

Are You an Entrepreneur? Do You Want to Be?

Are you an entrepreneur? Do you want to be? Are you living with one? This less-than-five-minute video is worth every second.

I subscribed to the GrowConference channel on YouTube as a result of watching this. Good stuff. And if you don’t see it here, click here for the YouTube original.

And thanks to VentureBeat for its post on this. I like that they called it: Anyone who has started, will start, or wants to start a startup should watch this video. I agree.

Free Online Video Business Planning Tutorial

My apologies if you’ve seen this elsewhere. It is available on the SBA community site, where it was posted about a year ago. I developed it originally as a donation to the SBA effort, because I believe what the SBA to help real-world entrepreneurs get started and run businesses is valuable. I cooperate with the Small Business Development Centers (check out asbdc-us.org) and the Womens Business Centers, and I’m a member of SCORE. I post this here — or repost — so you know about it.

Also, it’s a good example of an embedded Rebelmouse page in a WordPress blog. And another way to do a YouTube Playlist on a WordPress blog. If you don’t know about Rebelmouse, check it out.

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5 Signs of Patent Sharks Preying on Your Dream Invention

I’m really sorry to be the one to throw a bucket of cold reality splashing over inventors’ dreams. But darn, patents don’t mean what they once did, and businesses preying on patent hopefuls are not ethical businesses. These are shark-filled waters. Be careful. 

What brings this up is this email I received last week through my ask-me form on my website: 

We took a draft of an invention that would be something the everyday person could use and would be used on a daily basis. We went to an Arizona patent office and spoke with the director there. A few days later he called and said he had really great news for us. He and other people in his company wanted to patent it and try to market it, but with no guarantees. The process would take about 5 months and 13,ooo dollars to patent and to try to get it to market. Again, no promises, and if they can’t get it on the shelves it just wasn’t going to happen and they wouldn’t except it if they didn’t believe it would work. That is my life savings and i am nervous. I know to patent it my self would be cheaper, but i wouldn’t know how to market it. 

Can you see what I worry about in that message? There are two clear alerts, danger signs, in this message.  

  1. The wolf-in-sheeps-clothing factor: The email calls it “an Arizona patent office” as if it were a government office or some kind of public sector agency. But it’s not, clearly, because it’s talking about applying for a patent and taking a product to market. And charging money for promising to do it. My guess is it showed up on the Google search in the paid search results, as in the illustration here. 
  2. The business proposal: “He … wanted to patent it and try to market it.” But “with no guarantees.” So what, precisely, is he really offering to do, besides take the money? The only real thing offered for $13,000 is to apply for a patent. That could be as little effort as filling in the forms and editing the formal description of the inventions. What recourse is there when if the patent application sits forever without action, or is rejected? Are they giving the money back? What if the supposed “market it” yields nothing? Isn’t then “sorry, we did our best but your product failed” with no money back and nothing lost by the vendor? 
  3. Skin in the game: Why aren’t they offering to do this for a percentage of revenues or profits, or, alternatively, asking you to take a royalty percent if they do it at their expense? Both of those would be more reasonable business models for a relationship between inventor and entrepreneur. They take no risk. They give no assurances. 
  4. The amount of the offer: $13,000 might reasonable buy legal advice and polishing and formatting information for an application. If it came from a reputable lawyer, I wouldn’t be surprised. I don’t know what this invention is so maybe I’m wrong; maybe it’s so good that it will sell itself, just from having the patent. But If it’s like 999,999 of every million ideas, then to go from invention to design to prototype to product and take that product to market for that little money is absurd. Many self-started single-person service businesses start with that little money, but not when it’s paid to a third-party provider. And product businesses, with patents, marketing inventions? No.  
  5. The division of labor, and expertise problem: Attorneys provide legal advice, not business building, not marketing and sales. Marketing and sales and business-building services don’t fill out patent applications. So what’s up with this? No self-respecting attorney would offer to take the product to market. (I’m not an attorney, but, attorneys reading this: am I right?). Yes there are plenty of competent and honest attorneys with patent or intellectual property specialty who could review the invention and offer advice about marketability and patentability. They would be explaining to this person the realities of applying for a patent. If the invention doesn’t lend itself to patenting and developing a business, then a good lawyer might give this person the bad news  for just an hour or two of fees, probably less than $1,000. And if it is the one in a million, then a good lawyer will just do the legal for it, rather than pretending that one person can do the whole thing. In many cases — and I think this is one — the honest professional makes a clear distinction between the services they do and those they don’t. 
My recommendation in this case is to find a good attorney to help. If you have no idea…
  1. Contact your local Small Business Development Center, Womens Business Center, chamber of commerce, or business school in nearby college, university, or community college. Ask for help.
  2. If you have friends or relatives in business, ask them for recommendations finding the right attorney. Check references. Be skeptical. But there are good ones around, for sure, and a lot of them. 
  3. And if an attorney you trust recommends it, then apply for the patent. And do it realizing how much more you have to do before you make money with it. 

Understand the Critical Difference Between Ideas and Opportunities

Ideas are a dime a dozen. Opportunities are much more important. An opportunity is an idea that’s passed the test of planning. It has potential. You can implement it. An opportunity has some of the following elements:

  • Industry and market potential: look at market structure, industry structure, growth rate, margins, costs, etc.
  • Economics: capital requirements, fixed costs, cash flow, return on investment, risk.
  • Competitive advantage: degree of control, barriers to entry, availability of sufficient resources.
  • Management team: people who know the industry, the market, the operations, the logistics, the road to market. filter_istock_small

The business planning process is about filtering the opportunities — a precious few, requiring focus, and planning — from the ideas.

Whether you’re working on a new start-up business or growing an existing business, you need to encourage lots of ideas and then use your planning to filter them down into the real opportunities.

Remember displacement … recognize that you can’t do everything. You want your plan to help you focus in on the best opportunities among your longer list of ideas.

There is no external meter of good and bad opportunities. What you’re looking for is the right mix between business potential and your ability to reach that potential, given your position, core competence, strengths, weaknesses, and resources.

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What Business to Start? Look in the Mirror

So you want to start a business, but don’t know what kind? Sure, you can get a list of franchises or ask the experts what are good businesses to start. That works for some people. Lists of businesses to start are easy to find. My advice, however, is don’t look for a list of good businesses. Don’t ask what the big opportunities are. Get a clue. Go look in the mirror. And as you look in that mirror, ask yourself these questions:

MIrror

  • What do I like to do? How am I different? What is there about me that sets me apart? What excites me? What am I good at?
  • What do I like to do that other people (or companies) want to have done? What do I like to do that people will pay for? What do I like to do that I do better or differently from others who do it?
  • What value can I add? What’s missing? How can I do something better than what’s now available? What can I see about the future that others can’t see?
  • Where can I give value that isn’t there right now?

I’m down on lists because I don’t see the startup process as beginning with some idea that’s on a list, followed by research and putting together a team and developing a plan and starting a business. Instead, I see most good businesses starting with something that the founders believe in, something that they think ought to be done or ought to exist, something that excites them or intrigues them, all of that followed by planning and building a business to make it happen.

Here’s how it goes: you develop the original business plan to establish that your idea is an opportunity. Ideas are a dime a dozen, commonplace, and without any essential value. Opportunities are a subset of ideas. The planning process separates the opportunities from the ideas.

The heart of the business is that trio of identity, market, and focus. A lot of that is about you and what you want to do and what you can do better. And if building the business, I hope you fall in love with the business first. I hope you recognize the need and see how you can fill it. And, I hope you like the vision, know that you want to do it, and discover that you’re excited by it.

Do something you want to do and believe in. That restaurant you’ve always dreamed of, or skiing equipment, or a newsletter … success isn’t based on the idea, it is based on how hard you work at it, how much value you deliver. When somebody close to me wanted to start a graphic arts business, I didn’t say ‘no, don’t, there are a million of them.’ Instead, I said their success would depend on getting customers, providing value, and, in short, working hard.

In the Art of the Start, Guy Kawasaki offers a list of ways to generate new business ideas. If nothing else, read his first chapter. Just click, you can do that now; or later, if you want to keep reading me. Guy talks about getting going, about ideas being generated by impulses like “I want one” and “I can do this better” or “my employer wouldn’t (or couldn’t) do this.” There too, it doesn’t come out of the blue, it starts with you.

In Growing a Business, Paul Hawken shows how a business grows naturally out of the owners and founders doing something they want to do, filling a need they believe should be filled. I recommend it.

To be fair, there are exceptions. Franchise businesses, for example, when they work, are a business formula you pay for and implement, guided and taken by the hand every step of the way. Being a McDonald’s franchisee means you’re a millionaire, it doesn’t mean you like eating or preparing what McDonald’s restaurants serve. You buy a business to run. They tell you how to run it. If it isn’t a set formula and if they don’t give you all you need to know, then it’s a bad deal.
Thanks for asking.

(Note: I posted this on Up and Running several years ago. It’s as valid now as it ever was.) 

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