Tag Archives: Quora

7 Very Common False Assumptions in Entrepreneurship

These are very common false assumptions in entrepreneurship.

“What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.”

— Mark Twain

I answered a Quora question about this. Here’s my list of seven:

  1. That being profitable means having cash in the bank. Seems obvious, but spending on inventory, waiting on accounts receivable, buying assets and some other spending suck up cash while not having anything to do with profits. Profits ≠ cash. For more on this, The Difference Between Cash and Profits.
  2. That the lowest price option usually wins. That’s just not often true. Price is the strongest marketing message there is, and high-value high-price options are often the best strategy for a startup. Having the lowest price doesn’t necessarily generate volume (think of discount sushi, for example) and usually takes a lot of capital.
  3. That if you build it they will come. Actually, no. Not if they don’t know about it. Some really good products and services failed for lack of getting the word out. Meaning: marketing.
  4. That the highest quality product will win. Yeah, I wish this were true. But there’s marketing, sales, distribution, and all the rest of the business. In my four decades in business I’ve seen many better products lose out to better marketing.
  5. That the first to market wins. Nope. Rarely. Apple, Google, Facebook weren’t first. The winner is a combination of work, luck, strategy, resources, positioning, capital, and other factors.
  6. That you can’t do it if somebody else is already doing it. Actually, you can. See my point #5 above. Just do it differently, or better, or in a different market, or with a different strategy. Businesses are always copying other businesses.
  7. That more hours wins. People who work 80 hours a week rarely get more than a few percentage points of additional production over those who work 40 hours a week. Work smarter, not harder. To generate productivity in a group, acknowledge that people have lives, families, and need for downtime, regular exercise, etc.

Note: this was originally my answer on Quora.

6 Common Misconceptions About Angel Investors

The question on Quora was “What do investors ‘get’ that other people don’t?” I answered that question from the point of view of angel investors, specifically … not just investors.

1. Some of the healthiest businesses are not good investments

Many people think that a good business makes a good investment. The truth is not necessarily. Many real good businesses are bad investments …

For example, the founder-driven business that generates enough cash to fund its own growth. It’s founders may choose to not exit soon enough to offer a good return for investors. In these cases, founders are better off without investors. And investors have higher risk of never seeing an exit.

2. Angel investors make money on exits, not profits.

Investors own shares in the business, not revenue, and not profits. They make money when they sell their ownership for money. Increasing valuation generates a return on investment. Profits, without the exit, don’t flow to investors in normal startup situations; dividends are for stable companies, not profits.

Angel investors make money on growth, not profits.

3. There is an interesting underlying trade off between growth and profits; you can’t optimize both. It’s one or the other.

A company that loses money but grows well in terms of revenues, users, subscribers, and so forth can be an excellent investment because most valuations in high-tech startups are based on revenue, not profits.

Ironically, investors may be better off with high-growth that loses money because their money becomes more valuable, and more important, when it is all that stands between growth and not growth. Investment is more likely optimized when it funds growth.

4. Angel investors shoot for the big win, not a minimum

All serious angel investors know that most startups fail. They don’t look for the low risk investment that might yield a more reliable return, because those startups fail too. So they look for the big win, the next big bonanza, the huge success that will pay for all the failures.

5. Angel investors want to see your numbers but don’t believe them

Market estimates, market share potential, sales, costs, and all the rest … investors want to see them because they show what you’re thinking and how well you understand the business. Ideally it shows that you understand the drivers and the fixed costs, plus cash flow problems, and all the rest.

Regarding market numbers, they are going to review them but they will look at your assumptions and decide whether they believe them or not. The best market estimates trigger the dream and the imagination of the investors.

6. Angel investors scoff at analyses like NPV and IRR

Note above that angel investors don’t believe your numbers. How naive to think a number generated by assumptions compounding on assumptions has any actual metric value. My personal opinion is that when startups believe their IRR matters, they are too green, not long enough out of school.

(Here is the link to the original on Quora)

My Advice to Startups Seeking Angel Investment

Over the weekend I was asked what advice I’d give to founders of a startup seeking angel investment. Here’s my list.

  1. First, make sure you really want angel investment. Read 10 good reasons not to seek investors for your startup. Take it to heart. If you don’t need investment, really, you are better off without it. And also, read startup sweet spot too.
  2. If you do, then next, make sure your business is a good investment. Read up on what makes a business a good investment. It’s about the team, the growth potential, ability to scale, traction, etc. Many great businesses are not good investments. Read Do you have what investors want and angel investment self assessment.
  3. Wait until you’re ready. Don’t seek investors before you have a team in place, milestones met, numbers to show, good evidence of traction and validation. Investors invest in businesses, not plans, and definitely not ideas. Sometimes they invest in people, like known startup successes with great track records; but if you were one of those, you’d know it.
  4. Know the basics. Understand the normal process. Research investors near you, interested in your industry, and target specific people and groups. Never spread cold emails all over the map.
  5. Investors  invest in your business, not your pitch. What they buy into is the business, the facts, the achievements; not the pitching. If you don’t have milestones met, progress made, concrete numbers to show, then don’t waste your time. You need an intro or profile or summary first, and then a pitch, and, if they are still interested, a business plan for due diligence. But don’t ever mistake the plan, profile, and pitch for what matters. You tell them about the business.
  6. Do a lean business plan first, before the profiles, before the pitch. It’s for you, not the investors. It’s just bullet points, milestones, metrics, and projections. You need to know how much you need, and what you’re going to spend it on, before you start. Review it and revise it. A pitch without a plan is like a movie filmed without a screenplay. Don’t sweat the big plan with all the summaries and descriptions, at least not at first. Maybe not ever. But have a plan, keep it fresh, review and revise often.

(Note: I posted this first as an answer to a Quora question.)

Business Success: Talent, Skill, or What?

I received this question: Is succeeding as an entrepreneur a matter of luck or do only the talented ones make it?

And this is my answer:

Luck isn’t enough, and talent isn’t enough either. You can have either one, or even both, and still fail. What you’re missing, with your question, is the work. Business success takes work. You can succeed without luck, and also without talent; but not without work.

Interested in other answers to this question? They are on Quora, my favorite question-and-answer site.

Top 10 Pitch Fails

I was asked recently for a list of things that annoy me in angel investment pitches from startups. I’ve done this before, so there will be some duplication here. But here is my top 10 pitch fails list. 

  1. Profits. Talk of profits, overestimated profits, the failure to understand that investors make money on growth, not profits; startups with high growth rates are rarely profitable; profits in high-growth startups stunt growth and reduce the odds of successful exit. That’s why you need to spend other people’s money, right?
  2. “I don’t need no stinking projections.” Surprises me how often I’ve seen it. “We all know,” the pitcher says in a cynical tone, “that all those projections are useless.” And dismisses the idea, often with a wave of the hand. Or sometimes it’s a holier-than-thou tone. But no. I need you to think though unit costs, realistic volume, the conceptual links between marketing spend and volume, what it takes to fund growth. I want to know that you know, roughly, that you’re growth will take a ton of marketing spend, and that when you get to $20 million annual sales you are going to have a big payroll and overhead.
  3. Expecting me to believe your numbers. You’re damn right I want to see them, but don’t expect me to believe them. I use them to guess how well you know the nuts and bolts of your business. But at the moment of truth, I’m going to trust my instinct for what I think you can sell, and how much I think you can grow, given the stories you’ve told me and the markets you’ve carved out.
  4. Discounted cash flow. IRR and NPV. Amazing how people can believe numbers that project the future based on a compounded absurdity of assumed sales, less assumed spending, multiplied by an assumed discount rate, five years from now. And yet, I see young people crushed because I wanted something that had a lower IRR than their thing. Y’see, I didn’t believe the IRR either way. I went with the people and the market. This is actually a particularly annoying subset of the point above it.
  5. The annoying myth that nobody reads business plans. Big mistake: confusing the obsolescence of the big pompous formal use-once-and-throw-away business plan of the past with not wanting or needing planning. Ask the two faces of lean startups, Eric Ries and Steve Blank, whether startups need to set strategy, tactics, milestones, metrics, and essential projections for revenue, spending, and cash, and they’ll say the equivalent of “yes of course.” But they are (mis)quoted often as saying don’t do a business plan. What they mean – ask them – is don’t do an old fashioned business plan. Keep it lean, revise it often, and manage with it.
  6. Knowing everything. Sometimes people think investors want founders who know everything, answer each question no matter what, and are the world’s leading expert on any possible subject to come up. No. I want people who know what they don’t know, and aren’t afraid to be not certain.
  7. I don’t want people who get all defensive when challenged. The win is in the relationship, long term. I can’t tell you how many times I’ve seen private discussions between investors, after a pitch, go negative for somebody who investors feel “isn’t teachable.” It’s easier to work with people who listen, digest, than with people who think every doubt is a challenge to their leadership and authority.
  8. The small piece of a huge market. No, please, don’t ever tell me that your $10 million sales figure is realistic because it’s only one percent of a $10 billion-dollar market. Or 1/10th percent of a $10 billion market. That logic never works. Build your forecast from the units up, not from the top down.
  9. Oversharing the science or technology. I want to hear about the business, not the physics, not the biology, not the chemistry. Pitches and plans are not the right place to show off all of your knowledge.
  10. Not needing the money. If you don’t need the money then don’t seek investment. Own it yourself. Never seek outsider money you don’t really need. People who can live off of their generated cash flow are never going to exit
  11. (bonus point) Stock words and phrases like “game changer” and “disruptive.” Don’t tell us that you are either that. Cross your fingers, and hope we tell you that you could be.

This is another of my Quora answers. The original is at: What are the things that annoy you when entrepreneurs pitch to you Angels and VC? And someday I’m going to answer the question what annoys me about my fellow investors. Because writing these items generates a thought about that side of the table too.

Service for Equity Formula

Say you are a service provider – consultant, designer, coder – and somebody offers you startup equity in exchange for professional service. I pondered this question after seeing it on Quora. I turned back to decades as a consultant, and decades dealing with startups, to come up with this sure-proof service for equity formula. Try it. You’ll be glad you did.

Background: My actual experience with service for equity

I dealt with this problem a lot during my consulting decades. I was based in Silicon Valley from late 1970s through early 1990s, doing business plans, business planning, and market research for high-tech companies (Apple Computer more than any other) and startups. No big established company ever offered me equity – meaning a portion of ownership – for my services. Several startups did.

I was gullible and optimistic. I worked for several startups, as a consultant, for small pieces of ownership. I learned the hard way that startup equity is an extreme long shot, million-to-one odds at best.  It got so bad that I promised my wife that I would never consult again for equity.

But then something happened to trip me up. One of my service for equity clients took off. It became a big success. And I had equity. So I made a lot of money with it. Oops, There went the assumptions.

Specifics: My service for equity formula

First: you decide what you’d charge without the equity offering. Call that the fair value.

Second: figure out the minimum that you’d charge in order to not hate yourself, your client, and the job if the equity works out to be worth nothing. Call that the absolute minimum.

Third: Subtract the absolute minimum from the fair value. Call that the difference

The kicker: consider whether or not you like this client, like working with him or her, will learn from the job, and experience you can gain. Rank that as a number between 1 and 10, in which 1 is a very positive job and relationship, with a lot to learn, and the pleasure of working with somebody you want to work with; and a 10 is that total idiot client you can’t stand working with, you don’t respect, you don’t learn from, and is likely to hassle you for more work for less money. A 1 is somebody with whom you’d work for free if you didn’t need the money. A 10 is a loser who makes your life miserable. Call that number the “life is too short” ranking.

Here is my recommendation, in numbers, with formulas based on these variables:

service for equity formula
And here’s another rendition, this time one with more difference between fair value and absolute minimum:

The adjustment for value of equity

But wait, what? You’re noticing, I hope, that I’m entirely ignoring the alleged value of the equity involved. What a dufus! This whole thing is about the trade of service for equity. Right?

No. This is the real world. The odds on a startup getting from this point to having its equity actually worth money are about one in a million. Make your decision based on the life is too short ranking, not the value. Startup equity is so unlikely to ever generate real value that you can’t survive in a professional service doing your work for equity. Believe me.

Still, if you insist that this is a great startup, here’s how to adjust for the equity that is driving you crazy. Do this adjustment for that great startup that you love. It has a great team, great market, real potential. You really want a piece of it:

  • Do the ones you’ve ranked 5 or less on the life is too short scale for the absolute minimum.
  • Do those you’ve ranked 6 or 7 on the life is too short scale for the fair value.
  • Do those you’ve ranked more than 7 on the life is too short scale for exactly what the formula says. Why? That makes no sense, you say? You do it that way because in those cases, you’re wrong. They are far less likely to succeed than you think. People who rank that high on the life is too short scale end up messing up their opportunities, and failing.

But how do you charge 2 or 3 times market value?

Of course you won’t be able to charge what my formula suggests for the clients in the 7–10 range in the life is too short ranking. That’s okay. You don’t want those clients. They kill your productivity for the other clients you do want. So you price so high that if – heaven forbid – they do say yes, at least your pricing has made it worth it.

For the record, this post started as my answer to this question on Quora: My client wants me to work partially on equity, how do I calculate my costs?

Are There Statistics on Inaccurate Forecasts?

How often do forecasts fail? How many business forecasts are accurate? Are there statistics on inaccurate forecasts? It’s a good question. It relates nicely to my view that all business plans are wrong, with the addendum, but vital. While I almost never host guest posts on this blog – opinions here are mine – but I liked this one enough to post it here.

It’s a Quora answer, by Hubertus Hofkirchner, to the question Are there any statistics available on forecasting failures?

Here’s what he wrote:

This is a dangerously simplifying question in a highly complex subject. Let’s forget crystal balls, Gandalf, and Harry Potter for a moment. Let’s use Prediction Science. There are three hidden levels to this question.

Level 1 – Simple Prediction

  1. A forecast impacted by human action can never be 100% certain, because humans will react to forecasts with unforeseen actions which in turn can change the future dramatically, in accordance with chaos theory.
  2. We can only measure the accuracy level and forecast bias of a specific method for multiple predictions – not a single one – with regards to specific forecast topics.

So: What level of unavoidable inaccuracy or bias do we chose to call a failure? What is the commercial worth of more accuracy compared to the cost of producing it with a more expensive method?

Level 2 – Decision Making

Human decisions combine forecasts with their subjective (and never known) purpose and value judgements. This brings the next level: every human action has a purpose. The decision maker can act on an inaccurate or biased forecast but still achieve the actual purpose successfully.

So: Do we chose to call a success then a prediction failure?

Level 3 – Deception Intent

Also, the question assumes a one-way causality, that politicians act on forecasts, implying that bad forecasts will cause bad decisions.

However, politicians often work the other way round. Let’s assume that a politician (or the lobbyist paying him) wants to trigger a war. He produces a forecast by which the citizens’ purpose will support the liberation (politically correct word for war) of some country, somewhere. For example, the politician might predict the existence of unspeakable weapons. The public diaspproves the weapons, thus approves the war.

Of course, when the fabricated prediction fails to materialise, the public purpose is frustrated.

So: Do we chose to call this a forecasting failure? After all the politician’s real intent did work out perfectly fine.

The Riddle’s Answer

The big answer is not “42”. It is “50%”.

Explanation: There is no such thing as a forecast failure (see 1. above). There are right and wrong decisions (see 2. above), and “failure” is but the non-achievement of the decision maker’s purpose (see 3. above).

For economics, let’s assume that the investor wants to make a return in line with benchmark. On the stock exchange, it is obvious by tautology, that 50% of investors will perform above benchmark and 50% below. This very tautology is of course exactly valid for economic and political decisions. So the answer is 50% of forecasts fail.

Nice job.

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.

10 Most Common Business Plan Mistakes, Updated for 2016

top10planningmistakesOver the weekend, a Quora user asked me to list common mistakes that people make when developing a business plan.

I’ve done that post from time to time, and it seemed like a good time to do it again.

Here’s my list of most common business plan mistakes for 2016:

1. Misunderstanding the business objective.

All businesses need plans to set strategy, tactics, milestones, tasks, and essential numbers.

Not all businesses need plans to show to investors or bankers. They don’t have to be traditional formal plans for most businesses, but they do have to be lean business plans that are about managing change.

Plans themselves are useless, but planning is essential. Plans should be made to fit business objectives.

2. Not doing the plan at all, because it’s supposedly too hard.

That stems from #1 above.

3. Doing (and including) too much.

Real business plans are to run business, not just to communicate to outsiders.

They last only a few weeks. They are lean. They don’t have any descriptions or summaries that won’t be used. They take hours, not weeks or months, to do. They are never finished because they are revised every month or so.

And a plan for internal use has no need to describe in text what everybody in the organization already knows, such as backgrounds of the management team. Plans for businesses that already know their market, and make decisions without additional market research, don’t need to include, much less prove, their markets.

4. Overestimating profits.

It’s amazing how often this happens.

In a world where healthy normal businesses make six percent, eight percent, 10 percent or so profits on sales, half the business plans I see in angel investment mode project profits of 40 percent or more.

Really, half. Crazy.

People think we (angel investors) are supposed to be impressed, when what that really means is not understanding the business very well, and underestimating expenses.

5. Naked numbers.

Numbers mean very little without the stories that give them reality.

Don’t bother putting numbers to markets or potential markets without going bottoms up through the assumptions. Numbers always change. Work with the assumptions.

6. Percent-of-total-market forecasts.

Useless. Nobody gets a tiny percent of a huge market.

Successes get meaningful percentages or nothing. Huge markets are almost always poorly defined. The only sales forecasts that count are those based on assumptions, like traffic, PPC, conversions, channels, sales cycles, something real.

Bottoms up only, never top down.

7. Startups trying to compete on price.

You’ll fail. Don’t be the low-price spread. That takes big-branding capital.

Find a lucrative small market segment that appreciates value, and differentiate. Build a story that sizzles.

8. Showing off your knowledge.

I hate the plans that try to show how much founders know.

If your technology takes that much explaining I’m going to just skip to your resumé to decide whether (or not) you know what you’re doing.

This is business. Get to the business of it.

9. Vague, hand-waving at big concepts.

Plans need specifics, when and what, how much, and who.

If it doesn’t have major milestones, tasks, and metrics, it’s just cotton candy.

10. Stupid trite claims.

Half the plans I saw last year (about a hundred or so) claimed to be game changing or disruptive.

Don’t say it. Show it. Let the readers lay the labels on you. That’s way better.

The source on this, the original question and answer, are on Quora here:

What are some common mistakes that people make when developing a business plan?