Thoughts For Entrepreneurs
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Types of business plansThere are four basic types of business plans, each serving a different purpose. How you prepare your plan depends in part on the type you are preparing:
Paul Graham's WisdomIf you are an entrepreneur, then Paul Graham is somebody you should listen to. You can read his essays at http://paulgraham.com/articles.html. Here are just a few of my favorite passages:"What matters is not ideas, but the people who have them. Good people can fix bad ideas, but good ideas can't save bad people."and... "Financially, a startup is like a pass/fail course. The way to get rich from a startup is to maximize the company's chances of succeeding, not to maximize the amount of stock you retain. So if you can trade stock for something that improves your odds, it's probably a smart move."and... "There is more to setting up a company than incorporating it, of course: insurance, business license, unemployment compensation, various things with the IRS. I'm not even sure what the list is, because we, ah, skipped all that. When we got real funding near the end of 1996, we hired a great CFO, who fixed everything retroactively. It turns out that no one comes and arrests you if you don't do everything you're supposed to when starting a company. And a good thing too, or a lot of startups would never get started."and... "Once you've got a company set up, it may seem presumptuous to go knocking on the doors of rich people and asking them to invest tens of thousands of dollars in something that is really just a bunch of guys with some ideas. But when you look at it from the rich people's point of view, the picture is more encouraging. Most rich people are looking for good investments. If you really think you have a chance of succeeding, you're doing them a favor by letting them invest. Mixed with any annoyance they might feel about being approached will be the thought: are these guys the next Google?"and... "There is nothing more valuable, in the early stages of a startup, than smart users. If you listen to them, they'll tell you exactly how to make a winning product. And not only will they give you this advice for free, they'll pay you." What Makes a Good Financial Spreadsheet?We've seen hundreds of spreadsheets, both as presenter and recipient. In our experience, an excellent model is both “correct” and “user friendly,” and typically exhibits the following characteristics:
Quite often, it is difficult for the author of a spreadsheet to look at their work objectively and decide whether or not these criteria have been satisfied. When in doubt, have a colleague perform a thorough review of your work before showing it to any other third parties. Crash CourseIf you want to take your entrepreneurial skills to the next level, then learn from the masters. The Stanford Technology Ventures Program website offers countless resources, including video clips, podcasts, presentations, and web links. You will have an opportunity to hear directly from legends such as John Doerr of Kleiner Perkins and Guy Kawasaki of Garage Technology Ventures. You could easily spend weeks exploring this site and absorbing its collective wisdom. Enjoy!Easy MoneyThe Business Journal reported some cheerful news for entrepreneurs: In the second quarter of 2006 alone, fifty venture capital funds raised a total of $11.2 billion -- the highest level in five years, Heesen says. Venture capital firms invested $6.3 billion in 856 deals during the past quarter, representing the highest dollar amount invested by VC funds and the most deals signed since the first quarter of 2002. "The U.S. venture capital industry is in its best period than at any other time in the past 15 years," Heesen says. "It's a very stable environment. Funds are not over-investing and there's not just one hot technology that everyone is running after."Perhaps it is true that no single technology is garnering excessive attention. However, "clean-tech," consisting of businesses in fields like "water purification, solar power, biofuels, materials based on nanotechnology and clean-coal technology," is starting to break out by raising over a half billion in just one quarter: Clean-tech businesses received a record $513 million in venture capital in the first quarter, according to the latest figures available from the Cleantech Venture Network. The first quarter saw 67 companies getting financial backing, down from 73 in the fourth quarter of 2005 but up from 49 in the first quarter of 2005. Furthermore, the National Venture Capital Association reported an increase in seed and early-stage deals, making this a great time for experienced entrepreneurs to get a new venture launched. Let's see how long this window of opportunity stays open. Bootstrapping 101From time to time, we will feature answers to entrepreneurs' questions here on our blog.QUESTION Dwayne in New York asks: "Being an entreprneur is all I have ever dreamed of. I have what I believe (and have been told by friends and past business associates) to be good business ideas but no matter how big my dreams, the possibilities seem grim due to my personal financial assets. Is it at all possible to find funding without have capital of my own to invest?" ANSWER Dwayne, ASK YOUR OWN QUESTIONS Do you have a question about how to start a business? Just Ask the Experts and we may feature your question and our answer here! Who Will Save the World?The world needs big thinkers. More specifically, the world needs entrepreneurs who can figure out how to save the world. As nations like India and China continue to develop, their average living standards -- and hence per-capita consumption of resources -- will grow apace. According to the State of the World 2006 report from the Worldwatch Institute, these emerging economies still lag far behind the U.S. in many respects:
The Worldwatch Institute says: "If China and India were to consume resources and produce pollution at the current U.S. per-capita level, it would require two planet Earths just to sustain their two economies." Since we only have one planet, the impending global competition for resources can only be resolved through either disastrous conflict or major innovations in alternative energy, agriculture, pollution control, water purification, and other basic elements of our ecology. I'll take innovation any day. Are any of you entrepreneurs up to the challenge? Investor Events and Pitching WorkshopsAs you know, fund raising is a contact sport. The more you practice, the better you'll get at each of its steps and required skills: approaching investors, pitching, structuring and pacing your presentation flow, acing the Q & A, following up, etc.. A good way to practice your batting average in pitching your business, or to learn by watching others, or may be even to meet the right investor, is to attend investor events, as many of them as you can afford. I'm sure you can google up tons of services listing various events and conferences in your area. One source I like in particular is fundingpost.com, because they provide a brief, yet detailed description of each event, without you having to browse 5 more pages to determine if it fits your particular needs. Most of the events are tailored for early stage entrepreneurs, and consist of networking sessions, panel presentations, and actual pitches. The site also contains other useful services and resources for entrepreneurs, and deserves a good hour spent roaming through its pages. Check it out. Sarbanes-Oxley and StartupsIt looks like the Sarbanes-Oxley Act (2002) will affect not only the large and public corporations, but also the small, private firms, especially those with VC investments. The FASB (Financial Accounting Standards Board) has recently mandated that public AND private companies start deducting the value of employee stock options from their profits. Compliance for the private firms is to begin on December 15, six months after the public firms. According to the National Venture Capital Association, calculating the value of options will be so costly and time-consuming that many private firms will forgo them to their detriment. This would be unfortunate, since for many startups, "stock options help motivate founders and managers as they try to build new businesses," says Jim Breyer, former chairman of the NVCA (March 2005) and a managing partner with Accel Partners, a leading VC firm. The NVCA has turned to the U.S. Congress to step in and alter the FASB rule before it takes effect later this year. See more details in this article.
If you don't have time to read the whole Sarbanes-Oxley Act, this S-O summary covers many of the significant issues. For those seeking VC funding, make sure to also check out the "Venture Capital's Comeback" article, recently published in the HBS Alumni Bulletin. Productivity ToolsAs an entrepreneur, you've got a lot on your plate. Anything that saves time and frustration helps. So here are several productivity tools that I've been very happy with recently:
Know of a great productivity tool? Let us know! You can always submit resources to our website; just find the appropriate page in the Resources section and click on the "Suggest a Resource" link. Some sections of interest: - Reference & Research: http://www.caycon.com/resources.php?s=41 Business plan contests as a funding sourceThe winners of the Harvard Business School's 2005 Business Plan Contest were announced in early May. The winner was a plan for a bra business, a company called Uplift, founded by Karen Grajwer, an MBA student in the class of 2005. You can read the details in this interview. The interview shows how much effort and sweat goes into a research for a business plan, if you want to deliver a winning plan. This also triggered me to google "business plan contest" to see how much is going on out there, and I've got 23,900 results with the exact phrase match. Very encouraging. And the good news is that it's not just the business schools and universities that hold business plan contests (many with strict qualifying criteria). The trend seems to be spreading far beyond the educational world and sponsors are plenty: the Wisconsin Governor's business plan contest, BEST (Building Entrepreneurial Success Today) Business Plan contest sponsored by Ford Motor company, a WPI Venture Forum's contest, the Canadian Small Business BP Contest, and many others. The top prizes range from $10,000 to $50,000, and up to $25,000 for runners-up on some. You can get a list of all kinds of business plan contests from this directory. If you are an entrepreneur in the 'concept' stage, the business plan contest prizes can be a great resource to get you going, turning your concept into a business and bringing it to the next stage. Moreover, the money is not the only benefit these contests provide. The top ranking (or three) also serves as a great validation of your concept and of the quality of your business plan, and will help you during your pitches and to open many doors. Beware of FindersMany entrepreneurs work with "finders" who promise to help them attract investors, usually in exchange for a large monthly retainer and a percentage of the capital raised. More often than not, finders are not properly licensed as a securities broker, and are operating in violation of federal (and often state) securities laws. Why should you care? Among other things, your investors can demand a return of their capital (and possibly hold you personally liable) if you use an unlicensed broker to raise capital on your behalf. And there are many stories of finders who simply disappear as soon as you hand them a big fat retainer check. For additional details, read the The Secret World of Finders in the March 2005 edition of Inc. Magazine. Bottom line: Retain a good corporate/securities attorney well before you start looking for capital, and follow their advice very carefully. If you do choose to hire a finder, check with the National Association of Securities Dealers and with your state's securities regulators to verify that your finder is properly licensed and to see if there are any recent complaints against them. Ten Big QuestionsPotential investors want answers. In deciding whether or not they want to continue discussions, they generally want you to answer The Ten Big Questions: 1. What's the problem? Basically, if there isn't a big problem in the market - a major unfilled need - then there's no point in trying to sell a solution. So explain how people or companies are experiencing a significant level of pain because existing solutions are deficient. 2. What is your solution, and what makes it special? This one is obvious. Tell them what you do, and how your customers will benefit relative to existing solutions. 3. How big / severe is the problem? An attractive problem, from the investor's point of view, is a big problem - preferably one that the market will collectively spend a billion dollars or more to solve. 4. How will you make money? This may be obvious for some companies (we will sell widgets for $10 each), but not so obvious for many others. Software, for example, can be sold on a per-user or per-site basis, with or without recurring licensing fees, with or without recurring maintenance fees, with or without installation or customization fees, and so forth. Or you could give away the razor and make your money on blades. 5. Who will buy it, and how will you sell it to them? That is, how do you segment your potential customers, and what is your plan to efficiently make them aware of your product and decide to give you their money in exchange for it? 6. Why are YOU the best team to do this? You may have a great solution to a big problem, but you won't get an investor if your team doesn't have the skills to be able to execute your vision. 7. What are the alternative solutions, and what makes yours the best? No matter what you may think, you do have competitors. If you've invented a teleporter that moves people from point A to point B, your competititors still include trains, planes, and automobiles (and bicycles and sneakers). What makes your solution better than the alternative solutions for getting from A to B? 8. What have you done, and what will you do? Ideas are dime-a-dozen. Execution is what really counts. You need to show that you have the ability to make the right things happen. A good track record and aggressive future milestones (along with a realistic plan for making it happen) shows that you mean business. 9. What are the economics? Investors want a means of measuring your progress, often in the form of metrics that can be measured. Many of these metrics are economic - revenue per headcount, expense per headcount, marginal gross margins, revenue per customer, cumulative units to break-even, and so forth. 10. How much do you need, and what will you do with my money? Investors want to know if you have a realistic understanding of the costs involved in starting and growing your business. These ten questions only touch the surface of what investors need to feel comfortable with before they make an investment decision. However, if you can offer good answers to these ten, you're almost guaranteed to be invited in for further discussions. Setting PrioritiesAs an entrepreneur starting or growing a company, you have a million things to do. Every day. How do you decide what to focus on? There are two things to consider here. First is deciding what's important; second is understanding what you are good at. Many of the important things are fairly obvious: performing a thorough analysis of the market and competition; preparing your product or service to go to market (R&D, testing, product management, etc.); establishing a means of getting it to market (distribution, sales, marketing, beta customer relationships, etc.); recruiting the right team; hiring the right attorneys and accountants; finding capital to make it all happen; developing a sustainable competitive advantage; preparing a business plan; and so forth. These are just a few of the many absolute musts for almost any kind of business. And many entrepreneurs fall into the trap of obsessing over relatively unimportant things: spending days on end shopping for office furniture (just get something functional for now and trade up once you've grown successful); designing an elaborate brochure for a product that doesn't even exist yet (the product will inevitably change, so why waste money on brochures that will have to be replaced); setting up a heavy-duty file and e-mail server when the company only has three people; etc. These are all premature if you're an early stage company; when you've started achieving some level of success, you'll hire expert people to take care of these details for you. Other things are less obvious and fall in a grey zone, requiring some serious introspection and analysis: how much time should you spend on things like designing your logo, business cards, and letterhead; figuring out who to recruit to your board of directors; developing an employee benefits program; etc. Depending on your situation, some of these things may be more or less important than you think they are. So, the first step in setting priorities is to distinguish between "must haves," "nice to haves," and "things that suck up time without improving my chances of success." The second consideration lies in understanding what you are good at. Why? Because there are simply too many things that MUST be done for you to be able to do everything yourself. Since you can't do everything yourself, you need to focus on executing what you're good at, while hiring somebody else (employees, attorneys, accountants, consultants, etc.) to take care of the rest. Anybody can write a bulletproof contract, but why spend dozens or hundreds of hours doing something that a good lawyer could do in a few hours? It's simply not a good use of your time, unless you have a law degree or have a day job that involves reviewing contracts all day long. It all boils down to opportunity costs - the benefit you could achieve if you spent your time working on something that creates more value. For example, if you're an inventor with minimal exposure to accounting and finance, you incur a huge opportunity cost if you try to develop a financial forecast because you can create more value in further refining your product. You're better off hiring somebody else to do this for you. For most entrepreneurs, the same can be said of the process of developing a business plan - especially if you plan to use it to raise capital. Unless you fully understand the investor's mindset, you may be better off finding somebody to help with this process (although having said that, the process of writing a draft plan is an extremely valuable learning experience, if you have the time). Setting priorities can be extremely difficult. If you have a quantitative mind, you may be able to assign a dollar value to the benefit of achieving a particular task, and a dollar value to your time. Assuming that you accurately quantify the benefits (which is often close to impossible), you can do a cost-benefit analysis to decide how to set your priorities and decide on which tasks to do yourself and which to assign to others. If you have more of a qualitative mind, then you can use a rule of thumb: nine times out of ten, it's probably better to hire an expert than to try to do it yourself (care to perform a root canal on yourself?). To summarize: figure out what's really important; avoid wasting time on low-value activities; focus your time on the things you're really good at; and get help on the other important things. Is this the turnaround?We all know that entrepreneurs have had it tough over the past few years. But starting around mid-2004, my startup consulting company started receiving a flood of inquiries from entrepreneurs who wanted assistance. VC activity in many sectors started picking up at around the same time. Erika Brown at Forbes reported that U.S. venture capital funds raised over $10 billion in the first three quarters of 2004, and were expected to raise as much in the final quarter, adding to the $75 billion already available for investment. And 2005 is expected to be even better. The IPO market seemed to perk up a bit as well, with Google's successful IPO. It looks like we may finally be leaving the nuclear winter behind and entering a new era for startups. Entrepreneur OptimismA survey by the National Federation of Independent Business offers reasons to feel optimistic. Most notably, 47% of small business owners expect the economy to improve, 35% expect sales to improve, and 29% believe that this is a good time to expand. The overall index matches the 30 year high. The conclusion? This is a great time to start a business. What Kind of Lawyer Do You Need?The answer depends on too many variables, so let's assume you're a high-tech early-stage company looking for capital with realistic prospects of doing say $50 million or more in five years (i.e., VC material). First, you'll need a good securities attorney. These are the folks that make sure that you have the right corporate form (usually a C corporation), get you set up in the right state (often your home state, but possibly a place like Delaware or Nevada), draw up the incorporation documents, review or create nondisclosure agreements, review or create contracts with early partners, create employment agreements for the founders (in a way that doesn't scare off investors), establish your employee stock option plan, advise you on how to keep appropriate records, help you prepare to raise capital in a way that doesn't violate state and federal securities laws, and much more. Your securities attorney, in short, helps make sure that you keep a clean house. Well connected securities attorneys can introduce you to potential investors. Finally, a prestigious securities attorney may make investors more willing to invest - sometimes for no better reason than name recognition. Second, you'll probably need a good intellectual property attorney. These are the folks who help you register your trademarks, prepare and file patent applications, and develop a sensible intellectual property strategy. Legal matters are complex, and you're almost always better off by consulting qualified attorneys. If you are cash-strapped, go ahead and do the groundwork and prepare initial drafts, but make it sure that you get a pro to check your work. When selecting attorneys, be sure to check references, interview at least three of them in depth, and don't be afraid to ask tough questions. Finally, be sure to choose somebody that you "click" with and really feel that you can trust. Start SomethingThe most difficult part of starting a company is getting started. Most "entrepreneurs" are all talk and no action. How do you get started? Read a few good books, like The Art of the Start by Guy Kawasaki. Research like hell. Get your friends and family to believe in your vision. Most importantly, just create something useful and start selling it. It doesn't have to be perfect as long as customers are willing to pay for it. Perfection can come later, once you have more resources. For now, focus on creating something that is sufficiently better than the alternatives for people to be willing to pay for it. If people start buying, then quit your day job, and put everything behind your vision. As they say, "nothing ventured, nothing gained." Entrepreneurship is about action, not pondering. |