Most startups desperately need an investor and thus you may feel that you are willing to consider any source of funding, regardless of the type of investor. Both so-called “angel” investors and venture capitalist (VC) are able to provide the financial resources that your startup requires. I have found, however, that the decision process for choosing the best investor is very complex so it is especially important to make well-informed and carefully-timed choices as these can have a major impact on your long-term success.

The basic distinctions between types of investors are simple. Angels are typically high net-worth individuals who invest their own money, for which they are primarily interested in early or “seed” financing of amounts that start as low as $25K. Venture capitalists are professional investors who invest other people’s money from a fund. Their principle interest lies in larger sums derived from their investments that are earned later, from $2M up. Between these extremes there is a spectrum in which there is room for a large overlap.

Beyond the numbers, there are many factual and subjective issues that you should factor into your decision-making process. These include the following:

1. Investment control. Angels typically have simpler term sheets, allow greater flexibility in valuations, and are more realistic on time frames. VCs, on the other hand, tend to exert more control over the team and assert financial management of the company, its strategy, and its exit plans. Ultimately a larger VC investment can also narrow exit options.
2. Type of startup. Venture capitalists seek to fund businesses with the potential for a significant return on their investment. In addition, most venture capitalists want startups that have clearly defined economies of scale (such as software companies) rather than ones that scale linearly with some factor (such as service companies). Angels are more open to a variety of company types.
3. Expected return rate. Most venture capitalists look for 30% annual return, 10 times their initial investment in 3-5 years, or 50% IRR (a discounted cashflow calculation). Angels are willing to consider lower-return opportunities. Both types of investors recognize that many ventures fail, meaning the target returns are high to improve the average.
4. Total money needed. If you are looking for a specific raise of less than $2M, you will most likely seek angel investors. The picture is a bit more complex, however, because if the total money you’re looking to raise over the life of your company to be cash-flow positive is greater than $3M, or you will likely need money to scale, you will need to look to VC for resources.
5. Team experience. Successful serial entrepreneurs usually find it easier to raise money from venture capitalists. If you are a first-time entrepreneur it will be difficult but not impossible to get traction with venture capitalists.
6. Founder network. If you do not know any venture capitalists and none of your colleagues have built companies with VC funds, you probably will have more difficulty securing a VC investor. In contrast, if you have personal contacts with a CEO of a Fortune 1000 company, this may offer some advantage in finding valuable set of angels.
7. Value-add. This is the most debated but most important item. The value-add of both angels and VCs is dependent on the individuals involved in the process, but on average VCs are likely to add more value than angels. Venture capitalists focus on specific business areas, have multiple deals running concurrently, understand deal flow, and usually have more current insights, connections, and resources.

Finding the right type of investor all comes down to the investor fit and the stage of the start-up enterprise you are in. It’s definitely better to have people who have prior experience building businesses on your side. If you plan to exit in the near future, it’s important to have investors who have backed high-growth businesses.

In every case, the relationship between the startup and the investor is the key ingredient to a successful deal. It is essential to communicate with your investors openly and honestly. If there is mutual respect between you and your investor, it will be much easier to survive any potential challenges your startup encounters. It’s tempting to avail yourself of any financial resources available to your startup, but in the end it can be more costly than it’s worth.

Many startups are founded simply on the basis of a new and exciting technology, a problem that will result in surprise and frustration while waiting for funding and for customers to materialize, which represents the “solution looking for a problem” and “if we build it, they will come” syndromes.

Rather than focusing on the technology, a successful startup will begin by solving a problem for a large number of customers who are willing to pay for a solution. After identifying the problem, you must develop the solution with your technology as well as a strategy to maximize your impact in the marketplace. The focus of this article is on the value of a strategy.

In their new book “Now, Build a Great Business!” Mark Thompson and Brian Tracy describe five reasons to develop a strategy early in the process. They emphasize that before the “What” should come the “Why?”. Their book is written for businesses of all sizes, but the principles apply especially to startups in the following ways:

1. To increase return on equity invested. The first purpose of a strategy is to organize and reallocate your resources to increase the return on the money invested in your startup to-date, allowing you to earn more bottom-line profit-ability.
2. To position yourself relative to your competitors.  Business strategy allows you to change customer perceptions and responses to your product or service offerings. Rather than simply offer yet another option for a common problem, you should develop innovative approaches and changes in customer preferences that may not yet be covered by competitors.
3. To capitalize on strengths and opportunities. You must take advantage of the unique talents and product capabilities that make your startup superior to your competition so that you can offer things that your competition cannot duplicate in the short term.
4. To form a basis for making better decisions. All strategic and business thinking must lead to immediate action to increase sales and profitability potential relative to your competition. Failure to develop a strategy will lead to indecision or poor choices.
5. To attract investors and financing. Evaluate your startup from the perspective of a potential lender or investor and create a strategy that makes your company an attractive place to invest. The startups that typically receive the money in first-time financings are ones that have the following four advantages:
   • Experience in related fields. Investors highly prize gifted leaders who are business veterans with experience in similar ventures and who can make decisions quickly and effectively.
   • Great business model. Your offering should open new, large markets in ways that are difficult for competitors to emulate quickly.
   • Scalability. You must demonstrate that your business can build the necessary products and services rapidly and achieve economies of scale with minimum capital and labor.
   • Intellectual property (IP). Patent protection improves the chances of building a business with a sustainable competitive advantage, although it is not a guarantee.

Your business strategy starts with both your ability to describe your value proposition and your core competency. Most startups that find themselves struggling have a poorly articulated value proposition and thus lack a critical piece of business strategy.

A successful startup will be more effective with a proper strategy, risk assessment, and careful decision making. If you focus on the end goal, it will dictate the choices you make, providing you with the ability to stave off threats and foster success.

One of the first tough decisions that startup founders have to make is how to allocate the equity among co-founders. A seemingly easy solution to this problem would be to split it equally among all co-founders, since there is minimal value at that point but this is usually the worst possible decision, and often results in a later startup failure due to an obvious inequity.

An equally problematic response to the situation is to overly value the “idea person,” believing that the idea is 90% of the value (and thus 90% of the equity). In reality, the idea represents only a very small part of the overall equation. A startup will thrive only if the execution of the idea is successful, which means that the equity should be allocated based on the value that each partner brings to the table in each of these dominant variables:

1. Experience running a startup business. Running a new business starts with building a solid and credible business plan, working the investor funding process, and building an organization from nothing with minimal resources. Successful Fortune 500 executives are often not the best candidates for this role because most would not have experience with any of these tasks.
2. Domain expertise and connections. Individuals who are recognized as experts in the business area of your startup who have a good reputation, and who know all the key vendors and customers represent a significant value to the startup. Building a product it is important but it also needs to be distributed and sold through a variety of kinds of expertise, including marketing, technical, financial, or sales.
3. Pre-existing intellectual property. Ideas become intellectual property only once they have been converted into patents, trade secrets, trademarks, or copyrights. In many cases, one founder has a longer history with the company, providing an important completed piece of work to the startup and thus can have great value.
4. Sacrifice and time commitment. The level of commitment on the part of founders also represents a way to evaluate one’s contribution: A part-time commitment and a full-time executive role should be valued differently, especially if the cash compensation is nonexistent, deferred, or at high risk.
5. Funding. Providing the major funding source for an early-stage startup ordinarily entitles the contributor to a significant degree of equity. For purposes of commitment and business decision making, it is best if execution partners retain control of at least 50% of the equity.

One possible approach to factoring equity rationally would be to assign each of the above five items as 20% of the total, and allocate equity based on each partner’s relative contribution to each. For example, if an individual is providing all the initial funding, but has no active business role, it might be smart to offer him a 20% of the total equity.

Equity allocation is usually the first point in a startup where outside help should be considered. This may include seeking help from legal counsel, potential investors, or startup advisors as they may be able to provide experience and more importantly, an unbiased view that the entire team can trust.

It is of utmost importance that the discussion is addressed to right away, and that an agreement is reached quickly, which is then written down. If you and your potential partners can’t get through this conversation in a timely fashion and come to some consensus, then it’s unlikely that your startup can ultimately survive anyway. Startup decisions will only become more challenging later in the process.

Regardless of how the initial equity is split, it is important to consider vesting your founders’ shares over at least two years. This means they will be meted out month-by-month so that a partner who changes his mind or defects early will not walk away with half the company.

The next big challenge for a multi-partner startup is the allocation of roles, including how to assign the roles of CEO, CFO, and CTO. Many of the same variables apply as when considering allocation of equity, but here skills and experience are paramount. The inventor who has the key patent in hand is not necessarily best suited for the role of CEO. Of course, holding key assets and money always provide leverage to management rights as well as economic rights.

All partners should remember that their allocated shares are only the beginning, and will be diluted proportionately when outside funding is later required from angels or venture capitalists. Even if investors diminish the overall percentage of equity, that smaller percentage is still worth more than having 100% equity of a company that fails. The same logic applies to splitting equity with co-founders.

Even if you are anxious about the risk involved in starting your own business and you are tempted to sign up for one of the many “work at home” startup offers you see, you should reconsider. The offers that you see advertised on social networks and Craigslist are almost invariably scams, and thus pose a great deal of financial risk.

The problem of work-at-home scams is increasing. To address this issue, the web giant Google launched a  legal battle late last year against more than 50 companies that allegedly infringed upon the Google name to promote “work-from-home” scams. Their lawsuit came less than one month after a separate class action complaint was filed against one of these companies for a work-at-home scheme.

A scam refers to any deal that wants some sort of cash payment before you can start making money. Typically you need pay a registration fee or buy a starter kit, training materials, or a database of hot leads. Any organization that requires money upfront should raise suspicion; legitimate businesses will not require you to pay so that you can work for them.

If you are still tempted to try out a work-from-home offer, there are several things you should consider before you commit:

1. Contact the company. Try to find out the company name and contact information. If there is only an email address, they are likely not a legitimate business. Test the contact information. If it’s an 800 phone number, listen to see if the ringing tone changes while you’re waiting to be connected: that is an indication that their calls are diverted to an overseas base.
2. Ask for an interview. Most legitimate companies would not hire someone based only on an e-mail but would require a face-to-face or phone interview. If the company does not require an interview, as a potential employee or contactor you have a right to ask them why. You can also ask them what kind of screening process they use for their employees if they do not interview them.
3. Check company location. If the company is overseas or has no location specified, this should raise doubts. Beware of companies or individuals overseas who ask you to cash money orders or checks and offer to let you keep a portion as these are always scams.
4. Research the company online. An Internet search could give you revealing information about the company or may let you know how their scam operates. It is wise to do an Internet search of a company before you begin to work for them or before you send a payment. An Internet search may provide feedback from other people who have been scammed by the company.
5. Check posting frequency. Many scammers use an automated spamming program to post jobs repeatedly and throughout different cities. If you notice an ad that is re-posted every day or multiple times a day, this is usually a telltale sign that the post is a scam.
6. Pay by credit card. This may sound counter-intuitive but liability for online credit card purchases is usually limited to $50 if you are dissatisfied with your purchase and report the transaction. Some credit card issuers will even waive the $50 deductible.

Under no circumstances should you ever provide personal information to anyone in order to secure a job opportunity, especially sensitive information such as a social security number, bank account information, or credit card numbers. If something sounds too good to be true it probably is and thus you can assume it is a scam.

It is natural to feel anxious about starting a new business but remember that you can actually reduce your risk by beginning your own startup in comparison to the many other low risk alternatives on the Internet.

I wrote recently about the importance of a “sustainable competitive advantage,” in which I outlined the value of a business plan and the limitations of patents and competitor feature comparisons. Once you start selling products, however, all of these factors pale in comparison to your level of customer service.

John Spence, in his book “Awesomely Simple,” makes a compelling argument that in a world of nearly limitless product options and highly educated consumers with instant access to price, features, and benefits of almost every product, delivering consistently superior customer service is the only significant differentiator left for creating loyal and engaged customers.

The following ten suggestions come from John and other sources and provide a good overview on how to create a culture of superior attention to customers in your organization:

1. Create a customer service vision. Creating a clear and compelling customer service vision that describes the level and type of service your organization aspires to deliver is just as important for determining your company’s future success as having a company vision statement.
2. Exceed customer expectations. Show a relentless commitment to exceeding, not just meeting, expectations. Customers cannot articulate what it means to supersede their expectations, but they know  when they encounter it. Customer will remember their positive experiences in customer service and they will recommend your company to others.
3. Continuous customer service innovation. Many companies have an ongoing product innovation focus but rarely think about customer service innovations. Define specific innovation objectives and rewards for improving the customer experience.
4. Create superior customer value. Focus on creating superior value for your customers and they will respond positively. This means that you need to know your competitors, their technologies, and the alternatives available. This allows you to match your offerings to your target customers better than anyone else.
5. Own the voice of the customer. The only critic whose opinion counts is that of the customer. Create strong, trusting relationships with your customers. Solicit feedback that you can communicate to the entire organization and then be sure to take action on customers’ input.
6. Cultivate expertise in superior customer service. Find out everything you can about how to deliver great customer service. Research and implement the best ideas, benchmark your service against the top performers, and make improving customer service a core competency.
7. Train every employee to be a customer service champion. Empower employees with the tools, training, equipment, and support they must have to deliver excellent service consistently. Offer positive incentives for those who provide superior customer service and quickly address any issues raised by employees who do not embrace the service values.
8. Destroy barriers to delivering superior service. Look at all systems, policies, procedures, reports and rules. Rid your company of anything that creates roadblocks or frustrations in the effort to delight and amaze the customer. Rules that have not been conceived clearly can make it hard for employees to serve superbly and can kill your business.
9. Measure and communicate your goals.Create a clear, specific, well-thought-out and clearly communicated program for systematically collecting and expressing the most important customer service delivery measurements to people who can then act on them. Make it easy for your people to be successful in providing customer service.
10. Model your customer service values. Every level of the organization, starting at the very top, must actively demonstrate your service strategy. If you do not deliver excellent service to your internal customers—promptly returning phone calls, showing up on time for meetings, and acting professionally—there is no hope that your front-line people will deliver great service.

In the past, sustainable competitive advantage was based primarily on characteristics such as market power, economies of scale, technology lead, and a broad product line. The advantage today has shifted to companies whose attention to customer needs is superior. As a startup, you have the chance to lead. Take advantage of this opportunity.

Tough economic times have encouraged more and more people to try entrepreneurship as an alternative to traditional employment. There are positive aspects to this trend, but entrepreneurship must be approached with caution because this path is fraught with challenges

One element necessary for success that is emphasized by experts is having a process by which to  judge your own situation and your own temperament and then make a rational decision about whether this is a suitable option for you. An important for resource for making this determination is described in a new book by Bill Murphy, Jr., titled  “The Intelligent Entrepreneur,” which outlines the ten rules of successful entrepreneurship as follows:

1. Make the commitment. Entrepreneurship can be learned but you have to be committed to the process of building something of your own, rather than just coming up with an idea. It will likely take several ideas, some of which will fail, before you can call yourself a successful entrepreneur.
2. Find a problem, then solve it. Rather than finding a new idea first, begin by finding a problem. Problem solvers make successful entrepreneurs. Idea people are often dreamers who often do not enjoy the hard work of a solution in a specific time frame to make money.
3. Think big. Think new. Think again. Make sure that your solution will scale up. Professional investors often look for business plans that can credibly project revenues of at least $20M within five years or they will not justify an investment.
4. Develop a support network. Have a support team of people you know and trust. For example, an idea person and a problem solver make a great team. Successful entrepreneurs have to work well with many different kinds of people, whether they are partners, investors, employees, suppliers, or customers.
5. Take personal responsibility. Entrepreneurship requires the ability to work well with others and, at the same time, the ability to make decisions on your own and to trust them. You have to be decisive, accept responsibility, and provide the vision. Often decisions have to be made quickly, and with very little hard data, so you need to have confidence in your instincts.
6. Manage risk. Without risk, there can be no innovation. Not every idea can, or will, be successful. Fear of failure will kill innovation, but reckless disregard for risk will kill a business. The successful entrepreneur is able to find the balance between these two extremes.
7. Learn to lead. In a startup, entrepreneurs have to do two things. First, they will drive the business creation process, and secondly, they will inspire everyone else. Thus, leaders must provide vision to rest of the team, to investors, and to customers through clear leadership and effective communication.
8. Learn to sell. You cannot rely on customers to materialize once you have developed a product. Selling is a learned skill and takes effort, just like building a product. Everyone in your startup, especially the entrepreneur, needs to understand sales in order to effectively market your product.
9. Persist, persevere, prevail. Experts have found that the prime cause of failure in business is quitting too soon. The successful entrepreneur does not give up too quickly and uses creativity to overcome personal, financial, and technical obstacles.
10. Value time as your most important resource. Entrepreneurship is a lifestyle, not a job. Be prepared to make a long-term investment of your own time and resources. There are no quick fixes or easy solutions to making money. Learn to manage and balance your time because this is your best resource. Great entrepreneurs have a life outside of work and find time to give back.

The tips above from reporter Bill Murphy were compiled in his book based on three real-life success stories of Harvard graduates, all of whom proved the points by their failures as well as successes. He does not offer any magical solutions but these rules can shorten the learning curve and increase the success rate for every budding entrepreneur.

Some entrepreneurs seem to have no trouble attracting investors, while others—even those with a great business plan—may struggle with it. The reality is that angel investors are human beings, a fact that makes personal traits a critical component of any business relationship even before the investment is considered.

An important priority for angel investors is to finance entrepreneurs that have an unwavering passion and sense of urgency. In the business, this is commonly called “fire in the belly.” If you do not have the drive to succeed at all costs, your startup probably will not survive even if you can secure funding.

Of course, passion has to work in concert with a variety of visible characteristics that indicate that the entrepreneur has the attitude and practical skills to make it happen. Here are some key elements investors look for:

1. Communicates clearly. Those who can concisely explain the unique, compelling value of the proposed venture in written and oral presentations (elevator pitch) will be more successful in securing investors. Entrepreneurs should recognize that some investors may rely more on either written or oral presentations but a successful communicator will listen carefully before answering questions.
2. Develops and maintains networks. Successful entrepreneurs already have a visible network of trusted suppliers, potential customers, partners, and even investors, all of which are critical to any venture. A successful track record with previous investors will offer a compelling motivation to invest in your startup.
3. Demonstrates integrity and honesty. Investors will value those who are willing to provide details of the weaknesses as well as the strengths of the proposed venture and the challenges ahead. This will demonstrate to investors that you are willing to welcome the participation of the angel investor in the company, at least at the advisory level.
4. Values intellectual property. Those who can convincingly present a patent, trademark, or other unique contribution that can create equity value, not just current cash flow for the owners, will appeal to investors because this has value now and is critical for receiving maximum value in a merger or acquisition.
5. Demonstrates confidence. A calm and self-assured entrepreneur will inspire confidence in investors. Those who can demonstrate the milestones achieved, as well as those planned for the future, provide sufficient grounds upon which to invest in a venture. Such entrepreneurs demonstrate rational expectations and allow sufficient time to find capital, including due diligence time for investors.
6. Exhibits realistic expectations. The best entrepreneurs recognize and accept things as they are and react accordingly. They are quick to change their direction when they see that change will improve their prospects for achieving their goals.

At the stage during which the angel is normally investing, the entrepreneur may represent the only factor the angel can rely on to decide whether the deal is worth pursuing because the technology or product may still be at an embryonic stage and there may not be any customers to talk to in order to evaluate the market need.

The investor, in order to eventually be successful, has to identify not only marketable technologies but successful entrepreneurs. Investors will rely on a variety of means to judge potential success but will often try to assess an individual’s internal traits, including honesty, dedication, vision, intelligence, and leadership based on the external factors listed above.

If you think you want to be your own boss and run your own business, perform a careful self-assessment to determine if you have the right traits to be an entrepreneur. It will also help to ask those who know you best and are willing to be very honest with you about whether they think you have the personality characteristics to be successful as an entrepreneur. If your current situation is especially difficult or the future reward is high enough, you may be able to cultivate the skills necessary to succeed.

If you have not experienced failure, you are not pushing the limits. If you are really an entrepreneur, you will have to take risks and exhibit less caution than others, which means that some failures should be expected. Accept your startup failure as an indication of your courage: failure should not be pursued but you can embrace it when it does happen and learn from it.

People who are anxious about failing should not become entrepreneurs. Those who cannot overcome the psychological fears of making a mistake and losing money are better off working in a traditional employment setting. Successful entrepreneurs, on the other hand, tap into the positive possibilities that come with failure. Here are three examples:

• Steve Jobs was fired by Apple Computers in 1985, the company he helped to create. He went on to acquire Pixar, made it a success, and then came back to reinvent Apple as a very successful consumer products business.

• Dean Kamen, the creator of the Segway Human Transporter, several successful biomedical device businesses, and holder of 440 patents, jokes that his biggest failure is “that I have too many to talk about.”

• Thomas Edison invented the electric light bulb, central power generation, and the phonograph but failed in his effort to extract low-grade iron ore from sand. Rather than dwell on the failure, he instead went on to pursue many successful media and transportation businesses later in life.

Serial entrepreneurs who have failed at least once are more likely to get funding from investors in comparison with entrepreneurs who have a perfect track record. Investors recognize that founders often learn more from a failure than they do from a success. Do not be afraid to acknowledge previous failures to investors. Unless you have a long history of serial failures, you can use past failure to demonstrate how you have productively learned from previous mistakes.

A failure represents a potential resource for future success if you celebrate failure for what the mistakes taught you and use the experience to develop the next idea. Three things that famous failures emphasize are the following:

1. Accept responsibility rather than spread the blame. It is easy to blame partners, investors, customers, and the economy. If you blame someone else, you will never learn from your mistakes. Remember, you volunteered to be the entrepreneur so you are not the victim.
2. Capitalize on the good relationships you found. Even in failed ventures, there are always some positive relationships. Many entrepreneurs have taken on one of these individuals as a new partner and gone on to make millions of dollars. Good investors will fund you again and loyal customers will gladly take your next offering.
3. Study and profit from your mistakes. Mistakes are invaluable lessons that you should learn from rather than avoid. Making mistakes and becoming savvier through the process is the job of an entrepreneur.

Failure is usually not a single event but a collection of mistakes and circumstances that add up to test the patience of the founder. Failure combined with a strong sense of business ethics can motivate and produce innovation, while failure due to a lack of ethics can lead to desperation. Certain types of failures, especially failures due to lack of integrity and ethics, represent significant problems from which it will be much more difficult to recover.

Failure, even multiple failures, can be the first stage of a very successful journey. Success usually comes to those willing to persevere regardless of the difficulties that are faced. Resilience and agility are really the only sustainable resources in business. When you experience your first failure, do not take it personally but instead allow it to inform your future ventures, providing you with knowledge and experience for your next success.