September 2, 2003 - The Start Up
Process, Part II
by
Bill Snow
Are you a
wannabe or early stage entrepreneur? Print this column and post it on your
fridge.
Last week’s column was part
one of my two part expose of the start up process, and what really happens when
people stop griping and start doing. I’ve spent the past decade working for a
number of entrepreneurial companies -- some grew rapidly and were successful,
others floundered and failed – and I thought it would be interesting to review
some of my entrepreneurial experiences and observations, especially given my new
position as CFO for an early stage start up.
I have a unique vantage point
because in addition to spending time on the entrepreneur side of the equation; I
spent some time with an on-line venture capital exchange and investment bank.
I’ve written dozens of business plans and created dozens of financial models.
I’ve reviewed hundreds, if not thousands, of business plans, and I think I know
what I’m talking about.
Therefore, when entrepreneurs
ask me, and believe me, I am constantly pelted with this question, “Why do you
always take the VC’s side? Do you think VCs are perfect?”
My answer is a simple and
emphatic, “Yes! I always side with the VC. VCs are flawless, and always make
great decisions. In fact, VCs are god like creatures who deserve the adulation
of entrepreneurs.”
There’s a simple reason for
this…VCs have the money!
They write the rulebook, they
set the guidelines. The game belongs to the person with the money. The sooner
entrepreneurs learn this, the better. As I’ve said a million times, there is no
entitlement program in entrepreneurship. Entrepreneurs are best advised to
eschew all talk of “the way things should be,” and instead immerse
themselves in understanding “the way things are.”
Unfortunately, instead of
learning “the way things are,” I’ve noticed many entrepreneurs take a certain
delight and glee in the failures of VCs. They like to honk about the excesses
of the “dot bomb” era, and the many mistakes VCs made. They like to crow about
how evil VCs are, and how they know about someone who knows about a person who’s
brother had a start up company and was screwed by the VCs.
My advice to these people:
Get over it! Grow up! The “dot bomb” jokes are as stale as Flock of
Seagulls haircut jokes. Stop whining about alleged VC crimes, and start
building your business. Stop waiting for manna from heaven, and find a way to
generate revenues. Stop bitching, and start cutting deals.
As difficult as this may be
for many people to digest, I will fearlessly go out on a ledge and say there are
plenty of ignorant, clueless, and frankly, stupid, entrepreneurs in the Chicago
area. I know plenty of VCs in Chicago (and in the rest of the US) and I have
yet to meet one that is clueless or stupid. Remember this, most VCs are
probably driving Porches, while the typical gripe filled entrepreneur is eating
a dinner of macaroni and cheese over the kitchen sink.
Anyway, on to the rest of
“The Start Up Process.”
Embrace your inner stupidity
In other words, speak and
write in simple terms. People are more impressed with clarity than complexity.
When defining your business model, keep it as simple as possible. Refine your
pitch until you get it to the point where you mother could understand it.
Complexity for complexity’s sake is merely stupidity.
A good rule of thumb is if
the over-educated, blue bloods who only have consulting pedigrees think your
plan or idea is too simple, you just might be on to something.
Conversely, we have the
example of entrepreneurs, who, after over-complicating matters, declare that
they do not want to work with investors “who do not get it.” This is their smug
little way of playing one-upmanship with the VC, and this is a game that always
ends in disaster for the entrepreneur. The entrepreneur takes comfort that he
is obviously smarter than that dumb VC. I’ve heard dozens of versions of this,
and I always wonder if the entrepreneur realizes that failure to receive an
investment is a failure, not a strength!
Don’t be afraid of making
your business model and plan too simple. I can’t say this any clearer.
Know how and when to approach
investors
This is something that
escapes most early stage entrepreneurs. They seem to believe if they promote
their idea with hyperbolic exclamations of self proclaimed greatness, VCs will
be duped into jumping on board without doing any due diligence.
Guess what? This is called a
“presumptive close,” and it doesn’t work. In fact, telling a potential investor
“this is the greatest thing in the world, it’s doing to do a billion dollars in
revenue next year!” will make that investor summarily reject your plan.
Different investors invest at
different times. Friends and family will invest at the earliest stage of
development. Angels might come in early (pre-revenue), but more often than not,
they want to see some revenues. Venture capitalists are among the last types of
investors entrepreneurs should approach, and in the vast majority of the time,
VCs will only consider revenue-producing companies.
Beyond the revenue issue,
each investor has a type of company he likes to invest in. For example,
a VC fund that only invests in drug discovery and medical device companies will
be not be interested in a software company.
Mitigate risk, deliver wins
I say, “the entrepreneur must
mitigate as much risk as possible” so many times that I run the risk of
plagiarizing myself. Instead of talking about what you plan to do, you need to
talk about what you have done: sales, pilots/demos, strategic relationships,
advisory board members, and previous investment. These are all “wins,” and the
more wins the entrepreneur stockpiles, the greater the chance he’ll get an
investment.
Art of War
The book “The Art of War”
talks about how a general, as he makes his battle plan, knows that once the
battle begins the plan will be thrown asunder as communication lines are cut and
unforeseen problems arise. The general must be nimble enough to rapidly make
changes as the battle changes, but he also must know when to stay the course and
continue with the original plan.
Entrepreneurship is much the
same. In my new company, we’ve already fine-tuned our business model 2 or 3
times. We also know that as we move forward it’ll be likely that we’ll have to
further adjust the plan as we are faced with market realities.
Watch your pennies
Simply put, do things as
cheaply as possible. Smart entrepreneurs are getting abatements on rent (read:
they don’t have to pay rent for a year or two). Office out of your home for as
long as possible. Pull your favors and see if you can office out of someone’s
unused space. See if employees or vendors will be willing to perform tasks for
equity.
Flip on the revenue switch as
soon as possible
With the exception of Marxist
dreamers, spoiled suburban college students, and other “well-intentioned people
of zeal” who urge “people before profits,” entrepreneurs are in business for one
reason: to make money. Buckets and buckets of money. Heaping piles of filthy
lucre. The entrepreneur needs to understand this, and every employee brought
into this money seeking machine needs to understand that they only reason they
wake up in the morning is to engage in the shameless and gleeful pursuit of
revenues and profits.
Am I making myself clear?
Instead of dreaming up
complicated and obtuse business models with obscure revenue streams, focus on
what you can do right now to begin booking sales. Approach possible customers
and say, “if I deliver XYZ, will you pay for it?” If you can get a few pilots
and demos, you yourself the chance to leverage this with possible investors, be
they friends, family, angels, or VCs.
Motivated by money
My last point refers to why
I’m involved with my current company. We’re not doing this for our health;
we’re doing it to make a ton of money. Before you think this is a repeat of the
last section, I’m not referring to revenue generation. I am referring to the
exit. We all own equity, and we all want that equity to be worth large sums of
money. I am referring to net worth and value creation.
Entrepreneurs need to
remember that raising money is means to an end. Buying computer equipment,
setting up a network, buying desks and chairs, are all means to an end. At the
end of the day, we’re all looking for the same end: a company that 1) solves a
pressing pain point for customers, 2) generates revenue and profits, 3) creates
value, and 4) let’s us exit at a healthy multiple.
Anything short of that and
we’re simply whistling in the dark.
Has your company been profiled by Bill Snow? Send
an email to introduce your company:
bill@billsnow.com
About the author
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