One of the most prevalent mistakes early stage entrepreneurs make is to totally and completely miscalculate the role of venture capital in their business aspirations.  This reality drove me so batty that I created Venture Capital 101, a document that dispels the myths about venture capital, and provides entrepreneurs with a road map for growing their companies. 

EPrairie contacted me about doing a weekly column -- looks like it will be called VC101.  I've reprinted my first column below.  I'll focus on the topic of venture capital, especially as it relates to early stage entrepreneurs.  I’ll detail what characteristics make companies “venture worthy,” while painfully exposing the mistakes that make VCs run for the hills.  This column will look at current trends in venture capital, profile some Chicago-area companies, and get the inside skinny from Chicago-area investors.

Global Entrepreneur Monitor

Speaking of early stage entrepreneurs and venture capital, the Global Entrepreneur Monitor (GEM) surveyed 37 nations, and reported that some 286 million people in these 37 countries are involved with some sort of entrepreneurial pursuit.   I thought some of the numbers in this report made a compelling case for the difficulty and scarcity of venture capital.  Here’s the link to the report if you’re dying have your eyes gloss over:

According the GEM survey, there are:

* 286 million entrepreneurs (in the 37 surveyed countries)

* 20 million entrepreneurs who think their companies might be venture worthy (in the 37 surveyed countries)

* 12 million entrepreneurs representing 6 million start-ups (US only)

And from the National Venture Capital Association we know there were about 3000 companies in the US that received venture capital during 2002. 

These numbers reminds me of a movie where the freshman class is assembled in the gym.  One of the school administrators says, “look at the person to your left, look at the person to your right, only one of you will be here in 4 years.” 

In a similar vein, I invite early stage entrepreneurs to get to know 8,000 other early stage entrepreneurs.  The odds say only one of you will ever receive venture capital.

The big misconception

Let’s look at some of the biggest misconceptions about venture capitalists: the notion that they are degenerate risk takers, have money to burn, and are willing to take flyers on 100 unproven concepts in order to hit one homerun of Microsoft-esque proportions. 

The reality is that venture capitalists are not degenerate risk takers.   They do not invest in early stage (e.g., pre-revenue) companies.  They do not take risk so much as they manage, mitigate, and frankly, avoid, risk.  Unfortunately, too many entrepreneurs do not know this.  Perhaps these entrepreneurs have bumped their heads and they think they live in Sweden.  They seem to have developed a horrible sense of entitlement.

Sense of entitlement + bitter reality = many wasted steps

A “how to be a better golfer” joke made the Internet rounds a few years ago.  The number one suggestion was, “if you want to be a better golfer, go back and start at an earlier age.”  There’s a similar lesson for many entrepreneurs trying to raise funds in the difficult post 9/11 market: “If you want to get venture capital funding, go back and be a better entrepreneur.”

The bitter reality aspirant entrepreneurs need to face is that venture capitalists are returning money to their limited partners.  While venture capital deals are graded on a very steep curve, being the best of a subpar group will not yield investment.  If the choice is investing in lesser companies or returning money to investors, venture capitalists choose the latter.  Many entrepreneurs, especially in the boom time of the late 1990’s, developed a sense of entitlement where they thought if they came up with a novel enough idea, venture capitalists would fund them, sight unseen.  The truth is venture capitalists did not operate this way in the 90’s, and they certainly do not operate this way in 2003.  It is safe to assume they will not operate this way in 2010, 2020 or at any other time in the future.

An entrepreneur who dives into the world of venture capital armed only with a misguided and unprepared sense of entitlement will meet with bitter reality, resulting in wasted steps, for both the entrepreneur and the venture capitalist.

GolfServ

Speaking of golf and realistic entrepreneurs, let’s look at a recent Chicago success story…in the making.  GolfServ, which manages the content for over 200 golf related websites, recently raised $1 million from a group of local angels, including Bill Weaver and Steve Miller.  On a recent Sunday afternoon, Mike Lazerow, CEO of GolfServ, joined my foursome at Pine Meadow Golf Club.  While watching Mike consistently (and annoyingly) hit fairway after fairway, we discussed GolfServ as well as some of his philosophies. 

Mike is an experienced business builder who knows the ups and downs of entrepreneurship.  While still in college, Mike started University Wire, which eventually merged with Student Advantage.  The company, trading under the symbol STAD, went public in June 1999 at about $8 per share.  Over the next 6 months STAD rode the NASDAQ wave, eventually peaking at almost $30 per share (or almost $300, adjusted for splits) in December 1999.  All good things end, and STAD has come back down to earth, and despite almost $60 million in revenue, the stock languishes in penny stock territory, and currently trades over the counter.

Having seen the ups and downs of entrepreneurship, Mike is imbued with a healthy sense of reality.  He knows GolfServ’s current business model, which is heavily dependent on ad sales, is not a “venture worthy” deal.  A revenue model driven by ad sales is heavily dependent upon hiring more and more people who can only be expected to produce at a certain level.  It is difficult to get higher and higher levels of production from each person because there is a finite amount of time in every day, every week, every month.  People can only make so many calls in a given workday.  There is little or no scale in this model, and as such, VCs tend to avoid these kinds of deals.

Mike knows this, and he isn’t planning to look for venture capital.  Instead, in what should be lesson #1 for all entrepreneurs, he is concentrating on building a business.  Mike the realist knows GolfServ’s current revenue potential might be a $10 million a year business.  Nothing a VC would consider, but not bad for a privately held company.  Let’s face facts: the CEO of a profitable $10 million a year company will live a very nice lifestyle, there’s nothing wrong with this goal. 

Telling, there’s more to GolfServ’s story than an ad driven business.  In February 2003, GolfServ introduced an on-line subscription service, and in June, the company will unveil various enhancements.  For $30 per year, golfers will be able to keep their handicaps on-line.  GolfServ current has about 10,000 paying members, and hopes to have 40,000 by year-end. 

This model becomes the type of thing that scales, and VCs find interesting.  Do the math: according to Mike there are about 26 million golfers in the US.  For every one million golfers who sign up for the service, GolfServ will generate upwards of $30 million in revenue.  Instead of relying on advertising sales, GolfServ will utilize what I call the “customers sitting in their underwear buying things at 3 am” business model.  Any revenue generated from ad sales will be gravy on top of a very dynamic (and profitable) business.  Smart.  

“Do one thing well”

After watching Mike hit a couple of 50-foot putts to within “gimme” distance (for pars), we talked a little about some of the other things he does well.  Not surprisingly, Mike is a big proponent of the “do one thing well” philosophy.  GolfServ isn’t trying to be all things to all people.  The company GolfServ is focused on one thing: being the preeminent on-line resource for golf.  As Mike says, “we want to be the Yahoo of golf.”

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

Never mind the pessimists...it's a great time to start a business!

Let’s take a quick scan of some of the thoughts, ideas, and observations being permeated in the media and in networking circles: Things look bad, dark, dour, and downright awful.  The economy is slow.  Unemployment is climbing.  High paying IT jobs are going to India and China.  The stock market is down.  IPOs are almost non-existent.  The venture capital industry is one fifth (or is it one sixth?) the size it was in 2000. VCs are not investing.   There’s too much ambiguity in the world: Al Qaida still scares me, the Iraq situation is still going on, we now have a situation in Liberia, and to top it off, Madonna is thinking about making another movie!  By golly!  It’s never been worse!  What an awful time to be an entrepreneur!

Actually, it sounds like a great time to start a business.

I admit it; I have a strong counter intuitive streak in me.  I’m often drawn to people and ideas that run contrary to what the New York Times, MTV, and the network news tell us.  This counter-intuitiveness reared its head in early June at the MIT forum, where I watched a few VCs and entrepreneurs discuss the state of private equity.  One of the panelists mentioned that there is no correlation between companies being started in boom times and long-term success.  Apple and Microsoft got their starts and rose to prominence in the late 70’s and early 80’s, hardly a go-go economic time.  For every eBay, there are dozens, if not hundreds, of failed on-line-dotcom-B2B-ASPs that were launched in the late 90’s, widely considered to be a go-go boom time.

In other words, whether the general economic climate is fraught with optimism or pessimism, entrepreneurs go about their business of building businesses.  I am convinced that somewhere in the current pessimistic morass lurks another Bill Gates, Steve Jobs, or Larry Ellison, silently going about his (or her) work in optimistically paranoid anonymity. 

Optimism vs. Pessimism

Yes, I said, “optimistically paranoid anonymity.”  Another MIT panelist essentially noted that entrepreneurs and VCs are two sides of the same coin: they are both optimists.  Entrepreneurs tend to be paranoid optimists (“This is the greatest thing in the world, it’ll make me a billionaire…will you sign this NDA?”), while VCs tend to be skeptical optimists (“I hope this new deal is all that the entrepreneur claims…but I doubt it.”)

This paranoid-skeptical continuum is important to note, because 1) you have to avoid mixing these sundry parts and winding up with a skeptical pessimist, and 2) both entrepreneurs and VCs are cut from the same cloth: they are both optimists at heart.  But optimism can only get you so far.  There comes a time when you have to move beyond theories and talk about concrete steps to building a business.  With this in mind, let’s look at a few resources that should be known to every Chicago area entrepreneur.  Given my love of paradigms and accounting, I’m going to utilize the cash flow statement to make my points.

How entrepreneurs can build businesses using Bill’s Cash Flow Paradigm

Much like Gus Portokalos, the father in “My Big Fat Greek Wedding” who bores friends and family members with his line, “say any word, and I'll tell you how the root of that word is Greek,” I bore friends and family members with my line, “describe any situation, and I’ll tell you how it relates to a cash flow statement.”  Need to know why your kids are such potty-mouthed punks, or why the dog messes in the house?  I’m sure I relate it to the cash flow statement.

For this column’s purposes, let’s stick with entrepreneurial matters.  Entrepreneurs should look at every service provider, advice giver, hanger on, government agency, funding source, family member, etc., and think of how each of these different parties relates to the cash flow statement. 

Investing section

I know it sounds tantalizingly close, but the investing section does not refer to how much someone is investing in the company.  Instead, this section details how a company is investing in itself, that is, where is the company spending money?  OK, I know I’m blurring the lines here a little bit, because spending money on IT services, legal work, accounting, etc., technically doesn’t show up in the investing section of the cash flow statement, but for our purposes, let’s lump all outflows of money into one section. 

Here’s the rub: Any time you talk to an IT sales person, a consultant, an accountant, a lawyer, and so on, this is the section of the cash flow statement you should think about.  With the exception of the Cisco equipment reseller I invited to my last networking event, every service provider will jump at any chance to meet people and laugh at their lame jokes.  Service providers are looking to take your money, which means they will give you the time of day and return your phone calls. 

Is this bad?  Of course not.  Service providers of all stripes play an extremely important role in the development of any company.  But entrepreneurs, especially early stage entrepreneurs, should limit the time they spend with service providers.  You can’t spend money until you have money, therefore early stage entrepreneurs should focus on obtaining money, and that leads us to the next two sections.

Financing section

This section refers to how money is raised, either by selling stock or issuing debt.  Unfortunately, for many entrepreneurs, this is the only section that they pay attention to.  For too many entrepreneurs, the financing section takes on a life of its own, and becomes an end instead of a means to end.  Instead of raising capital to help build a business, many entrepreneurs only spend time chasing money.  They never actually build a business. 

If you want to play VC lottery and toss your business plan willy-nilly over every transom, here is Yahoo’s comprehensive listing of VC firms.  I don’t recommend this path, but for brave and foolish, there it is.

A better method of raising capital is to focus on the resources that can help you at the right time.  For the very early stage entrepreneur (e.g., idea stage or pre-incorporation) these resources are usually: 1) their own money, 2) friends and family.  One institution that will make “pre-seed” investments is the Illinois Technology Enterprise Center (ITEC).  The state of Illinois is in the process of opening a number of these facilities across the state, the first one is located in Evanston.  In addition to providing funds, ITEC can help guide early stage entrepreneurs through the labyrinth that we call capitalism. 

Once a company is established, the entrepreneur may look to angels or early stage venture funds for the next round of financing.  Some of the notables in the Chicago area include the Illinois Coalition, Northern Illinois Angels, Prairie Angels, and Arch Development Partners.

While raising money is important, don’t let it become your job.  Much like my advice about limiting time spent with service providers, entrepreneurs should actually limit their time with investors.  That’s right!  You heard me correctly.  Instead of making raising money a full time job, entrepreneurs should make something else their main focus.  This “something else” is found on the operating section of the cash flow statement, and in a nutshell you can call it SELLING.

Operating section

The operating section of the cash flow statement refers to how much money the company earns (or losses) due to the actual operations of the business.  Forget about the money raised from selling stock or issuing debt.  Those are short-term solutions, and raising money should never be confused for the main operations of a company.  Can a company fund itself strictly from its operations?  This should be the A #1 lesson taught in all college classes (even English Lit classes), and this be the A #1 goal of every entrepreneur. 

To this end, the Chicago area is fortunate to have a great resource.  One of the numerous goals of the Chicagoland Entrepreneurial Center is to help early stage companies make connections (and sales) with Fortune 500 companies.   For companies with interesting technology that is ready to go to market, I would think a phone call into the Entrepreneurial Center would be a must. 

Basic decorum

Lastly, there are a couple of resources that all Chicago area entrepreneurs should utilize.  Basic decorum is often a sorely missing piece of the early stage entrepreneur’s repertoire.  Both the Midwest Entrepreneurs’ Forum and Arch Development Partners run periodic meetings where entrepreneurs get the chance to present their business plans to a live audience.   The feedback, which is often delivered as a well needed kick in the pants, is just the thing all entrepreneurs need to hear. 

20 years from now

Instead of whining about the current state of the economy and the lack of VC interest, the next generation of Microsofts and Apples are out there selling.  They are solving problems and focusing more on their operating cash flow and less on their financing cash flow.  In 20 years, it will be interesting to look back on the ambiguity and vagaries of these recent years, and marvel that such successful companies were born from such “troubled” times. I’ll bet a number of these companies will be here in Chicago.  In fact, I’ll guarantee it.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

Let’s take a look at one of the most common miscalculations made by early stage entrepreneurs: Asking potential investors to sign a non-disclosure agreement (NDA).  In the pantheon of entrepreneurial mistakes, the NDA is right up there with the infamous line, “these projections are conservative.” Simply put, if you hope to raise money from VCs, you increase your chances of success by eschewing the NDA request.  Most (if not all) VCs will not sign the darn things. There are bound to be some exceptions to this rule, but not many. 

Why won’t VCs sign NDAs?

The answers to this question can be lumped into two camps: the obvious and the covert.  First, the obvious reasons: Risk management and liability.  Investors will not sign NDAs because it exposes them to too much risk.  If VCs signed every time someone asked, they’d be signing hundreds of NDAs every month.  In today’s litigious society, the odds of getting sued increase with each piece of paper signed.  A VC is bound to see numerous similar deals before (possibly) making an investment in one.  Entrepreneurs often think their deal is unique, when in fact, there are probably dozens of very similar deals in circulation. 

Now the covert reasons why VCs will not sign NDAs: Raising venture capital is not fair, and entrepreneurs are graded on things they don’t even know they’re being graded on.  An entrepreneur who asks a VC to sign an NDA is unwittingly exposing himself as a rank amateur.  Simply uttering the phrase “will you sign an NDA” is a virtual death sentence.  VCs know there is usually an inverse relationship between the voracity of the NDA request and the strength of the deal. 

There are unwritten rules and decorum in the venture capital business, and asking the NDA question demonstrates that the entrepreneur does not understand how the game is played.  Unfair?  You bet!  But it isn’t your money, and we do not live in a fair society.  The person with the money makes the rules.  If you don’t like it, you don’t have to play.

VCs are not likely to tell you this.  They will simply ignore you.  They will stop returning your phone calls.  They will not answer your emails.  Don’t kill your deal.  Don’t ask the NDA death question.

If you reflexively ask for an NDA before you’ll let someone read your plan, that’s a bad habit on par with chewing with your mouth open or driving slowly in the left lane.  Further, if your plan is based on an idea so tenuous that merely hearing what you do (or plan to do) will cause grievous harm to your plan, you don’t have a plan.  You have a pipe dream.

I spoke with a number of Chicago area VCs to get their comments on the NDA issue, and not surprisingly, they all echoed the same sentiments.  One VC told me point blank: “Bill, I will never sign and NDA.”  When I asked him what he does if an entrepreneur is insistent, his reply was, “I tell them we cannot sign NDAs, under advice from council.  If the entrepreneur cannot get past this issue, I move on.  I won’t return that person’s calls.” 

“NDAs are not worth the time and money,” I was told by Dave Baeckelandt of Chicago Pacific Capital Partners.  Dave is unique among investors in that he told me, under certain circumstances, he would sign an NDA.  Then again, as Dave pointed out, he’s “playing” with his own money, not managing a large fund of other people’s money. 

So, what are those “certain circumstances”?

Dave essentially said he’d consider signing an NDA if the deal was far enough “down stream,” and the entrepreneur was about to reveal non-patented intellectual property such as source code or a trade secret. 

While the entrepreneur may get lucky and find an investor willing to sign and NDA, the entrepreneur is better off following a basic rule: Don’t ask VCs to sign NDAs.

Selective Search

Shifting gears from discussions of non-disclosure, let’s move over to the world of full disclosure: the world of high caliber match making.

Barbie Adler, President of Selective Search, has been making some waves in the Chicago area with her high caliber match making service.  Barbie sees a flaw in current matchmaking services for high-level executives, and not surprisingly, she sees opportunity.  Barbie’s goal is to bring executive search quality to the world of matchmaking.  Obviously, this service is not for everyone, but as Barbie says, “You wouldn’t use Monster.com to find a CEO.”

The service is the antithesis of companies such as Match.com.  Selective Search takes the time to interview each client, providing a “hands on” approach as opposed to the impersonal and canned approached found in on-line services.  With 7 employees in Chicago, the company is still in the early stages of growth, and makes an interesting case to study.   

Barbie is executing on a basic plan that all entrepreneurs should follow.  First, she’s been able to self-fund the business.  Instead of searching for outside and capital and whining “she just needs some skinflint to open up the purse and provide $500K to get the business started,” she’s actually doing the business, finding clients, generating revenue, and proving her model.  It’s refreshing to find an entrepreneur who isn’t begging for seed capital.

Prove the model

First, Barbie is focused on “owning Chicago.”  While she has done searches in other cities, Chicago is her main focus for the time being.  Once she perfects the model, she’ll begin to open offices in other cities.  One interesting note, she’s discovered that the people best suited to work for Selective Search will likely to have executive search backgrounds.

Do what you enjoy

Barbie got into the matchmaking business because it was a natural extension of her professional and personal lives.   She found that she was constantly connecting people on a professional level, and at the same time, she noticed she had success in setting people up on dates.  Selective Search allows her to do what she enjoys and what comes naturally – another lesson for all would-be entrepreneurs. 

Leverage your connections

Drawing on her 12 years in public relations, it isn’t surprising to discover that Selective Search has been featured in media ranging from the Tribune to Forbes to Fortune to coverage by various local and national TV networks. 

Deliver results

Nothing speaks like actual results.  Instead of talking about what she thinks she can do, Barbie is able to furnish results.  According to company statistics:

“186 marriages resulting in 73 babies; 25% of our clients couple up in the first introduction; 45% of our clients need only three introductions before pairing off to form real relationships.”

Venture Worthy?

Barbie seems to do a great job, and she definitely has the high energy and drive needed to be a successful entrepreneur.  The question then becomes: Is this a venture worthy deal? 

Based on my understanding of the business, I would have to say no.  By her own admission, one of her challenges will be to retain Selective Search’s “hand on” approach while the company grows.  The “hands on” approach is wonderful, but this requires many people, therefore limiting the scalability of the business, therefore limiting the “venture worthiness” of the company. 

But is this a bad thing?  Not at all.  One thing early stage entrepreneurs need to remember is that venture capital is not a stamp of approval.  There are plenty of ways to grow a business without venture capital, and Barbie Adler is demonstrating that smart entrepreneurs don’t talk about doing it, they simply do it.  She isn’t sitting around waiting for someone to provide her start up capital; she’s actually running her business, generating revenue, and satisfying customers.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

In a former life working for a dotcom era company (the company is currently “between servers”), I had the great privilege of reviewing thousands of bad business ideas and talking with hundreds of clueless entrepreneurs.  I say great privilege, because when scrutinized properly, ineptitude is a wonderful teacher.  While I will not name specific companies, I have summarized some of the most basic, common, and irritating entrepreneurial follies subjected upon this humble columnist. 

Ignoring the sound advice of knowledgeable people a bad idea

I have attended enough venture capital events, and talked with enough organizers of said events, to know this: Too many entrepreneurs do not listen!  I know this sounds very basic, but you would be surprised at how often otherwise intelligent people completely ignore the good advice proffered to them by industry experts.  When an organizer of an event is a VC, and that VC offers advice to you, it is probably a good idea to heed that advice. 

I was at a recent event where the entrepreneur, against the advice of the experienced hosts, wildly forecasted sales of over $500 million in year 4.  He also tossed in phrases such as “no risk,” “guaranteed returns,” “these projections are conservative,” and other phrases of death.  When I later spoke with one of the hosts and mentioned the entrepreneur’s folly, I asked, “don’t you work with them to make sure they know these phrases are verboten?”

The answer was they do coach the entrepreneurs, and the entrepreneurs usually nod and agree, only to get on stage in front of an audience and revert back to their old bad habits.  I don’t know what advice I can offer beyond saying: Entrepreneurs who ignore sound advice are simply lining up to shoot themselves in the foot.

The engineer’s plan

This is a classic bit of entrepreneurial folly.  The entrepreneur’s basic misjudgment here is to this: “I’m an expert in this field, and I think everyone is an expert in his field.  If you are not an expert, then I don’t want to work with you.” 

Guess what?  Most VCs are not experts in every single field of study.  While VCs are typically very smart, and can usually talk about many subjects with a high degree of knowledge, it is improbable to think every VC is an expert and knows every minute technical detail about every field of science and business. 

Entrepreneurs need to write their business plans for laypeople, not industry experts.  Engineer’s plans typical gloss over, if not completely leave out, details such as market research, industry trends, competitors, financial analysis, operational plans, and much more.  Actually, engineer’s plans usually talk about the technology, and little else.  If your company has some technical bit of IP, provide technical details in a white paper.  Write your business plan as if your audience were 6th graders.

“This is the greatest thing!” (b/w “You don’t get it!”)

Entrepreneurs are imbued with an incredible sense of optimism, but using the “presumptive close” in an introductory phone call or email will not work.  Every entrepreneur hopes his project is the greatest, most unique thing in the world.  The fact of the matter is VCs probably see 10 deals every month that are very similar to yours. 

Too many entrepreneurs make the mistake of thinking if they pile on the hyperbole and accolades, investors will be intrigued.  The reality of the situation is that investors learn there is an inverse relationship between the hyperbolic level of self-propping up and the underlying quality of deal.  When you start talking about how the investors should jump in now because you’ve got three term sheets coming tomorrow, this is usually taken as a sign of desperation.  More accurately, you sound like a like a huckster selling snake oil, and you will be treated as such. 

Here’s a better approach: 1) make sure the investors you contact actually invest in your space, 2) eliminate the breathless sales approach and adopt a rational, evenhanded approach, and 3) talk about facts and limit your opinions.  Deals get done on facts, not opinions.  And if opinions enter into the decision making process, they won’t be the entrepreneur’s opinions.

When in doubt, throw it out:  Don’t whine about past injustices

My mother was a nurse.  She once told me the modus operandi in operating rooms as it relates to surgical equipment: If you’re not 100% sure a scalpel is clean and sterile, it is therefore dirty and contaminated.   When in doubt, throw it out. 

I wish more entrepreneurs would utilize this same philosophy.  Instead of applying it to scalpels, entrepreneurs should apply it to what comes out of their mouths.  If no good can come from what you’re about to say, don’t say it!

I bring this up because I’ve had dozens of conversations with Chicago area entrepreneurs who insist on talking about how this VC or that angel diluted their ownership and screwed them out of their companies.  This may be the case, but why mention it?  What good can come from whining about past mistreatment?  Talking like this makes it sound as if you have an axe to grind.  In addition to determining the quality of your deal, investors are determining the quality of you, the entrepreneur.  Investors really care about your past failures.  If they think you are a head case, they won’t work with you.  Sorry to break it to you, but life isn’t fair and people are mean.  If you want “fairness” and egalitarianism, join Greenpeace and hang out at a Phish concert.

Here’s a simple rule: If it doesn’t add value to your conversation, don’t say it.  If there isn’t any good that will come from it, it must be bad.  When in doubt, throw it out.

In conclusion…

A hole in the head has a unique way of leading to foot problems.  If you insist on proffering entrepreneurial folly, you’ll eventually shoot yourself in the foot.  If you see me at a networking event and would like to hear more, buy me a drink and I’ll be happy to tell you all about “Space Miles,” the “clear plastic talking Jesus doll,” or dozens of other precious stories best served with a stiff drink.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

Killer Technology, Tractor Beams, and the Library of Congress in a Sugar Cube.  Must be Star Trek, right?  Nope, it’s Arryx, and it’s here in Chicago

Early stage entrepreneurs are constantly asking me, “What does it take to raise venture capital?” 

The answer is simple.  In fact, raising money from venture capital funds is ridiculously easy…provided you have killer technology.  Be an Arryx, I often say.

Arryx, for those of you just emerging from the proverbial technology rock, is one cool company.  I know these columns are supposed to have a modicum of professionalism, but the basic fact is that Arryx is a cool company.  Any company that has the technology to move objects with beams of light is cool.  Yeah, you read that right, real Star Trek stuff. 

Two years ago I made the acquaintance of CEO Lewis Gruber.  I had just read a couple of articles about Arryx, one of which literally made my jaw drop to the floor.  The ability to move objects with “tractor beams” of light has that kind of effect of me.

When I first spoke to Gruber, Arryx was still in the process of figuring out what the heck to do with the technology.  No, Arryx is not about to release an affordable sugar cube sized computer that holds the Library of Congress. But the problem of what to do with interesting technology is a problem that many tech companies face.  The technology may be jaw-dropping in nature, but so what?  As I’ve often said, the “better mouse trap” theory is flawed.  The world will not beat a path to your door if you’re tying to sell the world’s greatest mousetrap to a target market that lacks a pestilence problem.

A company with technology as revolutionary and “out there” as Arryx is bound to face these kinds of problems, and I was eager to see what Arryx has been working on. 

The Technology

Before we dig into some products, let’s examine the technology.  Arryx’s website says:

“Our technology uses focused light to form optical traps that function like microscopic ‘tractor beams’ to grab small objects. Using only laser beams, we can independently and in parallel hold, move, rotate, join, separate, stretch, and otherwise manipulate hundreds of microscopic and nanoscopic objects ranging from the size from a human cell down to less than 1/1000th the diameter of a human hair. Because our technology uses multiple beams to hold an object, it is ideal for handling cells and other objects.”

In layman’s terms, Arryx uses light to move stuff.  Dr. David Grier, a professor of physics at the University of Chicago, developed the basic technology, which was transferred to Arryx.  Investors include blue chip funds such as Chicago’s own ARCH Development Fund, Draper Fisher Jurvetson, and Fahnestock Venture Capital Fund.  Lewis Gruber was brought on board to lead the commercialization charge. 

Products

What I enjoy about talking with Gruber is the fact, despite his obvious intelligence; he speaks in such simple terms.  He doesn’t try to impress by throwing arcane concepts at you.  He impresses by making the complex tangible to everyday life.  Witness the direction of Arryx’s product development.

Last July, Arryx released its first product, the BioRyx 200.  This is a workbench geared towards research institutions and universities.  Essentially, the workbench is a tool for other nano-related products.  It’s a tool for making tools.  Utilizing tractor beams (I suddenly feel like Austin Powers when I say that), the workbench can grab microscopic particles, enabling the user to “hold, move, rotate, join, separate, stretch, or otherwise manipulate hundreds of microscopic objects using only laser beams.”

Despite the workbench’s $275,000 price tag, this is a small potential revenue source because this is a niche market at best.  Why start with this product?  A win is a win, sales are sales, and the workbench furthers Arryx’s brand by keeping the technology in front of people.  Gruber knows this is not a multi-billion market.  While I understand what the workbench can do, it is not something I will ever need in my life, nor is it something I will give as a Christmas or birthday gift.  There is a certain unique market that needs the BioRyx 200, but this market is small.  I wish more entrepreneurs were as realistic about target markets as Gruber. 

The next product in the Arryx arsenal, currently under developing, is far more tangible to everyday life than the BioRyx 200.   What I love about this next product is that it was something I never thought about, but the second Gruber explained it to me, I had an “ah ha!” moment.

Using the same basic technology, Arryx is working on a product that will enable the cattle and dairy industries to sort sperm.  Left to nature, the birth mix between male and female cows is roughly 50-50.  For dairy farms, female cows are desirable -- you can’t milk a male cow – and in the beef industry, male cows are desirable – steers make far better steak.  In both industries, 50% of the cows born are not used, and therefore represent a waste of money for dairies and cattle ranchers.  The unused cows are fed and housed, but as they are not viable revenue producers.  They are even more useless than my dog. 

Using Arryx technology, X chromosome and Y chromosome sperms can be easily and affordably sorted, therefore reducing (if not completely eliminating) the creation of useless cows.  Yes, they will use the aforementioned tractor beams to grab and move X chromosome to one side, Y chromosome to the other side.  And, using one of Gruber’s catchwords, the product will be simple: one button.  All it will be designed to do is sort sperm.

But there’s got to be an easy-to-use and affordable solution that handles that issue, right?  The answer, according to Gruber, is “no.”  In fact, Gruber was surprised to learn that a good solution doesn’t exist.  Enter opportunity for Arryx.  Again, this is not a product that I will be giving to people as gifts (“Look Timmy, Mr. Snow gave you an Arryx Sperm Sorter for your birthday!  What do you say?”), but I think we all can see the implications of such a technology for the beef and dairy industries.  Given my diet, this product will have an enormous impact on my life.  

The next product in the Arryx hopper is a sensor that will be able to detect ecoli, anthrax, and any other kind of biological or radiological contaminants.  The sensors can be fitted on, say, military vehicles, eliminating the need for the “Kuwaiti Fried Chicken” approach, most recently used in this spring’s invasion of Iraq. 

The sensors can also be employed in brushes, allowing the user to simply brush an area to determine if the surface has been contaminated.  Beyond military and security applications, the brushes could be utilized by the food service industry to ensure restaurants’ food prep areas are clean and sterile.  Do you think every restaurant in America should use one of these brushes on its food prep area?  I do too.  This could be the sizable homerun that Arryx, and its financial backers, are looking for.   This might even be a product that I’d buy for friends (or myself). 

The future

Here we have three tangible products in the offing from the oft-confusing world of nanotechnology.  And somewhere down the line, perhaps the ten to fifth power product, Gruber is convinced we will get the sugar cube sized computer that can store the entire Library of Congress.

Now that is a gift I will definitely be giving. All brought to you because of the magic of nanotechnology.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

Chicago Entrepreneurs should do what they love – the money will follow

In the world of entrepreneurship, venture capital and empire building, there is a lot that can be said for hot technology, intellectual property, defensible positions, and scalability.  And then again, there’s a lot to be said for the touchy feely hippie mantra of “follow your bliss.”  In other words, do something you love and believe in and the rest will fall into place. 

This philosophy comes with a caveat to that above sentence: You have to get out and do.  You can’t sit around and wait for investors to “get it” and provide seed capital for you.

A great example of “follow your bliss” is Pat Hughes, CEO of Inclusion Solutions.  Pat’s passion is inclusion – connecting people who are isolated.  The funny thing is, he doesn’t look like the type of guy who was excluded from anything.  He has no disabilities, and, in fact, looks like he could still bowl you over in a rugby game. 

At first glance, he looks like your typical, run of the mill, major college fraternity product.  Nice guy, but not deep.  A guy who has always had plenty of friends.  A guy who isn’t going to mug you in a dark alley, but he’s not going out of his way to help, either.  A guy who reads the sports page first, thinks a backwards baseball cap is a de rigueur fashion basic, and “waters” the neighbors’ flowers in Wrigleyville after each Cubs game. 

Spend a few minutes talking with Pat and you will know that this first glance assessment was woefully wrong.  From the moment you meet Pat you know he passionately believes in what he’s doing.  His eyes light up, and he’s animated and energetic as he describes his life’s work.  He’s talkative and a natural salesman.  He’s not a phony: the pitiful sap who is merely going through the motions, hoping to meet an ever more pitiful sap (who happens to have money and takes pity on sap #1).  The pitiful sap who cannot start his dream until some dumb VC “gets it” and provides seed capital.  Unfortunately, we have more than our fair share of these people in Chicago.

And better than simply sitting around waiting for “manna from heaven,” also know as venture capital, Pat’s out there doing and selling.

You never know where the idea will come from.

As a college student at Kansas, Pat developed a friendship with an autistic person; we’ll call him Doug.  Doug’s mother hired Pat because Doug was completely isolated from the outside world.  After spending some time going bowling, playing video games, and other pre-planned event-type get togethers, Pat grew bored and stopped making plans with Doug.  Pat didn’t think he was helping and he was tired of constantly having to plan events. 

Doug’s mother called Pat and told him when the two young men spent time together, the effect on her son was immeasurable.  Doug might lack the ability to express this, but she knew it was very important to Doug.  She told Pat he didn’t have to “plan” events, that simply including Doug in his life as a friend would be incredible thing.  Doug didn’t have friends. 

The light went off.  Pat redoubled his efforts, and decided to bring Doug into his group of college buddies.  Bringing Doug into his group of was uncomfortable; people didn’t know how to react to an autistic person. 

From these experiences, Pat stated Natural Ties, a “non-profit dedicated to fostering relationships and friendships between people with disabilities and those without.”  For nine years, Pat served as executive director and grew the organization to 14 chapters, which have created over 500 inclusion relationships.  In 1992, former president Bush recognized Pat’s work with a Thousand Points of Light award. 

Pat eventually befriended a woman who was in a wheelchair, which obviously limited her ability to travel and get around.  She could not access many businesses because she could not get past the doors. 

Not surprisingly, this woman’s predicament piqued Pat’s interest.  How do you solve this problem?  How do you include this woman in life?  Pat figured you could litigate and force businesses to make changes, but this method is fraught with acrimony, and Pat is in the business of making friends.  Not a fit for Pat’s personality or beliefs. 

Instead, Pat developed the Big Bell to solve to problem of doors that are not automated.  The Big Bell system is very simple: It is an oversized wireless doorbell that alerts businesses when a handicapped person, or someone with limited dexterity is outside and desires entrance.  The employee simply comes to the door, and let’s the person in. 

In addition to the Big Bell, Inclusion Solutions offers “ADA entry kit” for business and an “ADA voting access kit, “ products in a similar vein. 

What’s the big deal?

An oversized doorbell?  That’s it?  Who cares?  That’s not venture worthy, Bill!  Maybe not, but that’s beside the point.  Pat is doing what he passionately believes in. And in another great lesson for all entrepreneurs and would-be entrepreneurs, Pat knocks on doors, asks for the business, and sells product. 

It’s kind of ironic, for a guy in the business of opening doors for others, Pat isn’t waiting for others to “get it” and open the venture capital door.  He’s too busy opening his own doors. 

Yes, he’s had financial help from family and friends, but that’s the group that a guy like Pat should go to.  They know Pat, they love his story, and they backed his dream.  This is another reason why you should be nice your relatives…you never know when you’ll have to hit them up for money. 

I don’t know if Pat will make Inclusion Solutions a long-term success.  It’s a commercial product and it takes some doing to get a product on retail shelves.  Life and business are full of many unknowns.  But I know this, if success hinges on enthusiasm and determination, Pat is already a success.  And if success hinges on basic decency, Pat is in a world of his own.  As far as I can tell, it’s the theme of his life.  How many of us can lay claim to that kind of theme, or any theme at all? 

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

The past week has seen an explosion of posts.  Some were written by sage advisors, but tellingly, many more were written by disturbed, distressed, and agitated entrepreneurs.  Guess what?  I saw the same frustrations, the same misconceptions, and the same errors that regular readers of my column will recognize.  Let’s review some more of these very common mistakes that early stage and wannabe entrepreneurs make.

Ideas are not enough – you have to have a company

A large part of the posts dealt with ideas, namely what makes a great idea.  One neophyte suggested a "great idea" was “one that leads to a very profitable business if properly executed and adequately funded.”

No kidding!  Talk about qualifying your answer.  That’s like saying “a great at-bat in baseball” is when you make contact and hit a home run. 

As I tried to point out, the whole “great idea” conversation is moot for a simple reason: VCs (with the notable exception of Tom Churchwell at Arch Development Partners) do not invest in ideas.  And even in the case of Churchwell, he’s usually only interested in the idea if it has some intellectual property attached to it.  Don’t contact him if you’re looking for someone to back your lemonade stand or record store. 

The bottom line is the vast majority of VCs invest in existing companies that already have sales.  Ideas are great, but much like opinions and a certain part of your body, everyone has one.  A company with a market validated business model is what venture capitalists look for.  Your friends and family are the investors who will (maybe) back your ideas.

You have to be willing to work

VCs do not make investments in order to do the work.  That’s the entrepreneurs’ job.   Believe it or not, many the neophyte entrepreneurs on the Internet board actually think that VCs should not only pony up the dough, but they should also help them flesh out the idea, make sales calls, and do all the work the entrepreneur is supposed to do.  I was fully expecting someone to say that VCs should also do the entrepreneurs laundry…and clean the house, too!

VCs provide the financial backing and they will naturally be involved in the operations of the company.  But the roll that most VCs will take is similar to that of a board member (and many VCs are board members): they help the entrepreneur with long term planning and provide some advice.  But the nitty gritty, day-to-day work will be covered by the entrepreneur.

Venture Capital is not a stamp of approval

Much like my dog, which has an uncontrollable urge to eat whether he is hungry or not, entrepreneurs seem to have an uncontrollable urge to seek venture capital, whether they can raise it or not.  If we could read my dog’s mind, his prime directive would say, “Must.  Eat.  Food.”  Likewise, if we could read the prime directive buried deep inside the unconscious minds of many wannabe entrepreneurs, it would say, “Must.  Seek. Venture Capital.”

Venture capital is not a stamp of approval delineating between “good” company and “bad” company.  Venture capital is a type of financing that only a very select type of company can raise.  Many entrepreneurs seem to place their initial energies on obtaining venture capital.  Instead, they should focus on building a company and generating sales.  Venture capital should be the last thing they think of. 

Reluctance to give up enough of the company

Worse than the Pavlovian drive to seek venture capital, many early stage entrepreneurs seem to lack awareness that if they raise venture capital, they will have to give something up.  There is often a stunning disconnect between the thought of getting money from a venture capitalist, and the realization that you will have to give up a sizable chunk of your company.  I have meet with, and talked with, countless entrepreneurs who think that they can raise $10 million and still own nearly all the company’s stock.  One Chicago area wannabe entrepreneur told me he wanted to raise millions of dollars of venture capital in order to buy an existing company.  He wanted to hire me, give me stock, and since he was in a jovial mood, he wanted to give stock to all the employees, too.  Sounds great, right? 

I should add he wasn’t prepared to put a dime of his own money into the venture. 

When I asked him how much of the company he expected to own, he told me, “Ninety percent.”  And he sounded pained when he said that.  I told him he’d be lucky to own 20% of the company when it was all said and done.  Frankly, his ownership position would most likely be under 10%.

Then there’s the case of another angel funded Chicago area company.  Believe it or not, the angels behind the venture felt they could raise $10 million and only give up 1% of the stock.  At the time, the company was still pre revenue.  

Scale is needed

Having scales means you have a skin condition and should probably see a doctor.  So what does scale mean?  Scale can mean the cost to deliver the product or service is the same (or virtually the same) whether you have one client, 100 clients, or 1 million clients.   Scale can also mean recurring revenue (contact sales).  And scale can also mean the product has a large price tag (six figures).  The best of all worlds would be having a product that has all three of these attributes. 

Someone who is selling an interesting retail product recently contacted me.  The problem?  The thing costs less than ten dollars, and once a consumer buys one, it is unlikely he’ll buy a second.  I like the product, but selling a low priced retail product is a very difficult way to become a millionaire.  Impossible?  Of course not.  Just very difficult. Low cost consumer goods are about as far away from scale as you can get.

Detailed financials

File this one under yet another area where the early stage entrepreneur thinks the VC should do all the work.  Many early stage entrepreneurs flat out expect the VC to create and refine a detailed financial model.  This misconception is found mostly in the people who do not understand accounting. 

Why should entrepreneurs create detailed financial models?  After all, it is highly unlikely that any single number generated on the spreadsheet will actually occur in real life.  What the model does is demonstrate that the entrepreneur fully understands the full scope of the business.  What are the key numbers?  What happens to output A if input X is reduced 20%?  While it can seem like a lot of busy work to create projected financials, the company will have to create detailed financial records if it gets funding.  Demonstrating in-depth understanding before the investment will only strengthen the odds of receiving that investment.  Being clueless is not a good option.

Either learn accounting, or hire someone who understands it.  If you are an accounting neophyte, find a partner who is a ringer.  

What’s the exit? 

This is another venture capital basis that seems to trip up many wannabe entrepreneurs.  If there is no clear plan for the investors to get their money back, an investment is highly unlikely.  One of the sage voices on the Internet board likened the exit scenario to owning a piece of David Lynch’s production company.  The company might be worth something and might generate strong cash flows, but what happens if/when Lynch leaves the company?  There’s no public market for the stock, and once the namesake leaves, it is unlikely the company will have any value. 

The two main exit scenarios are IPOs and acquisition by a publicly traded company.  Since IPOs are rare (especially today), entrepreneurs need to build businesses in industries that are ripe for consolidation.  If you create enough value (or become a big enough pain point to a competitor), someone will come a-knocking with a large check.  Then you can become an angel or VC…or you can sit on a beach and sip pina coladas.

Conclusion

It boils down to this: Entrepreneurs must mitigate as much risk as possible.  Avoid what I call the “lump of clay” syndrome.  VCs will only fund your company (maybe); they are not about to do all the work, too!  Entrepreneurs must create and refine a business model, validate it via sales, run all the day-to-day operations, get a dose of good luck tossed in, and maybe, just maybe, they can raise money from VCs.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

With alarming regularity, early stage entrepreneurs run into the decorum buzz saw Bill Snow calls “the maxims of venture capital.”  As bad as this is, there is actually something worse than running into a buzz saw: It is not knowing you just ran into a buzz saw.

A venture capital buzz saw exists.  No matter how much you rail, wail, whine, and complain, this buzz saw exists and you are not going to make it go away.  Venture capital presents the aspirant entrepreneur with a rich array of decorum, maxims, and truths that baffle far too many ignorant entrepreneurs.  I use the term “buzz saw” for a simple reason: Walking into a real buzz saw will result in a big mess.  The same can be said about the venture capital buzz saw.

Instead of trying to change the way things are, entrepreneurs are advised to learn the ways of the jungle, adapt their methods, and go after the right financing, at the right time, in the right way.  Today’s column focuses on some the right (and wring) ways to hunt for venture capital.

I don’t want to hear nonsense about “the way things ought to be.”

“Life is unfair, deal with it,” is a phrase I utter so often that I run the risk of eventually plagiarizing myself.  Regular readers of VC101 will know what I think about notions of “fairness,” (join Greenpeace and hang out at Phish concerts).   VCs do not want to hear how they should invest their money, and they do not want to be told how they should take risks.  When you have a pile of money you can decide exactly how you use it. 

This is not a perfect world, and venture capital is not a perfect system.  Remove all notions of egalitarianism from your approach and thinking.  It is up the entrepreneur to mitigate as much risk as possible, and not for the VC to take as much risk as possible.

The Truth about bad ideas

Many early stage entrepreneurs have a seemingly inexhaustible supply of bad ideas.  They often mistake an idea for a good idea.  No amount of spit and polish can make a bad idea compelling.  If the fundamental business model and/or underlying assumptions are faulty, a professionally prepared plan will not cure these fatal ailments.   

Further, make sure there’s a market for your idea.  The “better mousetrap” theory is fatally flawed.  If your target market does not have a pestilence problem, the world will not beat a path to your door to buy a “better mousetrap” they don’t need. 

The Truth about venture capitalists

VCs rarely say “no.”  They don’t want to be the example a successful entrepreneur uses one day when talking about “all those idiot VCs who passed on my deal.”  To their credit, VCs tend to be optimistic, helpful, and encouraging.  The downside of this is many entrepreneurs keep chugging on, working on bad businesses, mainly because they haven’t heard, “no, not a chance hell.”  

VCs are polite people.  Most people learn good manners at an early age. For example, it is not polite to hang up the phone while the other person is still talking. No matter how irrational or long-winded the caller, most people try to end a conversation politely before hanging up the receiver. In other words, just because VCs give you a few minutes when you call them does not mean they’re interested in your deal!  Do not confuse good manners for interest.

VCs utilize the “One Reason” rule.  During the first step of a review process, VCs rarely read business plans: they scan them. They are not looking for reasons to invest; they are looking for reasons not to invest.  They are not looking for the singular hidden gem in your plan.  Only if the plan passes this initial screening, will VCs dig deeper and seriously consider the investment.

The entrepreneur’s “greatest idea in the world” is the VC’s commodity.  VCs see 50, 100, 1,000 “greatest” ideas a month.  Entrepreneurs need VCs more than VCs need entrepreneurs.  The person who controls the money controls the situation.

While VCs know it is unlikely every investment is going to be a home run, they perform their due diligence expecting every investment to be a homerun.  Be prepared if you choose to contact a VC.

Basic decorum for entrepreneurs

The easiest way to explain this one is to say: You are being graded on your behavior just as you are being graded on your business plan.  Many first time entrepreneurs are unaware that they are being graded on the way they behave and the way they answer questions.  There’s no secret sauce here, this is all common sense, but you would be surprised how often money seeking entrepreneurs screw up the basic decorum test.  A simple error in any of these will result in entrepreneurial doom, and worse than that, most entrepreneurs will not even know what they did wrong. 

Irrationality, irritability, insanity, instability, complaining, griping, and whining. 

These are not good things.  If your behavior incorporates any of these things, you are essentially telling the potential investor that you are unstable, and therefore you are a bad risk.  You are dead.

Give direct answers to direct questions. 

This is the number one rules violation…with a bullet!  The entrepreneur is so excited about the chance to give his spiel to a decision maker that he often jumps 20 steps ahead, rushes through his answer, and generally fails to answer the question.  You can almost hear the gears spinning in the entrepreneur’s head as he parses every question, looking for hidden nuance and meaning in otherwise direct and clear-cut questions.  Here’s an example:

Q:  “What are your revenues?”

A: “Our technology is portable to Unix servers and we hope to get a patent next year after we use this venture capital round to pay back my mother.”

Be honest. 

While you would think this is a basic business tenant, many entrepreneurs flat out lie about their company and its prospects.  The truth will eventually come out, don’t shortchange yourself and your dream, and make sure you are honest in your presentation and answers.  One of the biggest lies entrepreneurs tell is that other investors are about to put money in the deal, and “you better get in now while you can buy at a low price.”

Be accurate. 

Entrepreneurs have a tendency to gin up their companies, trying to portray their efforts and dreams in the best light possible.  The combining of effort and dream seems to be the culprit here.  Using the same question as posed above; here is how honesty gets twisted:

Q:  “What are your revenues?”

A: “$2 million.”

Sounds like a direct answer to a direct question, right?  The problem, not readily apparent, is the fact that this entrepreneur doesn’t have a $2 million company.  He has some trailing revenue, but his $2 million figure is what he hopes the company will produce in the coming year.  Make sure you have a very clear delineation between historical results and your projections.

Understand the lingo in the venture capital world.

Educate yourself, do your homework, learn the terms and the language.   There are plenty of resources on line, start exploring. 

Know to whom you sent your plan. 

If an investor calls you back, it is a bad thing to say, “Huh, who are you?”  This makes it look like you are sending your plan willy-nilly to everyone and anyone.  Investors usually take this as a sign that the deal has been shopped, meaning a large number of other people have passed on it. 

Know if an investor actually invests in your type of deal. 

This is a basic issue that many early stage entrepreneurs don’t seem to understand.  Venture capitalists’ investment criteria are usually limited by their experience and/or the covenants of the fund’s operating agreement.  Let’s say a strong software company approaches a reputable venture capital fund that invests only in medical-related deals.  The venture capitalist will likely realize this software company is a good deal, but he will refrain from investing because software is outside his area of expertise and/or the fund prohibits investment in anything other than medical device and drug discovery.

Phrases (of death), ahem, don’t say these things

In addition to basic decorum, there is a pretty well know list of things I call the “phrases of death.”  I say “pretty well known” because experienced entrepreneurs and investors seem to be acquainted with all of these, while many first time entrepreneurs are befuddled and unknowingly walk into that venture capital buzz saw.  Don’t argue any of these points; just know if you say any of the following phrases, you are dead:

“You don’t get it!”

This is usually a sign of entrepreneurial exasperation, leveled after the entrepreneur has been rejected after the nth time.   The VC probably understands more about the situation than the person leveling the charge.  In fact, the exclamation is akin to yelling, “I’m telling mom!”  Stop your whining and fix your plan.  Or find a new job.

“Will you sign an NDA?”

This is a sure sign the entrepreneur is a rank amateur.  There is usually an inverse relationship between the veracity of the NDA inquiry and the quality of the deal.  If your plan is based on an idea so tenuous that merely hearing what you do (or plan to do) will cause grievous harm to your plan, you don’t have a plan.  You have a pipe dream.

An exception to this rule is if you are far downstream with investor negotiations (for example, you’ve already had numerous in depth, serious, and meaningful discussions), you actually have something proprietary, and it is time to “open the kimono” and expose the secret sauce (for example, source code) to the fund’s technical expert.  In this case, it is probably appropriate to ask for non-disclosure protection.

 “These projections are conservative”

Your rank amateur is showing!  This usually means the projections are pie in the sky, and extremely unobtainable.

“We have no competitors”

All companies have competitors, either direct, indirect or substitutes.  Movie studios directly compete against other studios, but they also indirectly compete with every other kind of entertainment: theater, sporting events, restaurants, nightclubs, and so.  There are always alternatives/substitutes to your product.  The biggest competitor you may face is apathy.  The customer’s decision to NOT buy your product is a possibility. 

“All we need to do is grab 1% of a $100 billion market and we’ll have a billion dollar company”

This statement is unique to exactly you…and the other 6 billion people in the world!  This is yet another sign the entrepreneur is letting his rank amateur show.

“I’ll quit my job upon funding.”

This means you won’t be quitting your job because you’re not getting funding (from a venture capitalist).  You need to make the full and complete commitment to your business long before you seek venture capital.

“Seasoned management will be hired upon funding.”

Oh, yes!  I can see the venture capitalists lining up when they read this sentence…lining up to laugh at the plan before it is condemned to the ash heap of clueless business plans.

Conclusion

As I’ve said countless times, the world isn’t fair, and venture capital is even less fair.  But I don’t think it is unrealistic to expect entrepreneurs to learn some of the basics before the wade into the Sea of Private Equity.  You wouldn’t try to fly a plane without possessing some knowledge about how to fly planes, so why do so many entrepreneurs try to raise money from a group of people who have their own unique language and culture, without understand that culture?  I’m reminded of the old joke about the American couple visiting Europe.  As they walk down the streets of Rome, the man turns to his wife and says, “Look all those foreigners.”

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com 

The process began with a phone call.  “You should talk with this guy, I think he has a good idea,” the caller told me.  “Actually, I may join the company.” 

Since the caller was a well-known figure in entrepreneurial Chicago, and a good friend of mine, I naturally met with the entrepreneur.  Turns out he’s a bright guy with a boat load of industry experience.  He’s got an interesting idea.  Not so long story short, I’m on board as CFO.

For this column’s first 2 months of life, I have talked about other companies and other entrepreneurs.  I thought it might be a fun idea and turn the spotlight on your (not so) humble scribe and talk about the experiences and observations – good and bad -- that have brought me to this point. 

Pay your dues – experience life

(Warning, spoilers herein)

Over the years I have communicated with many early stage entrepreneurs who are incredibly misguided about venture capital, entrepreneurship, starting businesses, and what it takes to grow a business.  I look back at my early years with horror as I realize that I once held many inane beliefs.   It is frustrating when I communicate with someone whom I know is incredibly misguided, but doesn’t yet know it.  I guess you can only learn things from experience, and to that end, it probably makes sense for would be entrepreneurs to make their mistakes and learn.  Here’s a short list of what I’ve learned:

•             When I was a child, I learned about myths: Santa Claus, the Tooth Fairy, and the Easter Bunny do not exist.  “S***,” I thought to myself as I caught my parents setting up toys that Santa purportedly left for my sister and me.

•             When I was a teenager, I learned about misconceptions: In the mid 1970’s, my grade school teachers told me, with absolute righteous authority, that the world was entering a period of global cooling(!) that would ruin the planet, and we would run out of gas by 1980.  “Oops,” I thought to myself when I got my driver’s license in 1983 and filled up the family truckster with gas that cost less than it did in 1979.

•             When I was in my twenties, I learned about dashed hopes and bitter reality: I am a Cubs fan, need I say more?

•             When I was in my thirties, I learned about venture capital.  Let’s see, what is that little ort of wisdom I learned about venture capital?  Oh, yeah!  VCs do not invest in early stage companies.  More so, VCs can sniff inexperience, ignorance, and plain stupidity from a mile away. 

With the exception of my column, entrepreneurs can’t gain experience by merely reading about things -- they need to go out and experience life’s little crushing defeats.  I guess it’s the only way to determine if someone has the hide of a rhino or the constitution of a kitten.  If someone is head long on running full blast into a wall, the best advice I can give is “get out of the way.”  If they get up and try again, they might eventually figure out they can get much farther by walking in a different direction.

Never stop learning

You want to be an entrepreneur?  Go work for one.  Find a job with a start up.  Work for free if you have to, but get out there and start learning though experiences.  Similar to a shark that must continually move (or else it will die), entrepreneurs need to constantly learn new skills.  I’ve found the best way to learn is to do.  While some people can learn all they need to know by reading a book, I think most of us have to get out there and get out hands around something. I think of accounting when I talk about this.  I needed to get into a business where my money was at stake before all the accounting principles and concepts I was taught in college really sunk in. 

Strengths and weaknesses

Do some serious thinking about your strengths and weaknesses, and be willing to take a “dumb job” in order build experiences.  I wanted more managerial and operational experience, so I spent a couple years in the mid 90’s working for a video retailer.  I managed in excess of a dozen video retail locations in rural Georgia, opened over 20 new stores, and integrated another dozen or so into the company fold.  The pay wasn’t great, the hours were long, I drove 40 thousand miles in one year, I lost 35 pounds (dropping my 6-4 frame down to a 32 inch waist), and developed an intense hatred of pagers (like Pavlov’s dog, I quickly became conditioned to pager beeping = huge mess that I have to clean up).

But I managed 120 people and 17 stores that grossed about $5 million per year.  I hired and fired hundreds of people, had guns pointed at me (avoid Monroe GA at all costs), made deposits at the bank, made sure payroll was met, dealt with shady contractors, and found ways to motivate people who previously thought they had a dead end job.  I had former employees call me awful names (former girlfriends are not the only ones to do this), I got my hands dirty, plunged toilets, soothed ruffled feathers, and in one freak out moment, dealt with a 3 am phone call from an absolutely hysterical manager who was convinced her store was haunted with ghosts.  I still get chills thinking about that one. 

I learned more about operations, management, people, psychology, and motivation than anyone working a consulting gig.  That, I can guarantee. 

Deal with ambiguity

Entrepreneurs must have an ability to deal with the unknown.  I was having a bad week when I told a former boss that it felt like “I was staring into the abyss.”  His reply, “It’s only a problem if the abyss stares back.”  In other words, deal with it.  It can always get worse. 

A few years back, I started a new job with a start up.  After my second day, I joined a bunch of other employees for cocktails at a nearby bar.  As we sat at the table, I mentioned that it was great to be with a group of entrepreneurs, people who understand what ambiguity is, and how to deal with it.  Instead of getting the knowing nods that I expected, I was greeted with a chorus of rolled eyes that essentially said, “Ambiguity?  What ambiguity?  We’re funded, there’s money, there’s no uncertainty.”

A mere two months later, after our IT development firm dropped the ball on the website (and the only way to produce revenue), these same “entrepreneurs” who scoffed at notions of ambiguity, quit.  To a man, instead of tightening the belt and redoubling efforts, they quit. 

From this experience, I coined the term “expense check entrepreneur.”  An expense check entrepreneur is someone who enjoys the panache of calling himself an entrepreneur only when things are good and those twenty thousand dollar per month expense checks are cut on a regular basis.  When it comes time to produce and be accountable, they demonstrate their kitten-like intestinal fortitude and flee.

Next week

I’m running out of space for this week’s column.  Next week I’ll wrap up by covering the art of war, embracing your inner stupidity, how and when to approach investors, and a few other interesting observations and experiences from my past.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

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 startup 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) lets us exit at a healthy multiple. 

Anything short of that and we’re simply whistling in the dark.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

-Iggy Pop, 1973

The irony of finding business inspiration from a song called, “Your Pretty Face is Going to Hell,” is not lost on me.  This line, which might be one of the most percipient business phrases in history, is buried deep in the brilliant muck of the Stooge’s album, “Raw Power.” 

While Iggy wasn’t describing the business of technology, patents, intellectual property, and venture capital, the lyric does hold a lesson for those of us in those arenas: If you want to make money, you have to have something people want.  And going beyond the lyric, you have to be willing and able to deliver the goods.  It’s as simple, as base, and as animalistic as that. 

In fact, if you are good enough, the power of ideas can get people to pay you hundreds of dollars for a handful of sand.  

The Value of Ideas

Many entrepreneurs fail to raise money from investors because the entrepreneur fails to offer something customers will pay for.  The entrepreneur is so focused on the idea, that he loses sight of whether the idea is good.  This is the legendary SLAP (Solution Looking for A Problem) that we’ve all heard about.  Most of us, at one time or another (myself included), have been guilty of “SLAPing” unsuspecting investors with unfounded tales of the riches to be had by selling something no one will actually pay for.

The SLAP is usually the result of “satisficing,” which, according the college professor who claims to have coined the term, means, “implementing the first solution you think of.”  How many of us run with the first idea that pops into our brains?  For some reason, we seem to believe the first (and often only) idea we think of is the best idea.  Sometimes it is, but many other times there is a better solution out there. 

Unfortunately, the kernel of many business plans is a SLAP.  Investors, who tend to be savvy people, usually spot SLAPs from a mile away, and summarily rebuff SLAP proffering entrepreneurs with the smartly hedged send-off, “it doesn’t match our fund’s criteria.”  The SLAP proffering entrepreneur, ego bruised because VCs “don’t get it,” enters an interlude of purgatory because the VCs didn’t actually tell him “no, not a chance in hell,” and spends the next 4 or 5 years wondering the high tech networking scene in a Marley-like existence, chained business plans clanking from every limb, muttering the same musty elevator pitch to the same people who have already said “no,” or worse, are not even in a position to make a buy decision. 

Welcome to Chicago!

Yes, ideas are great.  I love creativity.  But execution is better.  People who have “great ideas” that will “completely change ‘such and such’ industry” contact me regularly.  How do I know their ideas are so great?  Because they tell me so!  That’s good enough, isn’t it?  Is your computer dripping with sarcasm, too?  Look at this recent email exchange:

Bill, I have a question, which will probably sound incredibly stupid to you -- I'm a film producer, not a big business maven -- my husband has a great tech idea which would have a hugely positive effect upon the automobile and auto insurance industries, but I can’t tell you anything about it. We need to protect the idea.

The problem? He is neither an engineer nor a true techie, so we're stuck with this idea and no clue what to do with it. Also being aware that R&D can take years (although this concept is pretty simple, really), I wanted some advice – how can I raise money, how can I start this business without taking any risk?  If you have any thoughts, that would be great.

My reply:

Funny that you sent me this note. I have a great idea that will have a hugely positive effect on the film industry. I can't tell you anything about it, and even though I have no background in the film industry, I know it will be a huge thing!

Can you help me?

By turning her question around and repositioning it in an industry she knows, I asked our wannabe entrepreneur if she saw the folly in her approach.  As I told her, everyone has ideas.  Big deal!  Value is not in the idea; value is in the execution.  The sad reality is this: Anything that you or your husband has thought of has probably been thought of by someone else.  There are very few truly novel ideas.  And just because something is a novel idea, doesn’t make it a good idea.  I guess you can say it was a “novel idea” to raise tax rates and institute protectionist trade policies as the country was sliding into a recession in 1930.  It was novel (at the time), but it certainly wasn’t smart. 

As I told our wannabe entrepreneur: The question becomes “how can you execute on this idea?”  Drilling down deeper, I asked her if she was willing to quit her day job (and the certainty of a steady paycheck), to plunge head first into a world of uncertainty and ambiguity.  If you are, I advised, then start talking to people about your vision, and don’t play the shadowy game of “I have a great idea, but I can tell you anything about it.”  While teases might bring a few moments of fun, you have to deliver the goods and have the ability to execute if you expect to create value.  

Her reply?

Your note made me smile - touché!  You're right, of course. And no, we would not be willing to give up our careers to nurture the idea through a production stage.

And yes, it's entirely possible that someone has already had the same idea and is much further along in manifesting it.  I appreciate your answer.

Ahhhhhh…another day of saving someone from the hell that is my life.  I sleep well at night. 

Entrepreneurs emerge from this purgatory when they realize there is no law dictating that entrepreneurial decision-making must be made by the brainstem only.  Once we get past satisficing, and once we get past thinking ideas are the end-all be-all of entrepreneurship, we find execution is the crux of business.  Tony Bagdy, Director of Marketing at DigitalWork, sums it up nicely when he says, “The value of an idea is only as good as the skill set and the operational understanding of the idea-meister.” 

Lightening can strike, of course, but lacking experience and know-how in a certain field reduces the odds that your “great idea” is actually workable within that field. 

Dave Baeckelandt, President of Chicago-Pacific Capital Partners, adds, “People are more important than ideas.” 

He’s right, of course, it’s people who execute on a business plan.  A great plan isn’t going to run itself and find customers.  A great plan isn’t going to stay on top of those customers to make sure they’re happy and they’re paying. Great people do that job.  It’s been said a million times by a million different people, but it is worth repeating: VCs would rather invest in a “B” business plan with an “A” team, than an “A” plan with a “B” team. 

It’s how you execute

So, how do we get wannabe and early stage entrepreneurs to focus on the finding workable ideas and finding ways to execute those ideas?  I think it starts in the business schools.  In fact, I hereby beseech all colleges and universities to immediately drop the words “commerce” and “business” when describing their educational programs.  Those words are too clean and clinical, and ultimately soft-pedal what this system is all about.  My preferred nom de ecole might be a little chunkier, but I’m holding out hope that one day I will hear following:

Employer: “What did you major in?” 

Job seeker:  “My degree is in ‘getting people to open their wallets and give me money.’”

As I said, a bit chunkier, but it gets to the heart of what business and entrepreneurship is all about: getting people to give you money for something.  It’s as simple, as base, and as animalistic as that. 

This is not to completely dismiss ideas because I’ve often said economics can be boiled down to three things: 1) Raw materials, 2) manufacturing/production, and 3) the idea that says, “I can combine this raw material to that raw material and make something else.”

Ask yourself: If you could own only one of these three things, what would you choose?  I would pick “the idea,” and most people I’ve talked to pick “the idea,” too.  If given the option of possessing two of the three things, most people add “raw materials” to their list.  This leaves manufacturing as a third place finisher in a three horse race. 

Why is this?  In recent years we’ve heard many dire stories about the loss of America’s manufacturing base.   Alarmists are telling us this is a sign of economic weakness.  According to a recent Chicago Tribune Article, “Manufacturing’s malaise retains tight grip in U.S.” (November 3, 2003), approximately 12% of jobs in the US are manufacturing, and the industry is fearful this number will be declining in the years to come.

Guess what people, it’s not getting better!   And it’s not the end of the world.  Manufacturing will continue to decline in the US, but don’t think for a moment that this is a problem. 

This is not to diminish the angst and difficulties faced by US laborers who lose their jobs, but we have to realize it isn’t our ability to make things that makes America great.  It’s our ability to create ideas, and execute on those ideas that makes America great.  Making things is merely a byproduct of ideas and execution. 

At the time of this nation’s founding, approximately 90% of the US population was involved in the production of 100% of our food needs.  Today, less than 3% of the US population is needed to produce 150% of our food needs.  Short of agrarian progressives who have been rendered to the ash heap of history (let’s see, who was that?  Oh yes, Pol Pot), does anyone really believe that we would be better off returning to the days where 90% of our population was required to barely produce a subsistence level of food?

Manufacturing is going the same way as farming.  It’s not going to disappear, but fewer and fewer people will be needed to manufacturer greater amounts of goods.  My comments are not meant as a slight to anyone who farms or is involved in manufacturing.  I saw these things because it is a fact.  Change is not unprecedented, nor should we fear change, we should simply make necessary plans (i.e., find other jobs). 

What about raw materials?

Raw materials are not needed to create wealth, not does the possession of raw materials automatically lead to wealth.  Japan has the second largest economy in the world, and their stockpile of raw materials is, well, Japan doesn’t have raw materials.  Japan has ideas, and more importantly, Japan has the ability to execute.  Japan had manufacturing, of course, but their manufacturing base is and has been going in the same direction as US manufacturing: somewhere else. 

Yes, Japan has had a decade and a half of economic troubles, but who wouldn’t pick Japan’s “troubles” over a good day in the worker’s paradise of, say, Cuba.  Ah, Cuba…a beautiful country with abundant natural resources, poorer than a dirt clod because of a system that limits their ability to execute.  Don’t believe the red herring about sanctions being the root of Cuba’s problems: Cuba has to ration bananas and other products that grow in abundance on its own land. 

Barbie Doll Economics

A few years ago I read an account of what goes into the production of a Barbie Doll.  I can’t remember the exact numbers, but they went something like this: each doll is manufactured in China for a cost of 35 cents (raw materials and labor), and retails in the US for 10 bucks. 

Sounds like a rip off, right?  Sounds like a big US company exploiting workers for big profits, right?  Digging deeper into the cost structure, the doll wholesales for seven dollars.  That means $3 per doll is used by retailers to pay workers, pay for goods and services associated with the operations of their stores, and earn a profit.  Those stores are staffed by American workers, and buy products and services from companies that also employ American workers.

Of the seven dollars each doll wholesales for, Mattel spends $6.65 worth on accounting, shipping, insurance, legal, marketing, logistics, technology, consulting, and packaging.  And yes, they earn a profit, but the vast majority of wholesale price reflects payments for services, with American workers handling the lion’s share of those jobs. Manufacturing and raw materials play a very small roll in the economics of the Barbie Doll. 

What’s the point?

Don’t worry about the decline in manufacturing.  Focus on ideas.  Focus on your ability to execute.  Don’t get suckered into believing the first solution or the first business plan you create is automatically the best way to go.  Above all else, focus on getting people to open their wallets and give you money for something. 

The raw materials used to fabricate computers are virtually worthless.  But the string of ideas that say, “I can create silicon chips from sand,” and “I can build computers using silicon chips,” and “I can sell computers to people and businesses,” are the billion dollar ideas.  

If you have the ideas, and you have the ability to execute, you too can enter the world where people open their wallets and give you hundreds of dollars for a handful of sand.  Raw materials and manufacturing are merely byproducts to your creativity and execution.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

In other words, walk like you have a pair. Have some confidence!

I bring this up because I was recently a panelist at a business plan evaluation symposium. The CEO of the presenting company gained my interest when he said, “we have a great success rate in closing new business.” After all, this is what you want to hear from entrepreneurs, that they know how to sell and get people to give them money. That they have confidence.

The CEO proceeded to shoot himself in the foot when he added, “But I don’t know how we did it. Luck, perhaps.”

Ahhrrgggghhhhh! Have some confidence! I find nothing wrong with an entrepreneur touting his incredible sales ability. This CEO would have been better off saying, “We have a very strong track record of closing sales. I know that 9 out of 10 sales calls we go on will result in a sale, because we do our homework, we only deal with decision makers, and we screen to make sure they actually need our service and they have the ability to pay for it. I don’t waste my time with companies that don’t need our wares, and I don’t waste my time with those who cannot pay. I’ve always had this ability, and better still, I have a knack for teaching my employees to do the same thing.”

That sounds better than, “I dunno,” doesn’t it?

The CEO’s self-deprecating style may have been a sop at false modesty. Or perhaps his sales success (to date) has been due to dumb luck. Neither is a good thing. In business, as in life, false modesty is a disingenuous trait, and while it is definitely better to be lucky than good in some things (golf, for example), asking investors to bet on you because you are lucky is not a good thing! Self-confidence speaks volumes.

Resiliency

Self-confidence is different from luck because confidence means you are resilient. Anyone who’s played craps knows how quickly luck can leave you. When Sinatra sang, “Luck Be a Lady Tonight,” he was signing about a pair of dice, not a dame!

Self-confidence means you have the ability to pull yourself up from the floor after you’ve been decked or after your biggest client has fired you. Self-confidence is the ability to pull yourself out of bed and face another day of risks and disappointments, because you truly believe if you work hard enough and plan well enough, you will be successful. Self-confidence means you believe in yourself, in your abilities, and your vision, even when others cast doubt.

Luck is not resilient. Luck runs out on you without warning. Business models predicated on luck are doomed to fail. Think about how long it would take to have your business plan rejected by investors if you said, “Our sales model is based on luck.”

Ironically, when you are successful, the knee-biters of the world will snipe at you, saying you’re lucky. It’s been said before: Luck is the intersection of preparedness and opportunity. In other words, your hard work and preparation put you in a position to be “lucky.”

Confidence is contagious

I love playing poker against someone who is convinced he’s going to lose his money – because he invariably does. Anyone who plays poker is a keen study of body language. You’re looking for “tells,” that is, nonverbal cues that tip you to the hand of your opponent. People who are convinced they have no chance of winning simply emit an aura of negativity, and become easy targets to defeat. Those who believe they will win, the self-confident ones, emit a different aura, and even if they are holding a poor hand, they are going to control their actions and do nothing that “tells” other players the truth about their weak holdings.

Someone who believes he is born to lose…will lose. He has no chance of winning. Someone who believes he can overcome any odds stacked in front of him, stands of chance of doing that.

Belief in yourself, believe that you will pick yourself up off the floor if you get knocked down, and more importantly, communicate this confidence to your troops with every action. If you lack confidence, you will be surprised how easily other people will be able to read your “tells.” If you truly believe in yourself and your business, your employees will pick up on this attitude. Confidence is contagious. People want to be with winners, but they need a reason to believe. Give them that reason to believe in you and the opportunity, and they will find the confidence to believe in themselves. Getting into any game, be it poker or business, with the attitude that you’re going to lose, is a sure ticket to failure.

Overconfident?

If I had to choose between overconfidence and lack of confidence, I’d choose overconfidence every time. At least with overconfidence you have a chance of success. Those lacking confidence will rarely win.

Don’t be afraid of touting yourself, your company, and the skill set of your people. If you don’t believe the people in your organization are the best, bite the bullet and get rid of them. You have to believe in yourself, you have to communicate this to everyone, and you have to communicate you believe in your team. It’s the only way.

If you are waiting for someone else to tell you that you have deep reserves of self-confidence that you don’t know about, you’ll be waiting a long time. Self-confidence starts with you. The rest will follow.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

Using my dead-on Mongo impersonation, I typically reply, “Dunno.”

With all this talk of backwater and wasteland, I find it especially fitting that Wheaton based In-Pipe Technology, a company that helps municipalities and companies treat wastewater, received a bona fide, venture capital investment in November 2003.  But before In-Pipe secured the funding, the company went through what Dan called, “Bootstrapping 101.”

Introducing Dan Williamson

I’ve had the great honor of knowing CEO Dan Williamson for the past 18 months, and I know first hand the ups and downs he went through securing this round of funding.  I recently met with Dan, and after the cobwebs of the multi-martini celebration cleared my brain, I gave him a phone call. 

For those of you who plan to seek venture capital, you might want to rethink those plans.  As Dan said, “if I have ever have to raise venture capital again…it means I blew it!”  Dan is very appreciative of his venture capital partners, but he wants the company to be able to stand on its own.  I have no doubt AsiaWest, the main investor in the November round, would agree with that sentiment.  Profitability and growth are good things.  Raising venture capital is difficult.  

And if you still plan to seek venture capital, and if you don’t already play golf…learn to play golf!  This goes double for all you service provider types.  My sage business advisor told me a long time ago: The real business deals get done on the golf course.  Keep reading, and you’ll see where golf figures in this story. 

The In-Pipe Story

In-Pipe produces revenue.  In-Pipe has patents.  In-Pipe solves a real problem.  The CEO is highly skilled in his field, and has spent his entire professional career in the industry.  In-Pipe has a highly scalable revenue model that provides monthly recurring revenue. 

From the start of the process in summer 2002, In-Pipe Company took 18 months to raise venture capital.  Actually, the story of In-Pipe’s quest for venture capital goes back even further: Spring 2000.  But before we go through the story of raising capital, let’s review what In-Pipe does. 

A Truly Crappy Company

It is not an insult to call In-Pipe Technology a crappy company.  After all, if you spend a few hours with Dan Williamson, you’ll know more about what happens after you flush the toilet than you even thought possible.  In-Pipe deals with what Roe Conn and Garry Meyer of WLS call “big potty.”  Still don’t get it?  Think of Tim Robbins’ 500-yard crawl to freedom in The Shawshank Redemption. 

The In-Pipe method introduces a proprietary mix of naturally occurring bacteria into sewer lines to speed the break down of human waste (politely called “sewerage”) before the waste water reaches treatment plants.  In addition to greatly reducing odors, the In-Pipe method reduces the amount sludge and that needs to be removed from treatment facilities, and it reduces the amount of energy required to treat wastewater.  Believe it or not, this is a major problem in America, as well as most of the world. 

As an example, one of In-Pipe’s clients, a Chicago area municipality, was facing steep EPA fines because the effluent being released by the municipality’s two treatment plans into one of our local rivers exceeded EPA limits.  Nice, huh?  To remedy the situation, the municipality was spending $12 million and taking 2 years to build a third treatment facility.  Unfortunately, due to rapid growth in the area, the engineers knew the new facility would not be enough to bring the municipality into compliance.  $12 million of taxpayer money spent.  2 years invested.  And the city was still facing big fines.  Fines paid by the taxpayers, of course. 

The municipality learned about In-Pipe, placed a call, told Dan about the problem, and asked, “If we use In-Pipe, how long before we’re in compliance with the EPA?”

Dan took a look at the data, and said, “About six weeks.”

Five days later the deal was done, and In-Pipe added another $25 thousand a month of its stream of monthly recurring revenue.  I told you the revenue model scales.   In-Pipe never starts a month at zero.  For a crappy little company, it sure is a nice deal!

Back to the Funding

You remember the spring of NASDAQ 5000, don’t you?  The world was replete with over-educated expense check entrepreneurs, and everyone and their dog was raising venture capital.  It was in this environment that Dan presented at one of the first Prairie Angel meetings.  In-Pipe was still pre revenue at this point.  A full house was anticipated for the subsequent follow-on meeting.  Unfortunately, this meeting coincided with April meltdown of Nasdaq, and everyone was suddenly worried about their current investments.  Potential investments took a back seat.  

The world changed, and Dan decided to self-fund the company.  Fortunately for Dan, he was successful in his last company, and was able to sell that company to a large industry player. 

About a year later, as sales began to ramp up, Dan began investment discussions with a company that was affiliated with a Fortune 10 company.  Things looked good.  The other company “got it.”  They had plenty of money. 

But on the third day of negotiations, Dan (and his partners) decided to quash a potential deal.  They went with the “tummy technique,” e.g., their gut feelings.  In Dan’s words: “It just didn’t feel right.”

Turns out Dan’s gut feeling was right, because the Fortune 10 company in question was none other than Enron.

From there, In-Pipe presented at venture capital conferences in Chicago, Indianapolis, New York, and other locations.  Sales continued to increase, hitting about $30K per month in late summer 2002.  The company still was not profitable, but Dan felt profitability was only a matter of time.  And money.  While Dan had some money from the sale of the other company, his funds were not a bottomless pit.  Some angels came in and provided some operating funds, but this was still not enough to take the company to profitability. 

These are the days that entrepreneurs wonder if the gamble will pay off.  All entrepreneurs have them.  I think it occurs every day.

The Push to Toronto

By fall of 2002, Dan was feeling discouraged.  In-Pipe hadn’t yet raised enough money to get to breakeven, and Dan was beginning to doubt whether presenting at all these far flung conferences was really worth it.  According to Dan, I provided him with some advice, advice that he actually followed.  This makes me smile, because my career is littered with the remains of people who did not listen to my advice – myself included in that list.  So I was a bit surprised when Dan reminded me of what I told him when he was debating whether or not he should cough up the money to attend the conference in Toronto:

 “If you don’t go up to bat, you’ll never hit the ball.”

Long story short, Dan went to Toronto, presented to the conference, and In-Pipe was selected, “Most Promising Company” at the November 2002 CleanTech conference.  Of the four angels who eventually invested in In-Pipe, three came from the Toronto trip.  And the Toronto trip began the yearlong odyssey with AsiaWest, In-Pipe’s first venture capital investor.  But before we get to a successful close of venture capital, In-Pipe needed more money.  Where to go?  How about your local friendly neighborhood bank?

Bankers believe in hometown success story…Don’t believe it

While Dan eventually succeeded in obtaining an investment from AsiaWest, the process took a full year, and Dan needed money to feed his growing company.  Thinking a line of credit would help him manage his receivables and payables, Dan looked to the bank that handled In-Pipe’s account.

 “The Wheaton branch of La Salle Bank choose not to grow with a local startup company…even when we agreed to personally guarantee a line of credit,” said Dan, as he recalled the trials and tribulations of In-Pipe’s scramble for money.  “And you can quote me on that.”

I just did.  Some statement!

That statement is even more telling when you considered what happened shortly after Dan and In-Pipe were rebuked by “the bank that works.” 

Take Up Golf

In the summer of 2002, shortly after getting the “no” from LaSalle, Dan was playing in a charity golf outing for Wheaton High School, and discovered he was paired with some bankers from Northview Bank & Trust.  On the first hole, as the foursome was going through the customary “so, what do you do” conversation, Dan stated: “I’m looking for a bank that wants to grow with me.”

The bankers essentially said “great, let’s talk after the round.” 

The foursome went on to have a rollicking round of golf, and a great time was had by all.  When Dan called them the next day and reiterated his first comment, the bankers said, “oh, you were serious.”

 “Yes, I want to move my account and get a $50 thousand line of credit.”  Northview took the time to understand the business, provided the line of credit and Dan moved In-Pipe’s account.  The line of credit of instrumental in helping Dan hold on until the AsiaWest deal closed in mid-November. 

Turns out Dan is such a good credit risk that the bank wants Dan to move his personal portfolio to Northview. I guess there are two key takeaways in this section: Take up golf, and do your homework.

The Close

The round of funding, led by AsiaWest, closed on November 14, 2003.  This was one year to the date of In-Pipe’s presentation at the Toronto conference.  One year of ups and downs, of sweat and worry, of thinking the deal was in the bag, and then thinking the deal was dead.  One year of seeing the valuation go on yo-yo diets: up and down and up and down.  One year of worry and uncertainty.

The Final Tally

Today, In-Pipe has about 15 clients, all of whom have long-term contracts that pay In-Pipe monthly recurring revenue.  Every client that has come to the end of the initial contact has renewed its contract, and depending on the size of the next deal(s), Dan estimates In-Pipe only needs 1 or 2 more contracts to reach break even. 

November 2003 was In-Pipe’s best month to date, with over $100K in sales.  That’s up from $40K a month at the same time last year.  Dan estimates 2003 will finish with about $1 million in revenue (a $1.3 million run rate), and figures he can grow revenues by 250% in 2004. 

Tellingly, and perhaps disappointingly, most of In-Pipe’s investors have come from outside of the Chicago area.  Here’s the final tally of investors who believe in Chicago-area In-Pipe:

First round angels: Three individuals: St. Charles IL, Bloomington IL, and Austin TX.

Venture Round: Led by AsiaWest, which is headquartered in Connecticut, and is committed to developing US technology to address China’s environmental concerns.  In-Pipe met AsiaWest in Toronto.

New angels: Four individuals: Lighthouse Point FL, Winnipeg Manitoba, Denver, and Vancouver BC.   Three of these four angels originated from the Toronto conference.

Eight different investors, with only 2 from the Chicago area, and that’s if you ignore the 2 hour drive to downstate Bloomington.  No editorializing here, just the facts.  I’ll let you decide what this means.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

This happened to me last week, and I’m sure we’ve all had days like these.  I was standing on the North and Damen El platform, making my way to my swank Loop office.  While in the process of returning my CTA fair card to my pocket, the darn thing flipped out of my hand and fell onto the El tracks.  It still had over sixteen dollars of credit.   

Once downtown, I bought a cup of coffee to soothe my lightened wallet.  Upon entering said swank Loop office, I promptly dumped 16 ounces of black coffee on my desk, resulting in 20 minutes of mopping…with Kleenex.

Some of the coffee got into the cradle for my PDA, which prevented my Palm Pilot and my computer’s Outlook from synchronizing.  I periodically fiddled with the cradle, finally getting it to synchronize a few hours later.  When I checked my Palm Pilot for a contact, I discovered that my entire contact list was gone. 

That’s over 1700 names, email addresses, and phone numbers.  Gone.

This is merely a bad day, and it can happen to anyone.  And, yes, I had a back up for my contacts.

Version 2.0 of the Errant Entrepreneur: I’m a Moron and Don’t Know It

The above story is only a retelling of a few bad things that happened to me one day.  In the grand scheme of things, my little mishaps were simply that: little mishaps.  My bad day pales by comparison to the bad days had by many entrepreneurs, because at least I knew I was having a bad day.  Too many entrepreneurs have bad days, weeks, years, or careers, but because of the civil society we live in, no one tells them otherwise. 

Here are few traits of the Errant Entrepreneur.

Mine, mine mine!

This is also known as, “Not playing nice-nice with other kids.”  This is like playing cards with my sister…when she was four.  My sister would deal out a bunch of cards, look at her cards, and based on what she saw in her hand, make up the rules of the game. 

“Jacks are good!  If you have a Jack, you win.  Do you have any Jacks?” 

“No.”

“I win!  Let’s play again!”

While this was cute kid stuff, playing this game as an adult is a recipe for disaster.  I’ve worked for and with entrepreneurs who were constantly shuffling and reshuffling the deck.   I recall cautioning one entrepreneur, who was in the process of recapping the company (by issuing himself more shares in exchange for some dubious algorithms he had written) that he was going to alienate the old investors, and these were people he was going to need because the company was almost out of cash.  I tried the classic, “would you rather have part of something, or all of nothing?”

Unfortunately, he chose the latter.  I left shortly after that exchange, and the last I heard the police evicted him from the office by putting all the furniture and equipment on the sidewalk.  This happens when you change the game as it’s being played.  You alienate your investors and they cut you off.  Say hello to your basement!

SLAP

To my many loyal readers of VC101, SLAP means “Solution Looking for A Problem.”  I can’t lay claim to inventing the concept, but I’m pretty certain the acronym is mine.  Another way of defining the SLAP is to realize the “greatest mousetrap” theory is flawed.  The world will not beat a path to your door if you are trying to sell the “world’s greatest mousetrap” to a target market that lacks a pestilence problem. 

To understand the SLAP, let’s look at the motivation of the buyer.  If you do not have a headache, will you be willing to pay $10 for the world’s greatest headache cure?  Of course not, you don’t have a headache, why would you need a cure?

Digging down deeper into the world of the SLAP, we have the case of the entrepreneur offering a product that he personally likes and would buy.  While the concept of “following your bliss” may often be a good idea, it can too often lead to ruin, too.   Instead of spending some time (and money) doing research to determine if there’s a market for the product, the entrepreneur plows ahead, the torpedoes be damned, and plunges headfirst into a world of guesswork and gut feelings.  An empty pocketbook is the typical end of this road. 

Pricing

Many entrepreneurs get into a business selling a product that they one bought.  While this is often a good thing (having industry experience is usually helpful), too many entrepreneurs make the mistake of pricing the product as if they are the buyer, not the seller.  As a result, they often talk about offering the product at a below market price.  They don’t realize the value of their product because they can’t get themselves out of the mindset of a buyer looking for deal.  When you’re the seller, you should be looking for a deal for yourself.  And in our capitalist system, that means high prices!  If people are willing to pay, charge them the full price.  Make Milton Friedman proud.

The Numbers Game

I recently had breakfast with Jeff Coney from the Evanston ITEC.   Since Jeff is an actual CPA (unlike me, I only play one on TV), it didn’t surprise me to hear Jeff say, “Numbers are a statement of who an entrepreneur is.”

Jeff has seen far too many plans where, in his words, the entrepreneur is asking for money using a set of financials that do not support the story.  Financial projections are often/always an area where entrepreneurs can use assistance.  If you don’t understand accounting, make sure you get someone on your team who does.  If you don’t have solid numbers that make sense, people who understand these things will simply conclude that you are doing nothing more than trying to hoist some flimflam on unsuspecting investors. 

Listening Skills

Another Jeff Coney pet peeve is entrepreneurs who do not listen.  As Jeff told me, “having listening skills means you’re coachable.”   So many entrepreneurs shoot themselves in the foot because they don’t listen to people who know more than they do.  I have seen this at numerous MEF meetings, among other events. 

A few months ago, after seeing an MEF presenter make the all to frequent entrepreneurial mistake of claiming his company only needed a $500,000 investment to grow into a $100 million a year business in five years, I asked Jerry Mitchell if he coached the presenters and told them not to say stupid things like that.  It was a rhetorical question, because I am certainly aware that Jerry knows companies do not grow that fast with that little investment.  He simply shook his head and groaned.  With an exasperated look, he essentially told me, “I tell them!  They nod their heads and agree with me.  They make the changes to their presentation.  But when they get on stage in front of an audience, they go back to their old bad habits.”

If a potential investor doesn’t believe you’re coachable and doesn’t believe you’ll listen to his sage advice, guess what?  You’re not getting an investment.  

Quitters never win…and losers with bad ideas who never quit are morons

The development of entrepreneurship as an academic discipline has resulted in too many people believing the adage that “quitters never win and winners never quit” actually applies to entrepreneurship.  But guess what kiddies? 

THERE IS A TIME TO QUIT! 

There is a time to realize that your idea is a stinker, no one likes it, no one will pay for it, and the more you try to sell it, the more you’re burning bridges with people who are in positions to help you. 

In my early 20’s, I spent a few years working for a world famous theater company.  Let me tell you about the theater business.  Outside of buying a lottery ticket, pursuing a career in acting is about as long of a shot as you can take.  I have incredible admiration for those who make it as actors, because the odds are against you.  

Per union rules, the theater had to host open casting calls twice a year, and let me tell you, did the people line up!  Hundreds of people lining up for the chance to recite some overwrought passage from some overwrought Chekhov play.

And there wasn’t even a part in the offing.  They were going through the trouble with no tangle goal in site.  I always found this rather sad. 

I recall talking with the casting director, who told me she would see the same sad sack actors year after year after year.  There was part of her who wanted to tell these losers to give it up, that they didn’t have a chance of ever making a career from acting.  She wanted to tell certain people that they were awful, to move on. 

Instead of being brutally honest, she simply smiled and told them, “thank you.”  She did this for a reason: In the event some sad actor made it big, she didn’t want to be known as the person who told that actor that he “had no chance in hell.” 

As a result of her civility and desire to protect her name, hundreds, if not thousands of actors went about their business hoping against hope that their big day will come. 

In Chicago, we don’t have open casting calls for entrepreneurs, because, thankfully, we don’t have a union for entrepreneurs.  But we often have the same entrepreneurs trying to sell the same stuff to same group of people who aren’t buying, and because of civility, we are not telling our sad sack entrepreneurs that they don’t have a chance in hell. 

Brutal, I know.  But I think all entrepreneurs need to look in mirror from time to time, and be brutally honest with themselves because no one else is.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

CHICAGO – VentureWire recently reported that 2003 venture capital investment in the U.S. was about $15.3 billion, which is more than 25 percent lower than 2002’s figure of $20.6 billion. Compared to the salad days of 2000, venture capital investment has fallen by more than 80 percent.

But do not worry, little buckaroo, because 2003’s figure is still larger than 1998’s $13.5 billion figure. Things are never as dark as they seem.

The Nasdaq is up more than 50 percent for 2003. A trickle of IPOs started. If the market continues it upswing through 2004 (it will), the IPO market will pick up and guess what this means? It means VCs will begin to see exit scenarios and 2004 will see an increased amount of venture investment – that is, only for very qualified companies. The same rules apply.

1.            Early stage, wannabe and otherwise clueless entrepreneurs still call me, and believe it or not, people still believe VCs will invest in idea-stage, pre-revenue companies.

2.            While the phone does still ring, now it is a VoIP (voice over Internet protocol) phone.

3.            There is a competitive disadvantage to technology. It’s better to utilize cutting-edge technology than it is to create it.

4.            My friends don’t read my columns so they won’t know if I mock them. Nice job going 0-14 in fantasy football, Geek.

5.            Even though they do not read my columns, old friends send the occasional e-mail. Regrettably, instead of invitations to swank new year’s eve parties, I get the “you gotta talk to this guy because he has a great company” e-mails. See No. 1.

6.            It’s a thin line between persistence and harassment. Know if a VC actually invests in your industry before you contact him.

7.            In the immortal words of Dean Wormer: “Fat, drunk and stupid is no way to go through life, son.” Translated to VC speak, if you aren’t prepared and if you don’t understand how the game is played, you are wasting your time and the time of anyone you contact. Stop it.

8.            Trying to sell services to people and companies lacking money is a poor strategy.

9.            Ron May has the table manners of a Bolshevik.

10.          Congratulations to my buddy, John, for becoming a Chicago cop at age 37. When do I get to shoot the gun?

11.          If you say: “I will quit my job upon funding,” you might as well say: “I will not get funding.”

12.          If you say: “Seasoned management will be hired upon funding,” you might as well say: “I will not get funding.”

13.          If you say: “We face no competition,” you might as well say: “I am a moron and I haven’t done my homework.”

14.          If you say: “We only need 10 percent of this $50 billion market and we’ll have a $5 billion company,” you might as well say: “This is true for us and the 6 billion other people in the world.”

15.          Despite what my parents told me when I was a child, streets designated “snow route” are not designed solely for me.

16.          I know of many Chicago-area entrepreneurs and “managers” who should watch The School of Rock, which, contrary to its reputation as a formulaic music movie, actually is a first-rate primer in Shackleton-esque managerial and motivational techniques. I’m dead serious.

17.          There are no entitlement programs in venture capital. You won’t get funded because you exist (unless your mom is a VC).

18.          Those with the money hold power: Entrepreneurs need VCs more than VCs need entrepreneurs.

19.          Do not talk about what you’re about to do. Talk about what has been accomplished. VCs are not impressed with “we’re about to sign a contract with Cisco.”

20.          Create financial projections from the bottom up and the top down.

21.          Solutions looking for problems are poor venture capital candidates.

22.          Scale means the cost of selling one widget is the same as selling 100 widgets.

23.          Recurring revenue is a beautiful thing.

24.          I didn’t know there was a system to count years until I was in second grade and the girl in front of me explained what “1974” meant. That was the last time numbers baffled me. Now, names and faces confuse me.

25.          Watching my dog try to drink Lake Michigan, I realized there’s a thin line between thirst and stupidity.

26.          My favorite Chicago VC turn down of all time is: “Apparently you’ve confused me with someone who cares.”

27.          My favorite west coast VC turn down of all time is: “For your protection, the business plan you submitted has been professionally destroyed.”

28.          Don’t confuse activity with accomplishment.

29.          No matter what you do in life and business, you’re going to irritate someone. Don’t worry about it.

30.          Venture capital financing is the most difficult method there is to funding a company. You’ll pull your hair out, you’ll develop ulcers, your spouse will leave you, you’ll have to give up way too much of the company and it will probably take a year or more. There are companies in Chicago that refer to their days of venture capital hunting as “that year without revenue” because the hunt for venture capital often becomes an all-consuming-end-unto-itself search for validation. Nascent companies focusing on sales is a far better strategy.

31.          2004 will be the year for the Cubs.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

Another way to say scalability is to say efficiency.  Business unfettered by the mindless (but well meaning) minions of red tape will constantly search for increased efficiency.  The results of this ceaseless search often include outsourcing, mergers, and downsizing, all of which usually mean job cuts in the good old US of A.  A look at recent business headlines reveals this grime reality:  IBM will outsource nearly 5,000 IT related jobs to India; The JP Morgan/Bank One merger will result in 10,000 layoffs; Kodak will cut up to 15 thousand positions. 

India, in particular, is receiving plenty of press about the trends of outsourcing, and when you consider that we are being bombarded with story after story about the loss of jobs stateside, things look dire.  

So, what should we do?  Should we institute barriers to trade?  Let’s see, we enacted the Hawley-Smoot Tariff Act in 1930 to protect American jobs.  The result of this protectionist measure was more unemployment, not less.  The Great Depression didn’t reach its nadir until 1932 or 1933.  Things got worse, not better, when Uncle Sam steps in and tries to save jobs.

“OK, Bill,” you say, “I’m with you.  Tariffs are a bad thing.  So what should we do?  Change our buying habits?  Change our lifestyle habits?”

Think about that one?  With the exception of my technology-challenged mother, how many of us are willing to give up our digital cameras and return to film…so we can save the jobs of those 15 thousand Kodak workers?  After all, the main reason for the Kodak cuts is due to the shift away from film to and into digital photography.

Not me.  And I suspect most of you are unwilling to change your lifestyle so other people can keep their jobs.  We like the ease and, dare I say, efficiency, of digital cameras.  The fact that 15 thousand people will be out of work?  Not my problem, pal!

Probably the only time I found myself in agreement with former Clinton Labor Secretary Robert Reich is when, writing about job loss and changing economies, he said, “America also used to have lots of elevator operators…”

What a great, sapient, way of explaining this economic reality. 

Jobs shift, jobs change, economies grow and adjust.  This often results in ambiguity and uncertainty.  Then again, isn’t the nature of entrepreneurship ambiguity and uncertainty?  Isn’t the nature of what we hope to do in business and entrepreneurship predicated of finding new ways of doing things fast and cheaper?  Isn’t that what VCs want to invest in?

We don’t miss the days when 90% of our population was required to produce 100% of our food, do we?  How many of us, the fully infected gadget culture of instant wealth, would be able to handle life on a farm?  Subsistence farming?   I don’t think so. 

We don’t miss the millions of farm jobs that “disappeared” during the past 200 years.  As former secretary Reich pointed out, we don’t miss the elevator operator.  So why should we miss the IT jobs that are going to India?  Instead of griping about job loss, outsourcing, and other worries, let us be thankful we live in a society that allows capital, people, and ideas to freely flow where those resources are best utilized. 

And instead of being merely thankful, let’s take advantage of the fact that all of us have the opportunity to become millionaires.   Let me repeat that: we all have the ability to become millionaires.  We all have the freedom to live life as we see fit.  We all have the ability to make things happen for ourselves.  We don’t have to wait until some tinhorn bureaucrat says it is “OK” for us to proceed.  In keeping my column “fair and balanced” (since I’ve already quoted a democrat), I’ll close by paraphrasing something Ronald Reagan once said: Individuals have the right to live like kings in US because they have the ability to earn that living. 

All it takes is hard work and the ability to out think your competition.  Embrace changes, embrace new technologies, and try to find ways to leverage those changes to benefit you.  The system is set up for us to win, we just have to believe in ourselves…and execute. 

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

Whew, that’s a rather divergent grouping of topics.  Let’s dive in.  A Google search for the term, “included, but not limited to” produced over 5 million hits.  This is obviously a pretty common phrase -- dare I say, a clichéd term?  I used it two weeks ago while preparing a proposal for someone, and it got me thinking that this term nicely sums up the nature of entrepreneurship, and by proxy, the world of venture capital.  “Including, but not limited to” sums up the ambiguous nature of entrepreneurship.  If you want to play, you better be able and willing to wear many different hats.

But you better make sure you can tell you’re wearing the right hat…and the right time.

Heliocentric…or egocentric?  How about the Path of Stupidity?

Nicolaus Copernicus was a Polish astronomer who lived in the 16th century.  As much as I wish I could tell you he invented pierogi and founded the Zywiec brewery, he did neither.  Instead, Copernicus hoisted upon the world the novel concept that the earth was not the center of the universe.  This caused much consternation and gnashing of teeth for the followers of Ptolemy.  Ptolemy, after all, had asserted the earth was the center of everything.  After learning their idol’s earth-centric view was incorrect, the Ptolemy fan club disbanded and each former member swore an oath to never venerate someone whose name starts with two awkward consonants. “Thank goodness that SOB died a few millennia ago,” many of them were rumored to say. 

Before Copernicus, astronomers had a difficult time explaining retrograde, the apparent “loop-de-loop” motion of the planets as compared to the steady backdrop of the stars.  Based on their Ptolemaic dogma, these astronomers had to create ever more complex systems to try to explain the motion of the planets.  But no matter how much time and energy they invested in adding more and more layers of complexity to their model, their model never really worked.

Stay with me, I’m about to make a point.  Two points, actually.

1. After our friend Copernicus pointed out the obvious, that we inhabit a heliocentric universe, where the sun is in the middle and all planets (including the earth) orbit it, astronomers found it very easy to construct a model that shows the movement of all the planets.  In other words, the Ptolemaic process of adding layer upon layer of complexity to a system that was fatally flawed was nothing more than a vigorous walk down the path of stupidity. 

2. Self centered thought is usually the hallmark of children.  Children lack real life experience and have little or no ability or inclination to engage in introspective thought and self-criticism.  Because they lack these things, children tend to put themselves in the middle of everything: the world revolves around the child. 

I mention these seemingly divergent topics for a reason: Far too many early stage entrepreneurs are guilty of taking the Ptolemaic approach to their business “idea” and resulting business plan.  In other words, everything revolves around the idea and the plan.  No matter if the crux of the plan actually works, makes sense, or features a target market that will pay for the product, far too many entrepreneurs are guilty of plowing head first into a world of, “if it doesn’t work, I’ll just jury-rig it by adding another layer of complexity.”  This is called the “path of stupidity.”  All points within the path make complete sense, but the problem is the path is pointing in the wrong direction.

Further, too many entrepreneurs put themselves squarely in the middle of the venture capital world.  They can think of no other alternatives to their solution, and as a result, they often have a tough time grasping the concept that their “great idea” is merely the over abundant flora of VC’s email and snail mail systems.  As one Chicago VC recently told me, “We probably look at over 3000 plans each year, and we typically make less than 10 investments per year.”  Like children, too many entrepreneurs just don’t get it: Entrepreneurs need VCs more than VCs need entrepreneurs.

Financial models

All this talk about models leads up to one of the most over looked parts of entrepreneurship: the financial model.  Entrepreneurs can screw up their chances for funding in many ways when it comes to the financial model.  For example, just because your financial model kicks off enormous amounts of revenue and profit from a small amount of investment capital, doesn’t mean you have an idea that works!  In fact, most investors will jettison a plan that features a model that grows from zero to $500 million in sales in 5 years with only a single solitary investment of, say, $2 million.  Please repeat the mantra: If you show a financial model that claims you will grow from zero to $1 billion, or $500 million, or even $100 million in five short years, with only a very small amount of investment, you are merrily cascading down the path of stupidity. 

A few weeks ago, Darrell Williams from Du Sable Capital joined me at my usual lunchtime haunt, the Northside Cafe.  While we ate a very healthy lunch of bacon cheeseburgers and fries, we discussed a number of topics, and not surprisingly, we talked about financial models.  Darrell mentioned four constraints in putting together financial models: rate of return, the amount of leverage the operation supports, the time it takes to get to break even, and the impact of dilution on shareholders. 

Essentially, a given amount of money can only grow to a certain size in a certain period of time.  The longer it takes to get to breakeven, the more money the entrepreneur will have to raise, and the more the entrepreneur will be diluted.  If you have a tough time grasping the basics of accounting, it is time to take a refresher course at a local college.

Lazy Manager Rule

As much as I was impressed with Johnny Depp’s spot-on Keith Richard’s impersonation in “Pirates of the Caribbean, “ it was Bill Murray’s character in “Lost in Translation” who proffered my favorite recent quote:

“The more you know who you are, and what you want, the less you let things upset you.”

This is the “Lazy Manager Rule” to a tee!  In other words, be lazy.  Keep it short and to the point.  Don’t get bogged down in things that don’t matter.  Don’t let things bother you.  Life is too short to get hot and bothered by thing after thing.  Chill out, dude, and let laziness reign.

I’m saying this with tongue in cheek, of course, but if things are getting too complicated, perhaps your business model is starting down the path of stupidity.  If you have to constantly stand over your employees and correct their work, find new employees.  If you are repeating yourself, if you are repeating steps, over and over again, find ways to eliminate those steps.  You should be driven by maximizing your efforts, not spending a maximum amount of time getting that effort.  If you know what you want, if you know what works, you won’t get bent out of shape.  You’ve avoided the path of stupidity.  Embrace your inner-laziness and get it done with a minimum of fuss. 

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

One hoop in the money raising process that far too many early stage entrepreneurs think they have jump through is the venerable private placement memorandum (PPM).  A search of Google yielded approximately 9,000 results, and a quick scan of some of the sites included, “An Introduction to Private Placement Memos,” “Sample Private Placement Memorandums,” “We Will Write Your PPM,” and so on. 

So, what’s going on here?  Is this something early stage entrepreneurs should explore?  Is it worthwhile?  Does it help the search for cash?

Capital seeking early stage entrepreneurs…here’s the dirty little secret about the PPM: Don’t waste your time.

Based on copious amounts of study and firsthand experience, your humble columnist has identified four reasons why so many early stage entrepreneurs become infatuated with the PPM.  The reasons are:

1.     Confusing activity with accomplishment

Hiring an attorney to draft the PPM will involve time.  While the attorney will do most of the heavy lifting (although he will largely rely on boilerplate legalese), you will be actively involved with the process, making decisions about valuation, share allotment, stock prices, the business plan, the projected financials, and so on.  All of this requires work, work requires time, and if we spend time working that means we are doing something constructive?  Right?  Of course not.  It is a waste of your time.  You’ll be better off watching TV.

2.     Confusing completing a PPM with completing an S1

In the back of their ever-optimistic minds, I think that entrepreneurs must believe that completing a PPM actually means something.  A PPM without actual (and good) operating results is worthless.  It is merely a very expensive exercise in legal paper shuffling.  Remember the phrase track record, because you gotta have one, and it’s gotta be a good one.  It’s a chicken and egg thing.  What came first, the company’s track record of revenue growth and predictable earnings, or the stack of impressive looking legal documents?  Entrepreneurs often make the mistake of forgetting which needs to come first.  With the exception of the freak years of 1998 to 2000 (when the Nasdaq became a public market masquerading as a ‘friends and family’ investment clearinghouse), companies that raise money by using those fancy-pants legal documents (be it an S1 or a PPM) do so because the company is already a going concern with and operating history.  

3.     Path of least resistance

Early stage entrepreneurs need to stay busy, they have to do something.  For many entrepreneurs, calling a lawyer and forking over the money to construct a PPM is actually easier than calling people and asking for their business, or their investment money.  It is easier to hire someone than it is to get someone to hire you. 

4.     The New Shiny Thing (NST)

The NST syndrome affects far too many early stage entrepreneurs.  An entrepreneur with NST has a short attention span, and is constantly jumping full bore into any and everything that is new.  I’ve seen far too many entrepreneurs do this.  It reminds me of my dog, actually:  “What is this?  I don’t know, but it must be great!  I think I’ll spend the rest of the day sniffing it.”   While this is kind of funny, it actually sends a very bad message to other people: “I do not place any value in the things and people I already know.  Instead, I place value in things and people I do not yet know.”

At the end of the day, the early stage entrepreneur who frets and fritters away his time putting together a PPM is merely cascading down the path of stupidity.  He is falling for the big fallacy: Thinking this stack of papers is actually worth something.

OK, enough entrepreneur bashing, tell us what money people think of PPMs.  Won’t they think a professionally prepared PPM means the entrepreneur is a sophisticated person who is serious about business?

The short answer…no!  Just because you have a nice looking, and nicely worded document at ready disposal, does not mean you have a venture worthy plan.  Remember Snow axiom #47: No amount of spit and polish will make a bad idea compelling. 

PPMs can also have the opposite effect with sophisticated investors.  Instead of thinking the entrepreneur is sophisticated, they will reject the PPM out of hand as a sign that the entrepreneur is a clueless twit. This is similar to the stereotype of the country bumpkin putting on his grandpappy’s 1880 suit, replete with coattails and a top hat, driving into the city on a tractor, expecting to be considered a sophisticate because he’s wearing a suit and driving a horseless carriage.  If you are an early stage entrepreneur and you hire an attorney to draft a PPM, you will be considered a rube.

Sophisticated investors balk at PPMs because PPMs layout the terms of the deal, and sophisticated investors want to set the terms.  They want to write the contract, not agree to a contract that your attorney wrote.  Similar to the fact that power lies with the person with the money, the power lies with the person who writes the contact. 

What should we do, oh wise one?

Here’s a novel idea.  Instead of incurring all kinds of legal fees to produce a worthless document, spend your time hunting down investors for your dream.  Talk to your friends and family.  Look for wealthy angels by hanging out at posh country clubs (learn to play golf).  Hit up your dentist...or any dentist.  Or any doctor.   Another dirty little secret in the world of business is plenty of early stage companies are initially funded by dentists and doctors, because dentists and doctors have plenty of cash and they have one enormous Achilles heel: since they are very smart in one subject (medicine), they tend to believe they know everything about everything.  They’re worse than me!  For all their considerable smarts, dentists and doctors are usually bad business people who are susceptible to the lure of the new shiny thing: Your great idea.

Once you’ve identified some suckers, er, investors, hash out the terms of the investment, and then hire an attorney to draft the necessary legal documents.   Don’t waste your time hashing out details without investors…find the investors first!

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

March 24, 2004:  Eternal Sunshine of the Spotless Outsourcer

Venture Capital = Creativity = Entrepreneurship = Job Creation = Outsourcing = Freedom

Today, I’m dropping the “O-bomb” on you: Outsourcing.  The most dreaded and very topical subject: Outsourcing.  The bane of overpaid techies everywhere: Outsourcing.  The word that we should not say in polite company: Outsourcing. 

The way things are going the subject of  “outsourcing” will soon join the ranks of religion and politics as things you should not discuss on a first date.  Being someone who never walks away from controversial subjects, let’s tackle this one head on. 

First, outsourcing is a positive development and a natural result of a free nation and free people.  Freedom for entrepreneurs to run their business the way they see fit.  What do you want?  Some government hack, some central planning bureaucrat telling you how to run your own company?  Is that freedom?  Not to me.  Outsourcing equals freedom, and if you want to curtail outsourcing, you want to curtail freedom.

Second, outsourcing means jobs are flowing to lower or lowest cost providers, lowering costs for consumers.  Have you ever wondered why CD players, which cost $1000 in 1983, only cost a few hundred bucks today?  Or why that 286 Epson with 1 MB of RAM and 8 MB of total storage I bought in 1989 cost me $2500, while an infinitely more powerful computer costs less than $1000 today?  Like it or not, outsourcing benefits us all. 

Third, more jobs are being outsourced to the United States than outsourced away from it.  According to the Commerce Department, and as reported in the Wall Street Journal on March 15, 2004:

 “The value of U.S. exports of legal work, computer programming, telecommunications, banking, engineering, management consulting and other private services jumped to $131.01 billion in 2003, up $8.42 billion from the previous year…

 “Imports of such private services -- a category that encompasses U.S. outsourcing of call centers and data entry to developing nations, among other things -- hit $77.38 billion for the year, up $7.94 billion from 2002. Measuring imports against exports, the U.S. posted a $53.64 billion surplus last year in trade in private services with the rest of the world.”

Oops.  Can someone tell me why we’re being exposed these histrionic hissy fits over outsourcing from network news talking heads, actors who failed to graduated high school, and hirsute, Birkenstock wearing, know-nothing college students? 

The US has a trade surplus in outsourcing.  A $53.6 billion surplus, to be precise.  How come this isn’t being reported?  More jobs are being outsourced to the US than away from the US.  Outsourcing is a harbinger of freedom, and if we are free to outsource some jobs to other countries, other countries are free to outsource jobs to the US.  And other countries are outsourcing to the US.

All these factors impact the world of venture capital because venture capital rewards innovation, creativity, ingenuity, and hard work.  Outsourcing is freedom to make smart business decisions, and if we want to limit outsourcing (under the banner of saving jobs), we will simply stifle innovation and as a result, stifle venture capital. 

And there’s something else, and remember where you heard this first.  This current Sturm und Drang over outsourcing in the 2000’s is what the sniveling over Japanese economic development was in the 80’s: A whole bunch of nothing.  

As wonderful as the Japanese culture is (who doesn’t love sushi?), and as incredible as their post war economic story has been, Japan is known for excelling at exactly two products: automobiles and electronics.  That’s about it.  Japan did not over take the US economy in size, scope, nor in the area that I believe is the true driver of economics: creativity.  While we don’t hear much these days about how the Japanese are poised to take over the entire US economy, I vividly recall my childhood and teen years, when much gnashing of teeth was conducted over the advancements of the Japanese auto industry, and the fact that if nothing was done about it, America would have nothing. 

A bunch of hooey as it turned out.  Japan does not the lead the world in drug discovery (the US does).  Japan does not lead the world in software development (the US does).  Japan does not lead the world in computer designs (the US does).  Japan does not lead the world in patents granted (who does?  Oh, yes!  The US does).

Still not convinced?  Let’s look at economic development over the past 100 years, and think about the jobs that we’ve lost due to technological advancements or outsourcing.  Does anyone miss the 100,000 carriage and harness makers we had in 1900?  How about the 75,000 telegraph operators who once earned a good wage in the US?  How about the 200,000 blacksmiths who performed highly skilled tasks?  How about the 100,000 cobblers, or the 100,000 watchmakers we no longer need? 

And are we worse off because our farm employment has shrunk from 11 million workers in 1900 to less than one million today?  How about the fact that people employed by the railroads has fallen from 2 million to 200 thousand?  Is this cause for concern? 

What we’ve gained is hundreds of thousands, if not millions, of jobs in new industries.  In the last 100 years, we’ve created new jobs that include: airline pilots, auto mechanics, medical technicians, truck, bus, and taxi drivers, electricians, optometrists, professional athletes, medical scientists, and dieticians, to name but a few.  The number of physicians has almost doubled in the past century, and the number of self absorbed, egocentric, selfish authors and writers (your humble scribe included in that list) have increased almost fourfold.

In 1900, the US employed zero airline pilots and mechanics and zero automobile mechanics.  By 1997, we had over 900 thousand auto mechanics and over 250 thousand airline pilots and mechanics.

And yes, we’ve created a lot of engineers and computer geeks.  In 1900, we had less than 50,000 engineers in the US; by 1997, we had over 2 million.  In 1970, we had 160,000 computer programmers/technicians; by 1997 we had over 2.2 million.  (Source: Myths of Rich and Poor, by W. Michael Cox and Richard Alm.)

As someone who’s taken quite a few risks in life, tried to hit homeruns, and more often than not has struck out trying, I guess I have a difficult time sympathizing with 20-somethings who whine that they can no longer find programming or web development jobs that pay six figure.  So what!  Boo fricking hoo.  Join the long list of people who wish they were paid more for doodling with ones and zeros.  Stop whining, and go create something.  Real money is only made by those who gamble.  Unless you’re willing to bet the ranch, you have no right to complain that you’re not making enough.

Jobs ebb and flow, just as the economy changes and adapts.  One rapidly growing field in the US is logistics, and much of that growth is being fueled by…you guessed it…outsourcing.

I see nothing but disaster if we bow to the shortsighted idiocy of protectionists and the lunacy of the propagators of the “Bad News Gazette,” you know, the collective brain-dead trust of the AP, 60 Minutes, The New York Times, Time and Newsweek Magazines, or any of the major network evening news programs.  They continue to sell us the same Chicken Little, “the sky is fallen” drivel that they’ve been hoisting upon us for decades.  All we have now is a new batch of economic illiterates applying new terms to the same lame story: Things are bad, and they’ve never been worse! 

In the 80’s we feared the Japanese; today we fear outsourcing.  Mark my words; in 2010 or 2020 it will be something else. 

Pessimists are pros at straight-line extrapolation.  Excelling at straight-line extrapolation is nothing to be proud of, because development and innovation rarely follow straight lines.  These straight-line pros are essentially the same brainless twits who told me in grade school that the world will be out of oil by 1980 and we were entering a period of global cooling.

Oops.

Make your own opportunity.  Stop listening to the talking heads who spew bad news.  Do your own research, dig for facts, and stop waiting for Uncle Sam to cure your problems.  That’s what entrepreneurship and freedom is all about: the ability to make something happen.  Venture capital rewards innovation and creativity, and these are things that only thrive in free societies. 

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

Spring means Passover and Easter.  Spring also means the return of my religion: golf.  I thought it would be interesting to try to meld all these divergent subjects, but since ePrairie doesn’t pay me the big bucks to pontificate about golf, I’ll have to limit my sermon to the religion of entrepreneurship.

I therefore reveal to you, these 15…no, 10, 10 Commandments of Entrepreneurship in Chicago!

1.            Thou shalt not whine about the lack of venture investment in Chicago

If I hear one more smarmy little wiseacre whine that “VCs don’t invest in Chicago companies,” I’m gonna throw up.  I am so sick and tire of people complaining about this, because, as far as I can tell, the people who complain the loudest are the ones who have the least worthy business plans. 

Chicago has a long and distinguished history of entrepreneurship and business building.  If you can tap into that vibe, I can’t help you.  Chicago was built by people who had nothing.  They were hustlers.  They were willing to hustle to make a buck.  They were adept enough to find things people actually wanted to buy, and then they sold those things to that target market. 

Stop trying to sell solutions to a market that doesn’t demand your pipe dream.  If market demand, and service that.  And stop standing on the sidelines waiting for manna from heaven (venture capital), find clients first, build a business, then seek expansion capital 

The lesson here: If you want venture capital, become a venture worthy company

2.            Thou shalt not compile a PPM

As most of you know, early stage entrepreneurs should not waste their time compiling PPMs.  The PPM for the early stage entrepreneur is nothing more confusing activity with accomplishment.  PPMs should only be compiled and shopped by companies that have actual operating histories.

The lesson here: PPMs and pipe dreams equal pipe bombs.  This is a bad thing.

3.            Thou shalt not misrepresent your company

This is one of my biggest pet peeves (along with people who drive slowly in the left lane, and idiots who sit on weight machines watching TV instead of using the machine).  Misrepresenting your company occurs when an early stage entrepreneur does dumb things to make his company seem larger.  Instead of being honest and saying, “I’m in my garage trying to get my first client,” this entrepreneur likes to blur the lines and misrepresent the facts.

Examples include the use of stock photography on websites.  If I see one more website with that woman with the headset, or the two men shaking hands, I’ll choke.  These people do not work for you, why are they on your website?  I also despise when I don’t get straight answers to simple questions.  For example: entrepreneurs often blur the distinction between actual revenue and forecasted revenue.  I have seen too many companies that claim to have, say, $2 million in sales.  When I dig a little deeper, I find that they actually have $100,000 in sales, and they’re hoping they close that $1.9 million deal on December 31.

The lesson here: Get out of my way when you see me on the highway, and don’t believe your own over inflated hype.  

4.            Thou shalt not talk air other people’s dirty laundry in public by using a certain scurvy little gossip worm’s “newsletter”

There is a poison in Chicago’s venture capital/high scene.  It is personified by someone who has never raised a dollar from VCs, has never run a real business, has never built then lost then rebuilt a fortune (heck, he’s never built a fortune),and has never amounted to anything, yet feels it is his duty to “dig” into “real” stories and provide commentary on things he knows nothing about.  Out of one side of his mouth he whines that Chicago VCs don’t take enough chances.  Out of the other side of his mouth he delights in the failure of companies and people and investors who have taken wild chances. 

This person is the biggest flim flam artist in Chicago.  He’s a carnival barker whose caravan consists of the disenfranchised and immature whiners of Chicago’s scene.  He reminds me of a smart child who delights in getting the grownups to laugh by saying rude and outrageous things.  But there is no substance offered here, only a long line of caustic half truths and lies, peddled by a snakeoil salesman masquerading as someone who thinks he’s a valuable resource. 

The lesson here:  Find real entrepreneurial resources in Chicago.  There are plenty.  I’ll give you a hint: They’re the ones that eschew publishing anonymous attack emails. 

5.            Thou shall network like crazy

You can never have to big a professional network.  Hit the events, it’s actually pretty easy to make a name for yourself, provided you 1) have something to offer, and/or 2) you’ve actually accomplished something.  And by “accomplish something,” I mean making a pile of money for yourself via entrepreneurial activity.  Until you make a pile of money, all you can do is “be someone who has something to offer.”  See Commandment 7 for more details.

The lesson here: Get out there and meet people.  Don’t be a wall flower.  The world will not come to you.

6.            Thou shalt not be a not be a nuisance when thou networks with others

There is a fine line between networking and being a pain in the rear.  Yes, networking is very important.  But don’t pester people once you’ve made their acquaintance.  Just because you’ve meet one of the scene’s luminaries (e.g., people with money), that does not mean you’re buddy-buddy with that person.  You can’t force yourself into someone’s personal network just because you’ve made a professional connection.  You have to let those things develop naturally. 

The lesson here: If you want to break into a higher tier social/professional circle, make the type of money that that circle has. 

7.            Thou shall have something to offer

Commandment 5 mentions “have something to offer.”  What I mean by this is, short of being a successful entrepreneur (and for this purpose I define success as making a boat load of money), wannabe entrepreneurs can be valuable by having something to offer.  This means offering resources, help, and assistance to other entrepreneurs.  You don’t have to be a millionaire to be helpful.  If you’ve tried the entrepreneurship game a few times and crapped out each and every time, you can be valuable by learning from your mistakes, and helping others to avoid those same mistakes.

I’m a big believe in helping others as much as possible, without asking anything in return.  I believe if you are helpful enough to others (without demanding remuneration), good things will eventually happen to you.  If you sincerely want to help others, and you do a good job at it, you will build credibility far beyond what you put on a resume.  If decision makers know your name, and they have positive feelings associated with your name, then you have built a very power brand for yourself.

The lesson here: If you’re only a taker and not a giver, it won’t be long before you wear out your welcome.

8.            Thou shall be willing to work thy rear end off

The best thing about entrepreneurship is being able to work half days.  And you even get to decide which 12 hour half of the day you want to work!  Since most entrepreneurs have to wear many different hats, and most of those hats are full time jobs, most entrepreneurs especially work multiple full time jobs.  There is no way you’ll be able to get everything done that needs to be done if you only work 40 hours a week.

The lesson here: If you have a 9 to 5 mentality, forget entrepreneurship.  There are 168 hours in a week, if you are not will to work as many of those hours as possible, you’ll never make it as an entrepreneur. 

9.            Thou shall only seek investors who actually invest in your space

If you are early stage (e.g., pre-revenue) don’t waste your time with VCs.  Let’s go through this again.  Friends, families (and fools) invest in pre-revenue deals.  Angels might invest once you have some sales tractions.  VCs only invest once you’ve proven the model…and that model better scale like a monkey on crystal meth being poked in the rear with a cattle prod. 

If you have a viable going concern that you think you can grow to a substantial business, make sure the investors you contact actually invest in your type of business.  If you are a software company, it is unlikely a VC firm that only invests in lifescience deals will invest in your company. If you are a

The lesson here: Know what type of company you have, and what stage it is at.  Find the right investors at the right time. 

10.          Thou shall understand accounting

Much like economic illiterates, I can smell accounting illiterates from a mile away.  If you don’t know the difference between a balance sheet and an income statement, it is time to take some accounting courses at a college.  If you believe accounting doesn’t matter, you will be taken advantage of at every turn.

Or worse, you’ll inadvertently do something illegal.  A few years ago a friend sent me a proposed cap table for a deal he was working on.  In this table he listed the existing investors, how much money they had put in, and the number of shares they had.  He then had a second section showing the proposed second round, with new investors and new dollars.  The trouble was all the stock was being sold for a buck a share, and in order to show the first investors some appreciation on their investment, the entrepreneur was planning to issue more shares!  All told, he was planning to issue these people over 2 million shares. 

I asked a simple question: “How many shares are you authorized to sell?”

The answer: “Dunno.” 

Turns out the company was authorized to sell only 1000 shares.  As I pointed out, selling more shares than you are authorized to sell is called securities fraud.  This Kellogg grad retorted by saying the company was private, so securities law didn’t apply. 

I was speechless (which is news in and of itself).  What are they teaching in Evanston?

The lesson here: Accounting is the building block of business.  You better speak the language.   Or you will be speaking with the SEC.

And the special 11th commandment…

11.          Thou shall seek clients with the same voracity that thou seeks investors.

Here’s a novel idea for the bevy of Chicago early stage entrepreneurs.  Instead of flying around town with the same shopworn business plan in hand, instead of attending the same shopworn networking events with the same shopworn people who are not in any position to buy anything from you, make phone calls to actual client prospects. 

The lesson here: Selling stock is not the only way to raise money.  You can raise money by trying a novel idea…selling product.

Continuing and concluding…with our holiday theme

These commandments are based on my oft painful exercises in entrepreneurships.  I have made many of these mistakes, and worse still, I see many people making the same mistakes that I (and other entrepreneurs) have made over the years.

Chicago entrepreneurs who fail to adhere to these commandments will be visited by the ghosts of failure; past, present, and future.  Those who adhere: may your businesses be fruitful and multiple and scale.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

Last week I had the great honor of moderating an entrepreneurial panel at my alma mater, DePaul University.  The title of the event was, “Do You Have What it Takes?  Growing Your Business to the Next Level.” 

Our distinguished panel included Steve Golden, from Coolsavings fame, and now in the midst of a new venture, Mindsprinting; Kirsten D’Aurelio, a reformed actress who started Voicescape, a company that helps business people learn how to better project their voices; Caroline Lubber, VP of Operations for Vosges Haut-Chocolat, an entrepreneurial Chicago chocolate company; and David Marco, founder of EWSolutions, a systems integrator.

All four of these individuals had great comments and observations from the world of entrepreneurship.  In fact, I found their observations and experiences to be a very good primer for any and all entrepreneurs. 

The key takeaway from the evening had to be, “get off your duff and do it…but be smart about it.”

While most of the wannabe entrepreneurs (who want venture capital cash) are focused on “how do I grow a business to $100 million in sales?” a more percipient question may be to ask, “How do I get the first sale? 

How do I get dollar one?”

Another way of putting this might be to say, “Going from zero to infinity.”

Not that growing a company from something to a larger something is easy (it isn’t), it is simply that more difficult to go from sitting on your sofa dreaming about starting a business, to booking a single, solitary dollar in revenue.

After all, the difference between zero and one is infinite.  Getting off the sofa and starting your dream can be a daunting task.  What do you do first?

The Art of Shameless Self Promotion

A good place to start may be with the Bill Snow patented “art of shameless self promotion.”  I love people who are unafraid to promote themselves.  David Marco mentioned that before he started his business, he got busy with writing articles and columns and books.  He created a name for himself, and positioned himself as a very knowledge source of information.  In David’s fearless approach, he presented himself as THE expert in his field.  He didn’t wait for someone else to say he was an expert. 

Getting out there a building a name for yourself isn’t’ that difficult.  It just takes dedication and follow up.  It takes getting off your duff and talking with people.  Write articles, volunteer at events, become vocal and knowledgeable about a subject.  Set a goal of being THE expert in your field, call yourself an expert.

And most importantly, be an expert. 

And don’t worry about the anonymous jealous types who like to take swipes at the doers in Chicago.  As my sage business advisor told me many years ago, “No matter what you do, you’re going to tick off someone.  Don’t worry about it.”

Do what you love

Kirsten D’Aurelio talked about doing something she loved.  Kirsten was a frustrated actress, tired of dealing with a business that, even though she loved it, was completely stacked against her.  For every part that is up for audition, there are probably dozens, if not hundreds, of actors competing for that one spot.  It is a very difficult way to make a living.

Instead of beating her head against a wall, Kirsten decided to start a company that would utilize her training as an actor.  Even though she lacked business experience, she plunged headfirst into the business world.  When asked how she gained her first client, she said she felt passion for the project shined through.  In other words, enthusiasm can trump knowledge.  You don’t have to be a business expert (but you better learn quickly); quite often all you need is believe and excitement in your product. 

What are you waiting for?

One person from the audience wanted to know who each of the panelists started their businesses.  But as she asked this question, she prefaced it with the tired story of “in this bad economy…how did you do it…”

Naturally, I took umbrage with this person.  I told her that entrepreneurs don’t wait for someone to tell them, “It is now OK to start that business.”  Damn the torpedoes, damn the May Report, damn the collective bad news gazette (the NY Times, CNN, Time, et al.), if you have a dream, if you have the energy and follow through, don’t wait for someone to tell you it is OK to follow your dream. 

The economy is never as bad as we’re told it is, nor is it ever as good as we’d like to believe.  Entrepreneurs can make their own economies.  The economy follows entrepreneurial activity, not the other way around. 

How have you funded the company?

The entrepreneurs on the panel started their companies in different ways.  Steve Golden used friends and family money.  Kirsten D’Aurelio worked from her apartment and signed up paying customers before she looked for offices.  Vosges Haut-Chocolat was started in the kitchen of the founder.  And David Marco, as discussed earlier, went on his path of shameless self promotion.

In other words, no one waited for someone else to say, “It’s ok now.  The economy is strong enough for you.  You can start you little business.”

The real entrepreneurs simply go out and do it…and do it smartly.

Don’t fall in love with every idea

Remember, just because you’ve thought of an idea, doesn’t mean it is unique.  Odds are, a hundred other people have thought about the same idea.  Instead of focusing on the “uniqueness” of your idea, focus on your execution.

For example, following the event, I was approached by 3 different people, at three different times, all with the exact same idea.  Each person introduced herself as a “real estate person,” and they had the great idea to connect with local venture capitalists in order to help the VC’s portfolio companies find real estate.

I told the first woman, “good luck, I’ve heard that story a million times.”  She was a bit surprised, as she thought she had discovered a woefully untapped market for commission.  She was certain no one else was hitting up the VCs for this service.  I told her that every Tom, Dick, and Harry wants to connect with VCs because the layperson’s view is that VCs are bottomless pits of money who need more friends.  VCs are difficult to connect with for a simple reason: They are busy and they don’t want to be pestered.  In other words, you are the same thing as a telemarketer. 

Shortly after this exchange, a second woman introduced herself as a “real estate person” who wanted to connect with VCs.  Believe it or not, about 5 minutes after setting the second woman straight, a third woman introduced herself with the exact same story. 

As someone who doesn’t like to repeat himself, and fearing continued inundation of the oxymoronic “real estate person with a unique idea,” I quickly hit upon a truly novel idea: I left.

The Wrap up

The crux of this column is inertia.  Going from nothing to anything is a difficult task.  In the entrepreneurial world, going from a stand still to 1 mile per hour will take more energy than accelerating from 60 mph to Mach 1.  It is made even more difficult if you don’t plan for this first step.  Get out there, turn your name into a brand name, find something you’re passionate about, don’t wait for others to tell you it’s OK to start your dream, be creative and smart when looking for funding, and don’t fall in love with the first idea you find.

If you follow these guidelines, entrepreneurship can be easy.  If you don’t follow these guidelines, entrepreneurship can still be easy…easy to screw up. 

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

In recent weeks we’ve been treated to a couple of seemingly disparate news stories.  In one corner we have the steroids in baseball issue.  In the other corner we have the pending monster IPO of Google.  I put these two seemingly disparate stories together because one word comes to mind when I think about either: Asterisk. 

In the baseball world we have a situation where the exploits of certain players are in doubt due to the shadow cast by alleged steroid use.  With the Google IPO, we have some people who are hopeful that we’ll return to the halcyon days late 90’s IPO mania.  If we’re talking about placing asterisks next to the records of certain baseball players, shouldn’t we put asterisks next to the exploits of certain late 90’s era companies?

How would this work?  Let’s see…you just hit 80 homeruns?  Make that 80* homeruns.  You helped sales rocket from $1 million in 1996 to $50 million in 1999?  Put an asterisk next to it.  You drove in 200 runs in a single season?  Put an asterisk next to it.  You sold your company for $500 million in 1999?  Put an…well, you get the idea.

I bring this point up because in recent weeks I’ve been awash with people bragging about their exploits in the late 90’s.  This culminated with someone who told me it would be fun to talk to college students about the challenges of finding sales success during the dot com boom!  I used my usual “venture monkey” retort: during the late 90’s, we were all turbocharged monkeys on crystal meth with cattle prods poking our backsides.  Perhaps people touting their great late 90’s successes should add a FDA-type warning: Actual results may differ with your era. 

I think it is fantastic that some people got out when the going was good.  I have no problem with people making gobs of money.  But when I hear people brag about their wins from 1999 and completely gloss over the fact that the late 90’s business culture was a historical anomaly, their bragging rings hollow.  Talk to me about your wins from 2003.  Talk to me about selling today. 

Just as the current baseball era is running the risk of being known as the asterisk era, so too is the business era of the late 90’s.  And here’s the rub for this column and all the early stage and wannabe entrepreneurs who read it: the way business was conducted in the late 90’s was not normal.  And in turn, today’s economy is not “bad,” although you would have a tough time finding that fact reading the collective brain dead trust of the bad news gazette that poses as our mainstream media. 

The economy is not bad.  Repeat that.  The economy is not bad.  True entrepreneurs do not wait for the New York Times to make an official proclamation: “The economy is now in good shape.  If you wish to pursue your entrepreneurial dream, now is the time to do it.”

Entrepreneurs don’t wait for permission.  They do it.  They are often counter-intuitive and when whole world says stop, they go.  They don’t wait for some pundit to tell give them an economic green light.  They look both ways, and if they have enough room to move, they walk out into traffic. 

Don’t believe me?  Don’t believe Chicago has enough entrepreneurial spirit?  Simply hang out at any busy intersection and watch you fellow Chicagoans walk through busy traffic, blatantly ignoring the sign that says, “don’t walk.”  Go to Seattle or Cincinnati or Atlanta.  In those cities, in most cities, actually, people will not cross traffic-less streets simply because a street says “don’t walk.”

A bit of a stretch?  Perhaps.  But the lesson is if you want to follow your dreams of being an entrepreneur, you won’t let whining detractors stop you.  You won’t look for permission.  If you have some place to go, if you know where that place is, you’re not going to let 20 signs that say “don’t walk” stop you.

We don’t have a bad economy folks.  We had a mild recession in 2001, inflation is low, and the unemployment rate is comparable to the rate in the mid 90’s.  Venture capital investing has begun to level out, at roughly 1997 levels.  I don’t recall too many people complaining that the economy was bad in 1996, even though just about all indicators are comparable, if not better, than they were in 1996. 

We have far too many people who have been sold an economic bill of goods, and as a result, these people are sitting on the sidelines, grumbling about how “bad” the economy is.  The freak years of circa 1999 are not returning any time soon.  The time to stop grumbling is now.  Money is being raised, companies are selling, and companies are buying.  And maybe, just maybe, the Google IPO will jump start a little mania for the new millennium. 

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

Entrepreneuritis - the condition of being so focused, so “in the zone,” and so myopic in your pursuit of entrepreneurial riches, that you leave all sense and reason at the door and refuse to heed the advice of people who know more than you. 

This is a term I’ve heard many times before.  Who coined it?  Let’s see…hmmmm…oh yes.   I did.   And I coined to describe some of my early attempts at entrepreneurship.  With this in mind, let’s dial back the wayback machine, and revisit the on-line book that spawned this period column, Venture Capital 101.  It’s not plagiarism if you use your own previously disseminated works and give yourself credit, is it? 

Venture Capital Maxims: Truth, Phrases and Decorum

One sure sign on Entrepreneuritis is found when early stage entrepreneurs run into a buzz saw I call the maxims of venture capital.  Believe it or not, there is actually something worse than running into a buzz saw: its not knowing you just ran into a buzz saw.  Without further ado, here are 2 sure fire techniques, observations, and truths, that will  help you avoid Entrepreneuritis. 

The Truth about bad ideas

1.       No amount of spit and polish can make a bad idea compelling.  If the fundamental business model and/or underlying assumptions are faulty, a professionally prepared plan will not cure these fatal ailments.   

2.       The “better mousetrap” theory is fatally flawed.  If your target market does not have a pestilence problem, the world will not beat a path to your door to buy a “better mousetrap” they don’t need. 

The Truth about venture capitalists

3.       VCs rarely say “no.”  They don’t want to be the example a successful entrepreneur uses one day when talking about “all those idiot VCs who passed on my deal.”  To their credit, VCs tend to be optimistic, helpful, and encouraging.  The downside of this is many entrepreneurs keep chugging on, working on bad businesses, mainly because they haven’t heard, “no, not a chance hell.”  

4.       VCs are polite people.  Most people learn good manners at an early age. For example, it is not polite to hang up the phone while the other person is still talking. No matter how irrational or long-winded the caller, most people try to end a conversation politely before hanging up the receiver. In other words, just because VCs give you a few minutes when you call them does not mean they’re interested in your deal!  Do not confuse good manners for interest.

5.       VCs utilize the “One Reason” rule.  During the first step of a review process, VCs rarely read business plans: they scan them. They are not looking for reasons to invest; they are looking for reasons not to invest.  They are not looking for the singular hidden gem in your plan.  Only if the plan passes this initial screening, will VCs dig deeper and seriously consider the investment.

6.       The entrepreneur’s “greatest idea in the world” is the VC’s commodity.  VCs see 50, 100, 1,000 “greatest” ideas a month.  Entrepreneurs need VCs more than VCs need entrepreneurs.  The person who controls the money controls the situation.

7.       While VCs know it is unlikely every investment is going to be a home run, they perform their due diligence expecting every investment to be a homerun. 

Phrases (of death) - don’t say these things

Here are some of the sayings and phrases entrepreneurs should avoid at all costs:

8.       “You don’t get it!”

This is usually a sign of entrepreneurial exasperation, leveled after the entrepreneur has been rejected after the nth time.   The VC probably understands more about the situation than the person leveling the charge.  In fact, the exclamation is akin to yelling, “I’m telling mom!”  Stop your whining and fix your plan.  Or find a new job.

9.       “Will you sign an NDA?”

This is a sure sign the entrepreneur is a rank amateur.  There is usually an inverse relationship between the voracity of the NDA inquiry and the quality of the deal.  If your plan is based on an idea so tenuous that merely hearing what you do (or plan to do) will cause grievous harm to your plan, you don’t have a plan.  You have a pipe dream.

An exception to this rule is if you are far downstream with investor negotiations (for example, you’ve already had numerous in depth, serious, and meaningful discussions), you actually have something proprietary, and it is time to “open the kimono” and expose the secret sauce (for example, source code) to the fund’s technical expert.  In this case, it is probably appropriate to ask for non-disclosure protection.

10.   “These projections are conservative”

Your rank amateur is showing!  This usually means the projections are pie in the sky, and extremely unobtainable.

11.   “We have no competitors”

All companies have competitors, either direct, indirect or substitutes.  Movie studios directly compete against other studios, but they also indirectly compete with every other kind of entertainment: theater, sporting events, restaurants, nightclubs, and so.  There are always alternatives/substitutes to your product.  The biggest competitor you may face is apathy.  The customer’s decision to NOT buy your product is a possibility. 

12.   “All we need to do is grab 1% of a $100 billion market and we’ll have a billion dollar company”

This statement is unique to exactly you…and the other 6 billion people in the world!  This is yet another sign the entrepreneur is letting his rank amateur show.

13.   “I’ll quit my job upon funding.”

This means you won’t be quitting your job because you’re not getting funding (from a venture capitalist).  You need to make the full and complete commitment to your business long before you seek venture capital.

14.   “Seasoned management will be hired upon funding.”

Oh, yes!  I can see the venture capitalists lining up when they read this sentence…lining up to laugh at the plan before it is condemned to the ash heap of clueless business plans.

Basic decorum for entrepreneurs

Entrepreneurs looking for capital make the same set of errors with alarming regularity.  Here is a list of the most common decorum mistakes:

15.   Give direct answers to direct questions.  This is the number one rules violation…with a bullet!  The entrepreneur is so excited about the chance to give his spiel to a decision maker that he often jumps 20 steps ahead, rushes through his answer, and generally fails to answer the question.  You can almost hear the gears spinning in the entrepreneur’s head as he parses every question, looking for hidden nuance and meaning in otherwise direct and clear-cut questions.  Here’s an example:

Q:  “What are your revenues?”

A: “Our technology is portable to Unix servers and we hope to get a patent next year after we use this venture capital round to pay back my mother.”

16.   Be honest.  While you would think this is a basic business tenant, many entrepreneurs flat out lie about the their company and its prospects.  The truth will eventually come out, don’t shortchange yourself and your dream, and make sure you are honest in your presentation and answers.  One of the biggest lies entrepreneurs tell is that other investors are about to put money in the deal, and “you better get in now while you can buy at a low price.”

17.   Be accurate.  Entrepreneurs have a tendency to gin up their companies, trying to portray their efforts and dreams in the best light possible.  The combining of effort and dream seems to be the culprit here.  Using the same question as posed above, here is how honesty gets twisted:

Q:  “What are your revenues?”

A: “$2 million.”

Sounds like a direct answer to a direct question, right?  The problem, not readily apparent, is the fact that this entrepreneur doesn’t have a $2 million company.  He has some trailing revenue, but his $2 million figure is what he hopes the company will produce in the coming year.  Make sure you have a very clear delineation between historical results and your projections.

18.   Understand the lingo.  Educate yourself, do your homework, learn the terms and the language.  

19.   Know to whom you sent your plan.  If an investor calls you back, it is a bad thing to say, “Huh, who are you?”  This makes it look like you are sending your plan willy-nilly to everyone and anyone.  Investors usually take this as a sign that the deal has been shopped, meaning a large number of other people have passed on it. 

20.   Know if an investor actually invests in your type of deal.  This is a basic issue that many early stage entrepreneurs don’t seem to understand.  Venture capitalists’ investment criteria are usually limited by their experience and/or the covenants of the fund’s operating agreement.  Let’s say a strong software company approaches a reputable venture capital fund that invests only in medical-related deals.  The venture capitalist will likely realize this software company is a good deal, but he will refrain from investing because software is outside his area of expertise and/or the fund prohibits investment in anything other than medical device and drug discovery.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

This is by no means an “end all be all” list of personality types; I’m sure that there are many others.  While the majority of characters who inhabit start-ups are positive people who do valuable work, there are, nonetheless, a few negative creeps out there in start-up land.  I’ve often referred to them as the “knee-biters” of the world.  These are the ones who are most apt to eventually post “anonymous” venom about formers employers on certain websites. 

So…without further ado, here is my list of the seven types of start-up personalities…you should avoid:

1.      Expense Check Entrepreneurs (ECE)

This is a term I’ve used for a few years, but it is always worthwhile to repeat yourself from time to time.  These people typically boast MBAs from top-flight school.  They use big words and cutting edge jargon.  They are part of the gadget culture elite.  Their heyday was 1995 to 2000, which coincided with the heyday of the venture capital/jackpot mentality boom years.  ECE do not start companies, they latch themselves to start ups (but still call themselves “founders”), and like a plague of Zebra Mussels, they tend multiply  -- they bring their buddies in -- when they find a food source: Expense checks.

ECE love the cache (and potential rewards) that comes with being an “entrepreneur.”  Let’s face it, saying “I’m an entrepreneur” is a great way to impress the chicks at parties.  The only problem is ECE do not have the stomach for the risks that are associated with truly being an entrepreneur.  In other words, they are only “entrepreneurs” so long as the $10,000 per month expense checks are de rigueur.   Once the going gets tough, when actual results are demanded, and once the expenses are reduced, these types immediately leave the entrepreneurial life behind.

Tagline: “I’m outta here” (emergency purposes only).

2.      Mt. Eruption

After dealing with a “Mt. Eruption,” a beleaguered former colleague mentioned, “it seems every company has one.”  As I thought about it, my former colleague was correct.  Just about every company I’ve worked for has had that one person who goes “nutso” at the slightest provocation.  They think nothing of yelling and screaming in front of others.  This personality type is especially dangerous if the person has managerial responsibility.  Mt. Eruption thinks nothing of it to dress down a subordinate in front of others. 

It becomes very difficult to work with this personality type because everyone has to walk on eggshells for fear of inadvertently offending this person – and of course – setting off an eruption.  A seemingly innocent little question will likely be rebuffed by a long-winded, “it is not my fault” response which will likely segue into an ad hominem attack on the question asker.  And naturally, if the question goes unasked, Mt. Eruption will eventually erupt over that fact.

This is a person who displays classic passive-aggressive tendencies.  After all, Mt. Eruption will not let you know when you’re making a minor error and politely suggest a way of avoiding the error.  Instead, life’s little “bumps in the road” are stored in the recess of the brain, and only after a sufficient stockpile is obtained, will the eruption occur.

Tagline: “FINE!  LET ME TELL YOU WHAT I REALLY THINK OF YOU AND YOUR STUPID IDEA, YOU #$@%&!!!”

3.      Gloomy Gus

Everything is a disaster.  Everything is wrong.  It will never work.  These are the hallmarks of the classic Gloomy Gus character.  Forget the optimist vs. pessimist dichotomy of “is the glass half full or half empty,” because with Gloomy Gus, the glass is always completely frigging empty. 

I’ve long believed that people can be divided into two camps: optimist and pessimist.  Gloomy Gus puts the typical pessimist to shame because even the typical pessimist has the dumb luck of having the occasional good day.  Gloomy Gus doesn’t merely have a perpetual rain cloud over his head, the rain cloud is actually a bus used (allegedly) by the Dave Mathews Band.

Tagline: “It’s raining, it’s pouring, it’s never been worse!”

4.      The Grasshopper

“Get paid, do no work,” is the mantra of the grasshopper.  As much as I wish I could lay claim to the discovery of this character, it is Dilbert Creator Scott Adams who created the best example of this character…Wally.

Calling this character grasshopper is a reference to the classic fable by Aesop.  Just like Aesop’s grasshopper, this character is known for doing nothing, producing nothing, and contributing nothing.  Come to work at nine, go home at five.  Put the minimum in (perhaps), and certainly do not contribute for any extra effort, ideas, thought, or planning.  Don’t even try. 

For the life of me I do not know how these people continue to get jobs.  I recall working with one grasshopper – a person who was paid considerably more than me for doing the same job, by the way – who simply and flat out replied “no” to anyone who asked anything of her.  Can you contribute an article?  Can you make a sales call?  Can you work on this marketing literature? Do you have any ideas?  No.  No.  No.  No.

Apparently I missed the class in college that dealt with developing a six-figure career for doing nothing.  She’s not the first, nor the only grasshopper I’ve dealt with, so I am convinced there are entrepreneurs who, when putting together their business plans, pencil in a few slots for people who do nothing.  Maybe they consider it a cost of doing business. 

Tagline: “I’m taking off early…do we get paid today?”

5.      Daffy the  “Visionary”

It’s one thing if you are actually a billionaire who has a rather Looney-Tunes approach to life and business.  It is another thing if you haven’t amounted to anything and you willfully ascribe the “crazy visionary” moniker to yourself.

It just doesn’t work that way, folks!

The basic difference between being considered eccentric and crazy is, of course, money.  If you are able to pay people gobs of money, and you engage in crazy (but mostly harmless) behavior, people will probably continue to work for you and simply call you eccentric.  If you have not had massive success, cannot pay people, and you engage in crazy (but mostly harmless) behavior, people will not work for you and they’ll simply call you crazy. 

I think some otherwise intelligent people have gotten off track because they mix up two separate things: wealth and eccentricity.  They forget one of my golden rules, “correlation does not equal causation.”  Just because one person is rich and crazy, does not mean acting crazy will make you rich.  

Tagline: “Hey!  Look at me!  I’m crazy!  Crazy as loon, I tell ya!”

6.      Das Kommandant

Otherwise known as the “Devotee of the 1950’s School of Dictatorial Management.”  These are people, typically executives or managers, who think so highly of themselves, that they actually think they are gods.  They seem to believe employees merely exist to serve them.  Worse, they actually think that grown adults like to be taken to task in front of others.  These creeps have no idea how to truly motivate intelligent adults. 

Over a decade ago while I was finishing my MBA, I wrote a thesis paper that utilized the research of Geert Hofstede.  Hofstede identified various culture differences between the US/Western Europe and Asia, including “power distance,” which is germane to this section.  Essentially, power distance is how employees think of their bosses.  In many Asian cultures, the boss is revered as an all knowing, all-powerful being.  A near deity.  As such, the power distance in Asia is very large.

In the US and Europe, employees might have respect for the boss, but they consider the boss to be merely a person, not a god.  The power distance in the US is very small. 

 Das Kommandant doesn’t seem to realize this, and certainly does not realize his tyrannical rants, dress downs, put downs, and, well, hissy fits, have the opposite effect on people.  Das Kommandant will drive away the talented and intelligent, and will soon have a domain of only mice. 

Tagline: “Who’s the boss?!  Me, me, me!  I am!  Don’t forget that, moron!”

7.      The Mouse

The Mouse comes and goes, and no one notices.  The Mouse takes a two-week vacation, and no one realized.  The Mouse makes a suggestion, but no one hears.  The Mouse obviously is the person without a backbone, afraid to stick up for him or herself, afraid of saying anything that might cause trouble.  Ironically, the Mouse often ends up working for Das Kommandant.  They form a weirdly symbiotic co-dependent relationship that usually travels down the path of stupidity, with Das Kommandant thinking everything is smooth sailing because no one is voicing any discontent, and the Mouse too afraid to point out any possible problems.  

Tagline (from someone else): “Oh, you still work here?”

 Worse than dealing with people who have one of the personality types is dealing with someone who has ordered the combination platter.  Das Kommandant may be bad, but when you combine it with Daffy The Visionary, look out!  Mt. Eruption is a terrifying thing to deal with, but imagine the horrors of discovering someone who you thought was a Mouse actually has a Mt. Eruption personality, too. 

We’ve all probably dealt with these types of people in our careers.  Perhaps some of us possess some of these traits.  If anyone has any funny or interesting stories about personality types, of if you have other examples of personality types, let me know.  Fire away!

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

I’ve recently chatted with a number of early stage and wannabe entrepreneurs. Well, not recently. I’m always chatting with them, and I always enjoy it. What has been notable about numerous of these recent conversations is more than one entrepreneur has expressed the fact “it isn’t fair” because he has a family to support, and it is just too risky to quit the full time job and dive into the entrepreneur world full time.

Welcome to jungle, pal.

Who said it was fair? Who said it wasn’t going to be risky and incredibly difficult. So you have a family to support – too bad. These are the decisions that you made. If you can’t give up the job (for any reason), then it is time to give up the thought of being an entrepreneur. In essence, you’ve already made your choice, now is the time to acknowledge that choice.

If you’ve essentially chosen family and children instead of being reckless and risk taking, what’s wrong with that? That’s a choice to be proud of, not to regret. If you don’t get that into your head, you might inadvertently blame your kids for all the things you wanted in life, but were not able to obtain. That’s sad.

As a means of aiding and abetting as many early stage and wannabe entrepreneurs as humanly possible, here are some thoughts on the entrepreneuring life. Welcome to the jungle, baby!

Do What You Love

OK, OK, so you’ve heard this countless times. It’s a business adage that is as old as dirt. Instead of merely giving lip service to the notion, let’s explore what this really means.

I bring this up because during another recent conversation with a wannabe entrepreneur, I asked the person if doing what he was proposing was something he really loved to do.

“Yes,” was the reply.

So I rephrased my question in the form of something much more harsh. I asked, “Do you really want to do this every day, potentially for the rest of your life? Is this what you really want to face when you get out of bed every day? And not just the “big picture” part of your dream, but all the little details, too? The marketing, the sales, the accounting, the product design, the packaging, dealing with customers, taking out the trash, do you really want to do this for 12 or 14 or 16 hours a day, every day, weekends, too, for the rest of your life?”

Our wannabe entrepreneur friend assured me, “yup,” he was mentally ready to do it. Whether or not he truly is ready to do those things every single day is unknown, but all wannabe entrepreneurs need to ask themselves these questions.

The Power of Can’t

Can’t is one of the most horribly overused words in our language. It is an extremely powerful word, too, because “can’t” has the power to stop people dead in their tracks and cause them to give up dreaming and scheming. Far too many of us are guilty of automatically obeying that damn word, usually when it is invoked by a potentially jealous person who simply utters, “You can’t do that…”

Instead of following their dreams, instead of taking some chances, instead of risking looking like a jackass, too many people give up without trying, slump their way to their boring jobs every day, all because some sad sack intoned this horrid word.

No matter what you do, no matter what you attempt, someone will always tell you, “You can’t do that.” Sometimes it is another person telling you this. But far too often in entrepreneurship, the person invoking the “can’t” word is the same person listening to it. Far too many people talk themselves out of striving for something different.

Don’t give in to the power of “can’t.”

Salaries Are For Suckers

There is nothing wrong with taking a salary, of course. A salary comes in useful when paying the bills. But if you’re dreaming big, if you really want to accumulate wealth, you need to own the company, or a piece of it. Unless you’re a professional athlete (in a sport that pays), salaries alone are a tough way to accrue wealth.

And if money isn’t that the main thing for you, if you strive to call the shots in your career and work, then taking a salary from someone leaves you beholden to that person. You’re at that person’s (or company’s) beckon call.

The salary phenomenon has a way of institutionalizing people. During Japan’s decade and a half economic downturn, I have read numerous stories of “Salarymen,” men who have been laid off, but are too ashamed to tell their friends…and even their families. So the Salarymen get up early every morning, put on a suit and tie, grab their briefcases, and leave the house. They walk around Tokyo’s business district, trying to look as if they have a place to go, but instead of an office, they usually spend their days in a library or a museum or some other public place. After their day is done, the Salarymen commute home.

This is about as sad as sad gets. Unless someone is paying these people a salary, they do not know what to do with themselves. So ingrained is the idea of submitting themselves to a benefactor, that they get out of bed and go through all the motions of subjecting themselves to a benefactor…even when they do not have a benefactor.

If you want to do it on your own, if you want to make a big mark of your own design, you have to be willing to give up the salary (from someone else).

Make Your Own Magic – The Hustler’s Hustle

If you have limited resources, don’t try to start a business that is capital intensive! I have said many times: There are no entitlement programs in entrepreneurship. Just because you exit, you do not have the “right” to be an entrepreneur. If it takes too much money to start your dream, and no one is willing to bankroll you, boo hoo! Too bad. Join the long line of other people with dashed dreams.

Instead, find something that you can start of the cheap. In fact, make a virtue of your frugality. Be proud of the fact that you’re cheap. There is this thing called “the Internet” (have you heard about it?), and it can be a marvelous way for someone with limited funds to start a business.

There are some people who have the hustler’s mentality, and others who can learn a few things from people who hustle and strive to find a way of making a buck. This usually involves finding people who are willing to pay for something, as opposed to finding a product then hoping there is a market for it. Find needy customers first. The interesting product should be your second step, not the first.

Gain the Business – Lose the Business

While you’re focused on finding customers, revenue, and creating a real business, don’t lose sight of who puts money into your pocket: your customers.

It’s an age-old adage in business, but customers who have a bad experience with your company will rarely tell they had a bad experience. They’ll simply stop buying your product/service, no explanations given. It is far too easy for entrepreneurs to begin to take old customers for granted. Do this and you risk losing them.

Run Away From “Guarantees”

Avoid using the term in your sales pitches. If you want to have a little fun some time, send your attorney a draft of an agreement you’re putting together a new prospect. Liberally pepper the document with “guarantee,” and watch as your lawyer’s eyes bug out, his face turns red, and steam pours out of his ears.

Be wary of anyone who touts anything that is “guaranteed.” Avoid people who can “guarantee” you a return on your investment. That’s illegal. Avoid shysters who can “guarantee” you investment from others. That’s probably illegal, too. The word is fraught with potentially nasty legal consequences. If someone is using the word as a means of trying to gain your business, the odor of desperation should be noticeable from a mile away.

Don’t Cry For Me, Valuation

If you actually get to the point where you are a viable investment for angels or VCs, stop worrying about getting the best darn valuation, and do the deal. Your focus should be on growing the business. If you are successful enough, there will be plenty for everyone. Would you rather have 100% of a company worth nothing, or 10% of a company worth $50 million?

Further, when you’re raising money from your core of family, friends, and fools, pushing for a high valuation may come back to bite you in the rear. While your unsophisticated investors may be willing to go along with your $100 million pre money valuation (probably because they don’t grasp the concept of valuation), this will cause problems down stream if you get in front of a sophisticated investor. VCs and angels will push for a more reasonable valuation, and you’ll be left with the options of either 1) not taking the needed investment, or 2) explaining to aunt Bea and uncle Vladimir why their stock, once worth $100 a share when they bought, is now only worth 50 cents per share.

Reducing The Jungle To A Merely Scary Forest

You’ll never be able to fully and completely reduce risk as you venture into the entrepreneurship jungle. But being better prepared, being realistic with yourself and your goals, and truly understanding if starting a business is right for you, may help you reduce some risk.

And don’t become enamored with many of the so-called recent entrepreneurial “successes.” Don’t think these people are any smarter than you. Yes, they have fat bank accounts, but since so many “successes” have not been able to repeat the magic and make it happen a second time, I guess their business acumen was being at the right place at the right time.

Instead of waiting for the next boom time, instead of waiting to 1999 to return, instead of waiting to ride someone else’s coattails, get out there and make your own magic.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com

I was talking with an investor friend a few days ago, and he was seething over some of his experiences with different entrepreneurs. He posed a simple question to me:

“What is the true meaning of ‘soft circled’?”

Any of us who have spent time being an entrepreneur, working for an entrepreneur, or considering investing in an entrepreneur, know what this means. We’ve all heard these comments, or variations on the same theme:

“I’ve got $200K in new sales ‘soft circled.’”

“I was speaking the XYZ Venture Fund, and we have a ‘soft circled’ investment of $2 million.”

As we riffed on this idea and its various permutations, I realized that there is a thin line between entrepreneurial enthusiasm and outright lies. In my many dealings with entrepreneurs over the years, I have experienced this first hand. An entrepreneur will take an initial phone call with a VC and parley that into statements that the VC is “about to invest.”

Or they will look at their sales funnel, see 10 projects with an upper and lower range of revenue estimates for each, and instead of taking the lower estimates of 3 projects, they will take the upper estimates of all ten.

In other words, entrepreneurs are setting themselves up for failure, since success is now dependant upon getting 100% of the potential revenue from 100% of projects in the sales pipe line. There is no margin for error. Kind of sounds like the Airline Industry needing to book 101% of the seats on each flight to get close to breaking even.

Just because XYZ Venture Fund chatted with you, it does not mean the floodgates of cash are about to open. Just because a sales prospect has a problem your product solves and he’s expressed interest in your product, it does not mean the floodgates of cash are about to open.

There are many more steps involved to getting to close. And the more steps involved, the greater the chance something will go screwy.

And then there’s the biggest culprit of the “soft circle” phenomenon: People are nice.

That’s right! People are nice, and it sucks. Over the years I’ve seen the “Mean People Suck” bumper sticker on many cars. In my world, it is the nice people who suck, because niceness tends to screw up so many business dealings. Because people want to be nice, they often have a difficult time giving a firm “no” to an entrepreneur. Since the entrepreneur has not heard “no,” the entrepreneur, ever the optimist, continues to believe the sale/investment is imminent, and worse, the entrepreneur often uses the lack of “no” to try to get other people to jump in and buy or invest.

 There is a tyranny in being nice. Niceness often begets the path of stupidity. For those who do not know what the path of stupidity is, it is when every step you make is absolutely perfect and correct…but you’re walking in wrong direction. The process makes sense, but it will never lead to the intended result because you’re moving in the wrong direction.

Because I strive to provide a road map for entrepreneurial success, here is my handy dandy “Avoid the Tyranny of Nice People” translation guide:

•          If you don’t have concrete next steps, you do not have a sale/investor. What you’ve had is a nice chat.

•          If the momentum of the deal starts to wan, you do not have a sale/investor. I’m a big believer in momentum. If the initial call/meeting went well, but each and every follow up email/call is met with vague replies (or no reply), the potential deal is dying on the vine. Stop telling people the sale is “soft circled.”

•          If you are not speaking with the actual decision maker, you do not have a sale/investor. You’re chatting with an influencer. You need to talk with the real decision maker.

This said, the onus is still on the entrepreneur to properly and realistically describe the status of his/her company and its various deals, prospects, and engagements. I know from talking with other venture capitalists that the VC usually puts the words of the entrepreneur into a mental filter. While some optimistic exaggeration is always going to inhabit the words of the entrepreneur, the entrepreneur should take care to avoid being clumped into the VC’s mental spam filter. Be accurate, be precise, and be realistic, otherwise your words run the risk of being considered akin to emails touting investment opportunities in Nigeria (send me your bank account number please), on-line pharmacies, printer cartridges, and male “enhancement” products.

My VC101 columns were published on ePrairie.com and written in the wake of Venture Capital 101, a self published ebook about venture capital.  Send me an email, bill@billsnow.com