Category Archives: Startups

Why Invest in Creative Entrepreneurs?

BogotaWhat are creative entrepreneurs, and why should investors spend time and money on them?

Let’s start by explaining what creative entrepreneurs are and how they differ from entrepreneurs in general.  Of course, all entrepreneurs create companies, so they are all creative, but I’m using the term in the sense of Creative Startups:

“Creative entrepreneurs drive global change, create economic value and promote cultural tradition and innovation. They . . . are found across the creative industries: fashion design, music, film, cuisine and local agriculture, architecture, tourism, museums and cultural centers . . . . Wherever culture is thriving, creative entrepreneurs are busy building ventures that generate economic opportunity and a diversity of creative and cultural expression.”

Generally speaking all entrepreneurs do some of the items in the first sentence but not all. Creative entrepreneurs are unique in that they are driven to create economic value with a greater emphasis on creative and cultural expression.

In an earlier blog posting, What Expectations of Time and Money Do Investors Have?, I explored the differences between time investors and financial investors. Let’s now explore why each of these types of investors should care about creative entrepreneurs.

Should Time Investors Invest in Creative Entrepreneurs?

As ecologist E. P. Odum pointed out in 1971, variety and diversity increases on the “edges” caused by changes in population characteristics or community structures. Thus when people with diverse backgrounds work together, the results are far more impressive than the sum of what they could produce individually.

This is just one of the many reasons why teams that include diversity such as creative (in the artistic sense) genius, financial talent, sales talent, and marketing talent (to name just a few) can be so productive.

Running a company is highly interdisciplinary. It requires skills in product leadership, marketing, finance, human leadership, accounting, sales, negotiation, and so on. That is why most successful startup companies are managed by teams, not just one individual.

Wasserman’s Founder’s Dilemmas is a great book about this and other issues relating to startup founders. A mentor can supplement a startup’s team during its formative stages with complementary skills, prior to its ability to fully staff.

I recently had the opportunity to look over the companies in Creative Startup’s 2015 accelerator program (http://www.creativestartups.org/participants), every one left me in awe of its founders. All have a product or service and a creative raison d’etre.

Creative entrepreneurs couldn’t thrive without time investors.  The answer to the question of whether investors should invest time in creative entrepreneurs is unequivocally “Yes”!

Should Financial Investors Invest in Creative Entrepreneurs?

To start to answer this question, it’s valuable to understand how companies in creative industries stack up against other companies in terms of revenue growth rates, M&A activities, and multiples.

Revenue Growth

Revenue growth rates vary tremendously from company to company and have little relationship to industry.  This suggests that revenue growth rates should not be a major factor in influencing financial investors to focus on or steer clear of creative entrepreneurs.

M&A Activity

M&A activity is very much tied to industry. According to Price Waterhouse and Cooper, the four industries with the most active M&A activity in the first half of 2015 were technology, pharmaceuticals, entertainment & media, and oil and gas.

Of the four, entertainment & media clearly includes many companies whose humble beginnings were envisioned by creative entrepreneurs.

In a 2015 survey by KPMG, respondents were asked which industries would be the most active in M&A. Here are the results:

  • 84% – Healthcare/Pharmaceuticals/Life Sciences
  • 62% – Technology/Media/Telecom
  • 36% – Energy/Oil & Gas
  • 34% – Consumer Markets
  • 30% – Financial Services
  • 24% – Industrial Manufacturing

Of these, both media and consumer markets clearly include companies whose beginnings could have been envisioned by creative entrepreneurs. However, creative entrepreneurs and their companies can play a role in all industries; just look at the artistic creativity behind any of Apple’s products as one example. And technology companies are just as likely to acquire a design company to enhance their products as another technology company.

Multiples

According to Hoover’s, the average valuation for all small companies in 242 industries the US in 2014 was:

  • 1.2 times revenues, or
  • 5.1 times EBITDA

I extracted 11 industries from this list that seem dominated by creativity (once again, I need to acknowledge that creativity can exist in any industry). The industries I selected were catering, apparel manufacturing, bakeries, candy manufacturing, cookie manufacturing, jewelry manufacturing, art dealers & galleries, jewelry retail, music stores, architecture services, and graphic design services. Using just these 11 industries, the average valuations for small companies in 2014 was:

  • 1.08 times revenues, or
  • 8.75 times EBITDA

This leads one to believe that valuations should not be a major factor in influencing financial investors to focus on or steer clear of creative entrepreneurs. .

The Team

The final, but incredibly important, factor that influences investors to become involved with a company is its team. Investors like teams with experience and or knowledge. There are four ways to gain credibility as an investible entrepreneur (this list excerpted/edited from “’A-Team and B-Product’ Better Than ‘B-Team and A-Product’”):

  • Team with others who have “been there before.” Perhaps the most difficult thing for a first time entrepreneur to understand is that you are much better off with 10% of a $100M company than 100% of a $100K company.
  • Compete for a spot in an accelerator. Competition for entry is fierce, but you will learn a lot and some investors will consider your experience to be as good as having “been there.” Creative Startups in Albuquerque and Santa Fe is one of the few that welcomes creative entrepreneurs. Three others are briefly described in Where is All the Love for Creatives?
  • Plan to grow slowly with little or no investment money. Learn the tricks of Ries’ The Lean Startup, especially the creation of a series of minimally viable products.
  • Put your idea on hold and join an experienced team pursuing their dream.

The answer to the question of whether investors should invest money in creative entrepreneurs is another resounding “Yes”!  Financial investors should be attracted to creative entrepreneurs as much as to any other entrepreneurs.

Summary

Ultimately investors have goals that they need to meet and all entrepreneurs, creative ones included, must demonstrate that they are the best horse to back.  Those that can clearly articulate why investors should invest their time and their money are demonstrating that they understand every element of their startup and their environment and have the knowledge needed to succeed.

About the Author

Dr. Al Davis is a mentor for Creative Startups in Albuquerque and Santa Fe, NM and was formerly a mentor for startups in the Colorado Springs Technology Incubator. He has published 100+ articles in journals, conferences and trade press. He is a passionate world traveler and has visited 8o countries.

He is the author of 8 books, including, Will Your New Start Up Make Money? He was a founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003. He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting and optimizing their business strategies. Click on the following to see a short video on Offtoa:

 

Team of skilled designers and business people working together on a project

Want to Help Aspiring Entrepreneurs?

Offtoa has released a crowdfunding project on Fundable, https://www.fundable.com/offtoa-inc, aimed at raising capital and ultimately providing new features that our customers are requesting.

150 entrepreneurs have used Offtoa during the past two years to help them launch their businesses by automatically generating financial statements from just their business assumptions.

Most entrepreneurs have to iterate their assumptions several times to determine if their business ideas are feasible, and if so, how much cash they would need. Once they have credible financial statements, they can

  • demonstrate to lenders and investors that they understand their product, market, and team, and
  • hone their business strategies to optimize financial results.

Now it is time for Offtoa to raise some cash so we can help many more aspiring entrepreneurs and give them additional features. We’ve set a goal of raising $15,000 in 60 days. If we don’t raise at least that much in that time frame, then we won’t get anything at all, and we won’t be able to help the next generation of entrepreneurs.

We really need your help. We created some terrific rewards in exchange for your pledges. They include access to Offtoa itself, cool Offtoa hats, copies of my latest book, and personal startup consulting time from me. If you just want to contribute to our success, and the success of others, you can pledge any amount using Tier A.

Select this link now https://www.fundable.com/offtoa-inc to get all the details along with information about Offtoa, our product, and our vision.   You can also check us out here:  www.offtoa.com.

What Time and Money Investors Expect from Startups

Wise Mountain Gorilla 2When we talk about investors, we usually mean financial investors, but what are time investors? And what do they expect? Let’s explore the motivations behind being an investor in general and the difference between those that contribute time and those that contribute money.

Traditional financial investors include angels, venture capitalists, friends and family, banks, and so on. Time investors include mentors, staffs of accelerator programs, and the founders themselves. Some (but not all) time investors may be financial investors. Some (but not all) financial investors may be time investors. At a high level, all investors focus on achieving maximum return while minimizing (or at least moderating) risk.

What Investors of Time Expect

I’ve mentored many dozens of aspiring entrepreneurs and their startup companies. Personally, I do it for a very simple reason: I like seeing people succeed, and if I can contribute in any way, big or small, toward that success, I feel great. I expect nothing from my mentor time investment other than personal satisfaction of making a difference. In those occasional cases when the founders/officers believe that I can make a much longer-term contribution to the company (and I have available time) and they offer me a position as a member of the board of directors or advisors, then, I always prefer equity and/or options over cash compensation; that’s to better align all of our personal goals with the company’s goals.

I’ve been in executive positions in 5 startups . . . and counting. Some have been great successes and some miserable failures. I learned far more from my failures than my successes (although Iearned far more from my successes than my failures J). Good mentors should not be afraid to admit their failures; others can learn from the patterns of underlying mistakes.

All investors expect some type of commitment from founders/entrepreneurs. Whereas financial investors usually expect entrepreneurs to devote full-time to the startup, time investors (who are not also financial investors) are more likely to understand a founder’s need to balance life’s commitments.

What Financial Investors Expect

To no surprise, financial investors are primarily interested in financial returns. Investors want to know what their internal rate of return (IRR) will be for a given investment. IRR is the compounded annualized rate of return.

The IRR an early startup investor will achieve is a function of many factors, including:

  • The rate of revenue growth (usually a function of the market size, “excitement” of products offered, strength of the marketing campaign, alignment of products with a significant pain felt by customers, and competition). The faster the growth, the higher the IRR.
  • The profitability of the company.
  • The level of merger and acquisition (M&A) activity in the space. This contributes to how quickly and how likely the company will experience a liquidity event.
  • Typical multiples for the industry. When a company in this industry is acquired (or has a public offering), the acquirer (or the investment banker) will value the company. That valuation will be some multiple of revenues and some multiple of profits. The averages differ greatly based on the industry. See “Determining Future Valuation of a Startup.”
  • The likelihood that the company will survive until a liquidity event. This is a function of many factors including the experience and knowledge of the team. Only 50% of startup companies survive 5 years; see “Eight Seemingly Harmless Things You Should Never Say to Investors.”.
  • The likelihood that later investors will not severely dilute earlier investors with high liquidation preferences. See “Liquidation Preferences and Avoiding Dilution.”

As a result of the above factors, it is no surprise that investors in startups companies like to invest in

  • High growth companies
  • High M&A industries
  • Industries with high multiples
  • Teams that include experienced entrepreneurs or new entrepreneurs who have been through intensive accelerator programs.

Summary

Ultimately investors have goals that they need to meet and all entrepreneurs must demonstrate that they are the best horse to back. Those that can clearly articulate why investors should invest their time and money are demonstrating that they understand every element of their startup and their environment and have the knowledge needed to succeed.

About the Author

Alan DavisDr. Al Davis is a mentor for Creative Startups in Albuquerque and Santa Fe, NM and was formerly a mentor for startups in the Colorado Springs Technology Incubator. He has published 100+ articles in journals, conferences and trade press. He is a passionate world traveler and has visited 8o countries.

He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He was a founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003. He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting and optimizing their business strategies. Click on the following to see a short video on Offtoa:

Which Comes First: The Product or Target Market?

Chicken
Egg
Determining which comes first, the product or the market is challenging even for companies with an established brand and existing products consistently generating revenue.  It’s exponentially more difficult for startups to separate the two which is why it may be a relief to hear that the two are actually inseparable.

Startups are born in a variety of ways but two of the most common are these.

  1. When a recurring or consistent need is identified. The founders decide to build a solution and sell it to people with that need. The emphasis is more on the needs of the market but is still ultimately inseparable from the product.
  2. When founders develop something “really cool.” It is often for their own specific use, and realize somewhere along the way that if they can identify a group of people with the same need, they could sell it. Sometimes that requires some adaptations to make it more appealing. In this case, the process starts with the product and evolves to identifying a target market, again making them inseparable.

In the case of the chicken and the egg, both need each other. The same is true of the product and target market. One can’t thrive without the other – at least not as successfully.

If startups don’t know who their customers (i.e., their market) are, how can they determine their needs? And if they don’t know their needs, how can they determine what products to sell them? Alternatively, if they don’t know what products to sell, how can they determine who might want to buy them?

Investing the time to identify and understand their target market drives financial success for startups.

How to Define Your Target Market?

Here are some ideas on how startups can define their markets:

  • By consumer type. Startups that are planning to sell to consumers and businesses might find it helpful to distinguish their markets as B2C and B2B. Businesses can be further defined by size – small, medium, enterprise, global, etc.
  • By geography. Startups that are planning to sell only in one or more geographic regions (they could be cities, states or countries), and then later expand to other regions, might find it helpful to define their markets as names of those regions.
  • By distribution or sales channel. Startups that are planning to sell some products using in-house sales, and some products using a reseller or distributor or wholesaler, might find it helpful to define markets as names of those channels.
  • By marketing technique. Startups that are planning to make customers aware of products using a variety of techniques such as website, direct mail, telesales, pay-per-click web advertising, and so on, might find it helpful to define markets by the names of those techniques.
  • By demographic. Startups might find it helpful to define markets as children, double income no kids (aka DINKs), single income no kids (SINKs), zero income no kids (OINKs), retired, and so on.
  • By size of purchase. Startups may find it helpful to define markets as small purchasers, medium purchasers, and large purchasers.
  • By category of user. In some businesses, a product may produce multiple income streams from multiple classes of users. For example, a company with a product that helps high school athletes find the perfect college to attend might find it useful to define its markets as students, parents, coaches, and college recruiters.

There is no limit to how many ways markets can be defined. As a guideline for the sake of planning and to avoid unnecessary complexity, startups are best served by defining something as a unique market only if

(a) Pricing will be different than for other markets,

(b) Different products will be sold to this market than to other markets,

(c) A different commission structure will be used for this market than for other markets,

(d) Entry into this market will be in a different timeframe than other markets, or

(e) It makes sense to track the financial performance of this market independently from other markets.

The bottom line is there is nothing magical about defining a market. Startups can define it any way that makes good business sense. .

Is it better to define a market broadly or targeted?

To answer this question, let’s look at an example. Let’s say a startup has an innovative, but exclusive, approach to wedding photography.

  1. It could define its market to be the number of marriages in the United States every year, which is 2,000,000+. As a starting point, that might be okay, but where a lot of startups tend to come unstuck is in assuming that “we only need to capture 1% of that business and we’ll achieve our financial goals!”One percent of anything sounds so easily achievable but depending on the product, price, competition, and many other factors, it may be totally unreasonable. Broad market identification tends to lead to a false sense of security.
  2. Another possibility is to define its market as the number of actual wedding ceremonies in the United States that spend over $50,000 for the event. Now the target market is smaller but with a much higher likelihood of being the audience that will purchase from the startup.Although market penetration numbers are going to be higher, the resulting financial projections will be far more believable.
  3. Yet another possibility is for the startup to plan to grow its business regionally. Let’s say it is physically located in Denver. It can define its first market to be the number of actual wedding ceremonies in the greater Denver metropolitan area that spend over $50,000.Now penetration numbers could be even higher as the result of a more targeted marketing effort. Then it defines its second market to be Colorado, and then the third to be the Rocky Mountain region, always targeting the high-end only.

Bottom Line Advice

The narrower and more targeted the market is, the more focused the marketing message can be, resulting in a greater quantity of qualified leads and a higher conversion rate. This also allows startups to have a lower customer acquisition cost. All of that means a higher probability of being financially successful.

About the Author

Alan DavisDr. Al Davis has published 100+ articles in journals, conferences and trade press. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He was a founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003. He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting and optimizing their business strategies. Click on the following to see a short video on Offtoa:

Photo credits:

Startup Financial Statements: Why Not Excel®?

No Excel
When you are considering launching a new company, you need to create pro forma financial statements. There are three reasons:

  1. You want to make sure that the business path you are on could result in satisfactory financial results,
  2. Potential investors are going to want to see them, and
  3. The earlier you create them, the earlier you’ll know what underlying business assumptions you need to achieve.

The transformation of all your business assumptions (like product price, rate of sales growth, customer acquisition cost, and so on) into financial statements is “just” a massive combination of mathematical formulas, so why not “just” use Microsoft Excel®?

Well, the transformation of all your income and deductions into your annual federal income tax returns is also “just” a massive combination of mathematical formulas, so why don’t you “just” use Microsoft Excel for your taxes?

The answer is the same for both cases! The transformations are non-trivial, error-prone, and extremely time-consuming.

I admit it. For 20+ years, I did use Excel to build customized spreadsheets to create pro forma financial statements for 40+ startup companies. Each took me a few hundred hours to create. Let me say that again:  each one took a few hundred hours!

Much of that time was spent debugging all the formulas, especially the ones relating to depreciation of fixed assets, interest on loans, cash flows for accounts receivable and accounts payable, and option packages for employees.

For those of you who have done this a few times, you know that the problems usually manifest themselves as the cash balance on the cash flow statement doesn’t equal the cash at the top of the balance sheet :).

I’m a lot smarter now.

Why Use TurboTax® (or an Equivalent) for Income Taxes?

The reasons are:

  1. Your goal is to do your taxes, not to program or debug formulas.
  2. You want to spend your time earning income, not filing taxes.
  3. You don’t want to make mistakes.
  4.  TurboTax will walk you step-by-step through all your income and deductions, or if you insist, you can use its checklist and do them in any order you like.
  5. TurboTax will warn you of missing items.
  6. TurboTax will let you know of problems with your return that the IRS will not like.
  7. TurboTax will provide advice on how to fix any problems.
  8. TurboTax makes sure you have a complete set of all forms and schedules necessary for your Federal and State returns. For example, if you have capital gains, TurboTax adds Schedule D; if you have none, it excludes Schedule D.
  9. You get tips on how to reduce taxes or how to maximize itemized deductions.

Why Use Offtoa™ (or an Equivalent) for Financial Statements?

The reasons are:

  1. Your goal is to create your pro forma financial statements, not to program or debug formulas.
  2. You want to spend your time running your startup, not creating financial statements.
  3. You don’t want to make mistakes.
  4. Offtoa will walk you step-by-step through all your assumed sources of revenue and expenses, or if you insist, you can use its checklist and do them in any order you like.
  5. Offtoa will warn you of missing items.
  6. Offtoa will let you know of problems with your financial statements that your potential investors will not like.
  7. Offtoa will provide advice on how to fix any problems.
  8. Offtoa makes sure you have a complete set of financial reports (income statement, balance sheet, cash flow statement) for five years (monthly, quarterly, and annually), plus extensive graphs. If you expect to have investments, Offtoa includes capitalization tables and estimated internal rates of return (IRR) for your investors based on industry average valuations.
  9. You get tips on how much cash you’ll need, or when you’ll become profitable.

Summary

If you have unlimited time, yes, you should do your income taxes using Excel and you should create your startup’s financial statements using Excel.

But if you are a busy entrepreneur and want to spend your time running your company, use a tool to transform your business assumptions into pro formafinancial statements.

About the Author

Alan DavisDr. Al Davis has published 100+ articles in journals, conferences and trade press. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He was a founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003. He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting and optimizing their business strategies. Click on the following to see a short video on Offtoa:

Microsoft, Excel, and the Excel logo are registered trademarks of Microsoft Corporation. Intuit and TurboTax are registered trademarks of Intuit, Inc. Offtoa is a trademark of Offtoa, Inc.

4 Things You Must Do When Starting a Company

BXP135658The lean startup movement (of which I am a big proponent) has thankfully eliminated the “build it and they will come” attitude among aspiring entrepreneurs.

In its place, most new entrepreneurs build minimally viable products (MVP), test them with real customers, receive feedback, adapt and refine, and continually repeat until they find a product that customers like (at a minimum) or ideally, crave.

This new process reduces risk, minimizes cash burn, allows companies to fail early, and allows investors to put their larger investments into only those companies that look like potentially big winners.

However, it also puts a very heavy emphasis on the product – an emphasis that can result in distracting startups away from other essential activities that when initiated at the start of a business can help to identify and reduce other risks just as enormous.

The Biggest Risks

Those risks will vary from company to company and industry to industry, but some risks are common to all startups:

  1. Will customers crave your product?
  2. What will customers pay for your product?
  3. Are their sufficient numbers of customers?
  4. How will you make customers aware of your product?
  5. What will it cost to produce your product?
  6. What will it cost to run your company?
  7. How much cash do you need?

So how does a startup manage these risks from their inception and consistently?

Reducing Those Risks

The popular iterative process described in the second paragraph of this article addresses risk #1 very well. If pricing experiments are included, it can also address risk #2.

Addressing risk #3 requires some level of market and industry research. I’m not suggesting a major effort here, but I am suggesting that you spend at least some time understanding market segmentation, the competition and which segments each competitor aims for. Make sure you include substitute (indirect) competitors.

Failure to address risk #4 early is perhaps the most common mistake of newbie tech entrepreneurs. Often, they’ll think “once we figure out what the product is, then we’ll figure out how to sell it.” This is just a few steps away from “make it and they will come.”

Another common attitude among newbie tech entrepreneurs is “oh, the internet will take care of sales.” The fact is making sales takes work for 99% of companies. Internet sales are not easy! And margins when selling through Amazon are close to nil.

Iterate on your sales model just like you iterate on product features. Start with an initial proposal (based on serious thought!). Then iterate as you learn more. Some of your basic options include inside sales force, outside direct sales force, sales channels/distributors (e.g., Amazon), and internet sales from your own website along with a major SEO effort. Each choice has major impact on your costs and thus your viability as a company.

The easiest way to address risks #5-#7 is to create a quick financial model.

  1. First, make a list of all your business assumptions; this is a good idea to keep you organized in your experiments anyway; after all, it is these very assumptions that serve as the hypotheses that you are testing in your lean startup experiments.
  2. Use a tool to automatically transform the assumptions into pro forma financial statements. These financial statements will then tell you (a) when you will be profitable, (b) when you will break even, (c) how much cash you will need, and (d) what your company’s valuation will be based on industry averages, and (e) what kind of return your investors are likely to receive.

The actual process of entering data for business assumptions should take you no more than 30 minutes. But the real value of using a tool that requires you to write down your business assumptions is the thinking that it inspires you to do. For example, for manufactured products, it asks you questions about what you assume the cost of raw materials will be; for software products, it asks you questions about how many customer support people you plan to hire, and so on.

Remember, these are just assumptions, so you can launch your company with your eyes wide open. You don’t want to start a company that you know will be unprofitable from the start.

I am not advocating for a full business plan. On the other hand, I do not believe that just having the right product is a sufficient first step. Instead you need (from the start!) to be engaged in at least four simultaneous risk-reduction activities:

  1. Building an MVP and then iterating it until customers crave it
  2. Studying the market, segmentation, and competition
  3. Assuming a sales model and iterating as more is learned
  4. Building a financial model based on assumptions and iterating as more is learned

Here are some examples of why just getting the right product is not good enough:

Why the “Right Product” is Not Sufficient: Example 1

Let’s start with a hypothetical case. You have created a product that provides a special nutritional source for pregnant women in Niger, to help reduce the country’s 14% rate of maternal death during childbirth.

You can run a series of experiments to determine if the product is palatable and refine it if necessary. You can also run a series of experiments to determine its efficacy on reducing deaths.

However, the biggest hurdles are not the product’s features. The biggest hurdles are logistics, costs, prices, and everything else that makes up the business.

Why the “Right Product” is Not Sufficient: Example 2

Turning to a simpler example, suppose you are building an app. You can tweak it based on myriad experiments until you have the product that customers love. But if customers expect to download the app for free, you have no business.

 

Why the “Right Product” is Not Sufficient: Example 3

Let’s look at another example, this time from a real company: This company planned to manufacture industrial lubricants with very unique properties and capture a large percentage of the market by (a) marketing unique differentiators that were the result of unique raw materials that were “green,” and (b) price the products well below competition.

That sounded like a great value proposition for all stakeholders. However, a careful early financial analysis revealed that the green raw materials drove the cost of goods sold up to around 85% of the planned price. This left just a 15% gross margin, far too low to support infrastructure costs. A financial analysis at the beginning revealed that this company was a non-starter.

Why the “Right Product” is Not Sufficient: Example 4

Let’s look at one final example, another real company: Adapta Medical. Founded by Dr. Glen House, and based on his numerous patents, Adapta iterated on and perfected an intermittent urinary catheter that an individual with limited dexterity (e.g., a C6-C7 quadriplegic) could use to self-catheterize.

From the beginning, Dr. House experimented with product designs, customer satisfaction experiments, multiple manufacturing sources, and financial models, simultaneously. The tasks that took the longest time and consumed the most energy were working out the manufacturing and cost models. Fortunately for him, he started on these from the beginning, so after about a year product iteration (to arrive at the first commercially viable product), he only had another two or so years to work out the manufacturing and cost model glitches.

Now that he is in production, he continues to perfect the product, iterate on the financials, hone the costs, and adapt the manufacturing processes. Learn more about Adapta at www.adaptamedical.com.

Summary

These days, everybody thinks they can launch a new company. The popular process of “iterate the product until customers like it” provides necessary but not sufficient assistance to the naïve first-time entrepreneur. At a minimum, an entrepreneur must start with these four activities to mitigate the risks of starting a business:

  1. Building an MVP and then iterating it until customers crave it
  2. Studying the market, segmentation, and competition
  3. Assuming a sales model and iterating as more is learned
  4. Building a financial model based on assumptions and iterating as more is learned

Start doing all of them at the beginning; don’t do them sequentially.

About the Author

Alan DavisDr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books. He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.

If you’d like to learn if your great business idea will make money, take a look at Will Your New Start Up Make Money? If you’d like a tool that transforms business assumptions directly into pro forma financial statements, check out www.offtoa.com.

 

 

Starting Line Photo Credit: “Female Track Athletes at Starting Line” by Tableatny (Creative Commons)

Risk Photo Credit: “Los Angeles Graffiti Art” by A Syn (Creative Commons)

Niger Flag Photo Credit: “Niger Flag” by Philippe Verdy (Wikimedia Commons)

Not for Sale Photo Credit: “Onis Not for Sale Sign” by Noblestrawberry (Creative Commons)

Dramaten_mask_2008a

Startups and Ethics

We have all read about high-profile unethical happenings at companies like Enron, Tyco and WorldCom, but unethical people exist at all levels and in companies both large and small.

To avoid having to deal with ethics in your startup, be observant for the following characters who can pop up anywhere.

The Over-Promiser

Many of us have experienced overzealous salespeople promising customers features that are only being considered for implementation by the company. Some salespeople do this as a means to pressure the R&D team to raise the priority of some features that the salesperson considers to be high priority.

The salesperson thinks that, “We must build feature x into the next release; I have already promised it to customer y,” will be a convincing argument.

In one startup company in which I was president, the VP of Sales took this approach to an extreme. We had 2-3 features still in the conceptual stage, all of which required negotiations and signed partnership agreements with third parties. The VP of Sales did not just promise that we would offer those features in the future; in order to get their sales, he lied and told them that we offered those features today.

Not only did he create mistrust internally, potential customers quickly realized that promises were being made that couldn’t be kept.  There’s no way to restore that loss of trust.

After my repeated warnings, he continued his behavior, and we soon “parted ways.”

The Desperate Salesperson

In another startup, we had a team of three salespeople, all on base salary plus commission. They were an inside salesforce making outgoing phone calls to targeted customers.

All of us were in cubicles so we could hear each other’s phone calls fairly easily. One salesman, let’s call him The Desperate Saleperson, was pacing the halls while talking on his phone with a prospective client. I was able to discern quite easily that he was talking to a female executive (I later learned she was a CEO of a $5-$10M company).

She was not buying his usual sales messages, so he asked her out to dinner. Now, there are a few ways he could have asked her out to dinner, and this was definitely not the appropriate way. She turned him down and hung up on him. Then I heard him ordering flowers to be delivered to her office. Arggh.

Professionalism, ethics, and integrity will survive long after sales are won and lost.  When colleagues are willing to compromise their values the outcome not only reflects on them, it reflects on you and your startup. Value and reward integrity above all else.

He was fired the next day.

The Customer Without Integrity (CWI)

I joined my first startup in 1984 and was responsible for the company’s services division. I had worked for 5 months to secure a $500,000 subcontract with a large government contractor to perform configuration management services. Our purpose was to:

  • Be the “keeper” of the official software baseline.
  • Be the “keeper” of the complete list of outstanding bugs and enhancement requests and ensure that the list was consistent with the current software baseline.
  • Ensure that each new proposed baseline was thoroughly tested for correctness relative to any bugs or enhancement requests that it was supposed to address before accepting it.

I had hired a staff of three to work on the contract but not yet hired the project manager, so I was filling that role temporarily. After a few months, the project manager for our client, let’s call him CWI, came to my office and handed me a large magnetic tape.

He said, “here’s the new baseline.” I asked, “which of the 1,200 outstanding bugs does it fix?”

CWI responded, “I have no idea. Nor does the development team. Just take this and make it the new baseline.” I explained that if I did that, we would no longer have any idea which of the 1,200 bugs still existed in the product and which were fixed. I explained that by accepting the new baseline without a trace to the associated bugs violated the basic principles of configuration management.

His answer was, “We have a meeting with our Navy customer tomorrow. And we promised we would have the new baseline approved. If you don’t accept this baseline, we will miss the deadline and we will be in default.”

I had worked very hard to obtain this contract, and losing it would be a major blow to our startup company, especially my division. But to follow CWI’s command meant violating the very purpose for our subcontract. And from a larger perspective, I was also helping my customer swindle the Navy. I just couldn’t do it.

I suspect that my raise, bonus, and stock options that year were less than I would have liked, but at least I was able to sleep at night. No revenue is worth loss of your personal integrity.

The Grade Changer

A few years later I was teaching a monthly course at a US Army base. Each class consisted of about 35 Army officers, mostly captains and majors, with an occasional 1st lieutenant and an occasional lieutenant colonel or colonel.

Each class also included 4-5 “allied officers.” These were guest officers from all branches from countries that were not (at least in my opinion) our most obvious allies, but were mostly from developing nations whom we seemed to be courting to become better allies of the USA.

During my first month of training as an instructor, the officer in charge of the school, let’s call him Colonel Potter (not his real name), explained to me that I may not give a grade lower than a “B” to any of the allied officers. I asked why not.

Colonel Potter told us that a few years ago, an instructor at this school had given a “D” to one of the allied officers, and when that officer returned to his country, he was executed for disgracing his country!

I understood and consented. In retrospect, some may consider such a practice to be unethical, but the policy did not (and still does not) stir up the unethical bits from the bottom of my soup pot.

The Contract Violator

I was teaching a course on entrepreneurship in Jos, Nigeria, a few years ago and we were discussing the fact that in the USA, founders usually must provide personal collateral if they want to obtain a loan. This led to a discussion of “terms and conditions” and “contracts.”

One of the students then asked, “Here in Nigeria, we have no civil courts to enforce violations of contracts. So contracts have no meaning here. What do you recommend we do?”

My response was heavily influenced by a lesson taught to me many years ago by Ben Sparks, attorney at law (if I misquoted you, Ben, it is entirely my fault!): “Contracts should be signed only by people who completely trust each other at the time of signing. And contracts are used as the basis of lawsuits only when that trust is no longer present.”

My recommendation to my Nigerian student was very simple: “only do business with people who you trust entirely.” When trust doesn’t exist in the beginning of a relationship, it definitely won’t exist at the end.

The One-Sided Boss

This story took place in a small company that had been around for 20 years, but it certainly could have occurred in a startup.

The owner of the company wanted to retire and decided to sell it to two of the employees. One of them decided to have one-on-one meetings with each of their former colleagues, who now have become their employees (not a bad idea!).

During one of those meetings, an employee remarked that she might have a difficult time working for his peer because he did not respect her. The new leader’s response was, “He’s the boss. He doesn’t need to respect you. You just need to respect him.”

Respect has to be built and earned over time.  When it doesn’t exist, or worse when it has been eroded, a great deal of honest work must be done to repair it. And above all, respect is always a two-way street.

Summary

If you recognize these people, don’t let them infiltrate your startup.  Only partner with those you trust and who have the qualities you need to make your business successful.

Please write your comments about these stories. Which have you seen yourself? Which are the most common? Which are the worst? Do you have you own stories of unethical people in your startups? Write about them in your comments.

____________________________________________________

About the Author

Alan DavisDr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.

If you’d like to learn if your great business idea will make money, take a look at Will Your New Start Up Make Money? If you’d like to verify that your great business idea makes financial sense, sign up for www.offtoa.com.

Which Way to Puchowich

Why Grant Options Early?

During an interview with a solar panel manufacturing startup in Vietnam, the CEO and co-founder lamented about high employee turnover.

He asked for advice on retaining employees and I suggested he consider granting stock options. These golden handcuffs would motivate his employees to stay because the agreement could result in a significant upside for them financially.

His response was one I’ve heard before, “me and my two brothers own the entire company. We don’t want anybody else to own any part of it. Maybe when the company gets larger we might consider granting options to employees, but certainly not now when the options could become so valuable.”

Many entrepreneurs fear loss of control. However, by motivating employees with shared ownership, you actually increase the likelihood of everyone succeeding.  Let’s look at the tactical side of options to better understand the positive role they play in the psychology of employees.

How Does an Option Work?

When you grant an option to an employee (aka the grantee or optionholder) to purchase n shares of the company, you are telling the employee that s/he may purchase n shares at some point in the future (usually at any time over the next 5 years) at a fixed price (called the strike price) that is defined today.

By regulation, that strike price must be close to today’s fair market value of the stock. See this great article by Morse Barnes-Brown Pendleton, PC, to learn about determining strike prices.

An option grant should never be an oral agreement; it should always be in writing and backed up with a previously approved formal option plan.

What Are Options Worth?

Let’s say an employee receives a grant of 50,000 shares with a strike price of $.20 per share. Furthermore, let’s say that the company’s current plan calls for growth (revenue and profit) and the sale of additional shares (e.g., via investments), resulting in the company being valued at $25,000,000 in 3 years with a total 6,250,000 fully diluted (i.e., outstanding shares plus all options exercised) shares.

And finally, let’s assume that the company actually achieves all its goals and the above plan becomes reality.

After 3 years, the employee could exercise his/her option, purchase the 50,000 shares at $.20 per share at a total cost of $10,000. Then, assuming the shares are liquid, s/he could immediately sell those shares at their current value of $4.00 per share (i.e., $25,000,000 divided by 6,250,000), and receive a check for $200,000.

So, at first glance, one could argue that this option was “worth” $190,000 ($200,000 minus $10,000) or $3.80 per share. But actually that’s the employee’s profit resulting from exercising the option and then selling the shares.

The actual “value” of a stock option is influenced by many factors:

  • The strike price and the expected growth of the company (the two factors shown above)
  • The probability that the company will achieve the expected growth
  • The probability of a total loss
  • The time value of money

Most entrepreneurs need to understand how to assign a strike price and the mechanics of how options work; they do not need to understand option valuation theory but if you really want to learn about it, the place to go is Black-Scholes.

Why Grant Options to Employees?

An employee who has options has the potential to receive a large sum of money if the company does well and the company experiences a liquidity event and the employee stays with the company.

The above is part of a formula for motivating employees to work hard (to help the company do well) and to stay with the company.

One of the best aspects of granting options to employees is zero risk:

  • If the employee chooses to not exercise the option, it costs her/him nothing
  • If the employee chooses to leave the company before exercising the option, the options return to the option pool.

Why Grant Options Early?

The spread between the strike price of an option and the market price of the share at the time the option is exercised determines the profit received by the employee. We usually talk about this spread in terms of percentage profit (1900%) or multiple (19x), as opposed to a simple dollar amount ($3.80).

The percentage profit is usually proportional to the rate of growth of the company. The faster revenue and profit growth for the company during the period of the option, the higher the percentage profit (in general!) for the optionholder.

As a general rule, a company’s revenue and profit can grow as a percentage of its previous year most easily during its formative years. After all, it is easier to grow 200% when revenues are $200,000 than it is to grow 200% when revenues are $20,000,000.

Therefore, granting an employee 1% of the company’s outstanding shares as options when the company is tiny will result in a much more valuable reward to the employee than granting that employee the same number of shares a few years later. More reward means more motivation and more long-term commitment.

And notice that as a founder, you “lose” the same number of shares either way!

Summary

Many entrepreneurs fear loss of control. However, by motivating employees with shared ownership, you increase the likelihood of company success. And success is what entrepreneurs should be striving for.

Offtoa lets you model stock options for employees so you can easily see how much dilution results for founders and investors.

About the Author

Alan DavisDr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.

In case you were wondering, when I got to the “Rudzensk and Puchowich Crossroads,” shown in the photo, I turned right and headed 7 km toward Puchowich, the village where my grandfather grew up.

If you’d like to learn if your great business idea will make money, take a look at Will Your New Start Up Make Money? If you’d like to verify that your great business idea makes financial sense, sign up for www.offtoa.com.

 

 

 

Photo credit: “Rudzensk and Puchowich Crossroads,” Belarus © Alan M. Davis 2006

 

Botswana Truck

Are YOU a Good Risk to be an Entrepreneur?

During the past 30 years, hundreds of people have asked me, “I’ve got this great idea for a product. All I need is funding. Will you help me?”

As I search through online forums, I see similar pleas over and over again, “I have this great idea for a new app. Will you help me build it?”

Kickstarter and similar venues are full of great ideas that need money.

Let’s assume that you have a great idea. Will adding money be sufficient to create success? Or are there other ingredients that make a business successful? The answer of course is that building a profitable business requires more than a great idea and money!

It includes attributes of the market, the industry, your background and skills, and the rest of the team’s background and skills, to name just a few. But let’s focus right now on just YOU.

Are you a good risk as an entrepreneur? Do you have what it takes? Should others have the confidence in you to bet their money on you and your company? Here is a list of qualities that experienced investors will be looking for from you.

1. Are you 100% committed?

Assuming that you are looking for others to invest their money in your business, they need assurance that you are completely committed. After all, when things get tough (and they will), you should not find it easy or comfortable to simply walk away from the business.

To demonstrate commitment, you need to show you have some kind of skin in the game. This can be done in many ways. For example, quitting your day job. Taking out a second mortgage on your home. Putting your retirement savings into the venture. Using personal credit card debt to partially fund the company. Working 60 hours a week for the new company while working your day job.  All of these demonstrate commitment.

If you don’t show commitment, you don’t have what it takes, and you should not be surprised if others see you as a poor risk.

2. Do you surround yourself with excellence?

Startups require an enormous breadth of skills. As an entrepreneur, you need to be confident enough in yourself to bring on board your team the absolutely very best talent that compliments your skill set. You do not have all the skills necessary to run a company by yourself. Nobody does. Whatever talent you are lacking (e.g., law, accounting, sales, marketing, engineering, product development), you need to hire the absolutely very best!

If you are afraid that hiring somebody “better than you” will somehow erode your position, you probably don’t understand the role of a corporate founder. If you are afraid to hire the best, don’t expect others to invest in you. You don’t have what it takes.

3. Are all the requisite skills covered?

In the previous section, I talked about the fact that no single individual can possibly have all the requisite skills to run every aspect of a company. So what are these requisite skills? Among others, they include:

  • Product development
  • Sales
  • Marketing
  • Accounting
  • Finance
  • Law
  • Leadership
  • Manufacturing
  • Quality control
  • Operations

And each of the above has multiple dimensions that sometimes require multiple individuals (unless you are fortunate to find individuals whose skill sets span the dimensions). For example, within marketing, there is SEO, website development, marcomm creation, lead acquisition, branding, and so on.

Of course, some of these areas are easily outsourced (e.g., law and accounting). And others can easily be deferred until the company grows.

If you are going after serious investor funding (e.g., from angels or VCs), you will need to have all these areas covered, or at least make it clear that you understand that you will need to quickly fill any vacant positions.

4. Have you or your team “been there before?”

Experience running a startup arms you in a way that cannot be replicated by books, mentorship, and research.  These are important too but experience is the best teacher. Regardless of whether that company was ultimately successful and not, certain patterns repeat themselves in every company. Investors do not like seeing their money squandered while first-time entrepreneurs learn lessons.

If you are a first-time entrepreneur, you might think that you have no chance to secure funding. That is not at all true. The solution is to build your team and make sure the team includes individuals who have been there before. Consider “having been there before” as just one of the many diverse set of skills one needs on the team.

Personally, I served key roles in two startups. First I was a non-founding, vice president for a company that eventually had an IPO. Second I was a founding member of the board of directors for a company that was acquired by a publicly traded company. By the time I launched a startup as the CEO, I clearly had “been there before” even though I had not personally been the founder or CEO of either of the two earlier companies.

5. Are you a proven leader?

You may be the perfect founder for a company, but may have none of the skills required of a leader. In such a case, you might want to serve as the chief technical officer (CTO) for the company and allow somebody else to run the company.

You will still be a significant shareholder, but the company will be more attractive to investors and you’ll end up with a smaller piece of much larger pie than a large piece of a very small pie.

6. Are you motivated by the right things?

Outside investors (as well as potential colleagues) are going to be assessing what motivates you to start a company. It has to be for the right reason. Or at least it must be for a reason that is compatible with the investors.

Some of the likely wrong reasons to start a company are power and ego gratification. A good reason to start a company is a sincere desire to satisfy a customer problem. Wealth creation might be okay if it is not the only reason, and it isn’t just for yourself.

I remember asking the founder of my first startup company what his goals were; he responded, “I plan to become very rich, and I hope as many people as possible become very rich along with me as we endeavor to solve the problems that the customers have” I like that!

Summary

Many aspiring entrepreneurs who lack funding blame investors (or lack thereof) for their failure. In many cases, however, these individuals have at least two options:

  1. They can improve their chances of funding by changing their own skills, attributes, and attitudes.
  2. They can figure out how to bootstrap their businesses. By doing this they expend their energies slowly growing their businesses instead of complaining about the lack of funding.

If you have what it takes to be an entrepreneur, the next step is to create your pro forma financial statements. If you want to learn how to generate pro forma financial statements automatically from your business assumptions, check out www.offtoa.com.

About the Author

Alan DavisDr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., a SaaS company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.

If you’d like to learn if your great business idea will make money, take a look at Will Your New Start Up Make Money? If you’d like to verify that your great business idea makes financial sense, sign up for www.offtoa.com.

 

Seven Signs your Startup will Succeed

Banded Snake Eagle, Ubuntu, TanzaniaMatthew Toren wrote a terrific article 7 Myths About Starting a Business That I Used to Believe. In it he debunks 7 myths about startups that could otherwise easily deter those with a great idea that don’t know any better. With these myths debunked, let’s talk about the seven signs that indicate your startup will be among the 50% that survive 5 years.

1. You Know Your Competition

Key to a product being successful in the market is that customers see it as a better solution to their pain than alternatives offered by the competition.

Better can be mean lower priced, or more convenient, faster, cleaner, greener, more exclusive, more reliable, and so on. These qualities are called differentiators.

I use the word competition here in the broadest possible sense, including companies that are directly competing with you (e.g., Avis if you are Hertz), companies that are indirectly competing with your company (e.g., bus companies if you are a rental car company), and the status quo (e.g., people who are not traveling because of the lack of transportation options).

2. You Know Your Financials

Lean is the only way to start most companies today, but prudent does not mean blind. Responsible lean companies document all their business assumption so they can run experiments to validate those assumptions and incrementally lower risk. Those same documented assumptions are also sufficient to create pro forma financial statements.

Those financial statements enable you to determine whether the company could succeed if the assumptions prove to be true.

3. You Have Room for Error

Pilots always have enough fuel to return to an airport, and always use a runway longer than is required for their aircraft type. Having room to navigate the unexpected is also crucial for startups because inevitably one, some or even all of these things will happen:

  • Fewer visitors will come to your website
  • Customer acquisition cost will be higher than planned
  • Revenues will be lower than expected
  • Customers won’t pay on time
  • Materials, raw goods, and services will cost more than budgeted

4. Your Sales Are Planned Bottom Up

If you guess at your projected revenues, you are not setting up your startup for success. Instead, determine how you are going to sell. For example:

  • Are you going to drive traffic to your website and then convert x% of the visitors to paying customers?
  • Are you going to make x outgoing sales calls per day, and convert y% of them to paying customers?

See the article, 5 Steps to Get & Keep Your Startup on Track, to learn how to calibrate your revenue projections.

5. Your Experiments Are Planned

After you state your assumptions, run experiments to validate (or refute) them. Either way, you are making progress. Knowledge is always better than guesswork.

For example, run advertisements and perform SEO and see how many actual visitors you can drive to your website. Run A/B tests on various pricing models to see what price attracts customers.

6. You Have an External Board

If you put your co-founders and/or your officers on your board of directors, you will receive zero benefit from them; after all, you’ll hear the same things from them in the board room that you hear every other day.

Instead, fill your board seats with experienced individuals who (a) can offer you different opinions, (b) can bring skills that your current team does not have, (c) are not afraid to question the decisions you are making, and (d) can serve as a totally independent sounding board for you.

This is what a board of directors can do for you. And then compensate them with stock options.

7. You Are Sharing Ownership

Jerry Kaplan said it best: “Equity is like sh*t. If you pile it up, it just smells bad. But if you spread it around, lots of wonderful things grow.” Incent those who contribute to the success of your startup with stock options (or reverse vesting stock), and the company is more likely to grow and prosper. There is little downside, and lots of upside. See You are Not Your Company for more details on this subject.

Summary

Starting a company has inherent risks. But some risks are easy to reduce by planning, validating, refining, pivoting and then doing it all again!

I recently visited JoJo, a young woman in Kigali, Rwanda who started a Jibu water franchise. During my hour-long visit with her, I asked her a dozen or so questions. I was impressed by the fact that although she had little formal business education, she had tons of business common sense, understood what her biggest risks were, knew how to reduce those risks, and understood which levers influenced the success of her franchise.

I have no doubt that she will be one of the long-term survivors. JoJo knows how to make a startup succeed! In her case, she knows her competition, knows her financials, has room for error, knows exactly how she is going to sell water, and is constantly running marketing experiments. Although she does not have an external board of directors, she has surrounded herself with individuals with lots of experience.

If you want to learn how to generate pro forma financial statements automatically from your lean business assumptions, check out www.offtoa.com.

About the Author:

Dr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.

If you’d like to learn if your great business idea will make money, take a look atWill Your New Start Up Make Money? If you’d like to verify that your great business idea makes financial sense, sign up for www.offtoa.com.