Professor Raiton’s Inside Perspectives: Entrepreneurship, Creativity, Innovation

Inc. has a fun feature this month in which ten highly successful entrepreneurs reminisce about the early days of their business. Nuggets of wisdom easily digestible in five minutes or less:

1. Gordon Segal - Crate & Barrel
2. Richard Tait & Whit Alexander - Cranium
3. Frank Perdue - Perdue Farms
4. Elon Musk - Tesla Motors / Space X / SolarCity
5. Robert Redford - Sundance
6. Mary Kay Ash - Mary Kay Cosmetics
7. Ben Cohen & Jerry Greenfield - Ben & Jerry’s
8. Jerry Yang - Yahoo
9. Hyrum W. Smith - Franklin Covey
10. Bill Gates - Microsoft

IF at first you don’t succeed, it doesn’t matter that you tried.

That seems to be the message of a working paper prepared recently by a team at Harvard Business School. The study found that when it comes to venture-backed entrepreneurship, the only experience that counts is success.

“The data are absolutely clear,” says Paul A. Gompers, a professor of business administration at the school and one of the study’s authors. “Does failure breed new knowledge or experience that can be leveraged into performance the second time around?” he asks. In some cases, yes, but over all, he says, “We found there is no benefit in terms of performance.”

The study looked at several thousand venture-capital-backed companies from 1986 to 2003.

Professor Gompers and his co-authors Anna Kovner, Josh Lerner and David S. Scharfstein found that first-time entrepreneurs who received venture capital funding had a 22 percent chance of success. Success was defined as going public or filing to go public; Professor Gompers says the results were similar when using other measures, like acquisition or merger.

Already-successful entrepreneurs were far more likely to succeed again: their success rate for later venture-backed companies was 34 percent. But entrepreneurs whose companies had been liquidated or gone bankrupt had almost the same follow-on success rate as the first-timers: 23 percent.

In other words, trying and failing bought the entrepreneurs nothing — it was as if they never tried. Or, as Professor Gompers puts it, “for the average entrepreneur who failed, no learning happened.”

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From The Equity Kicker by nic 

The Wall Street Journal today has a great article designed to help potential entrepreneurs figure out whether they are cut out to found their own businesses.  If that is you then the whole piece is well worth a read.  Being an entrepreneur can be a fantastically rewarding occupation both financially and at a personal level, but it is manifestly the case that not everyone is cut out for it.  Moreover, unlike most jobs, once you have founded a business and employed a few people leaving the company can be prohibitively difficult.

The article is structured around 10 questions that entrepreneurs should ask themselves and then after each one there is a brief discussion of the issues.

In the remainder of this post I’m going to bring out the single best question and the subsequent discussion and the list the remaining questions without the discussion (you can go back to the WSJ for that).

Single best question: 

Are you a self-starter?Entrepreneurs face lots of discouragement. Potential buyers don’t return calls, business sours or you face repeated rejection. It takes willpower and an almost unwavering optimism to overcome these constant obstacles.

John Gartner, an assistant clinical-psychiatry professor at Johns Hopkins University and author of the book “The Hypomaniac Edge,” theorizes that many well-known entrepreneurs have a temperament called hypomania. They’re highly creative, energetic, impatient and very persistent — traits that help them persevere even when others lose faith.

“One of the things about having this kind of confidence is they’re kind of risk-blind because they don’t think they could fail,” Prof. Gartner says. And, he adds, “if they fail, they’re not down for that long, and after a while they’re energized by a whole new idea.”

The other questions:

• Are you willing and able to bear great financial risk? [there is a reason many entrepreneurs are already wealthy]
• Are you willing to sacrifice your lifestyle for potentially many years?
• Is your significant other on board?
• Do you like all aspects of running a business?
• Are you comfortable making decisions with no playbook?
• What is your track record of executing ideas?
• How persuasive and well-spoken are you?
• Do you have a concept your passionate about?
• Do you have a business partner?

I have seen many entrepreneurs struggle with different questions on this list and their companies have hit bumpy patches as a result.  Conversely just about every successful company I can think of has been able to cover off all of them.  Not necessarily via a single individual though - and founding teams need positive answers for these questions between them not for each person separately.

Many of these questions apply also to ‘professional CEOs’ who come into startups when they through the inital founding stage, but are still small.

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• Tips for Pursuing an Entrepreneurial Career

From HighContrast 

Plenty has been written on how to write good exec summaries. The best article I’ve found is the one that Garage Ventures did. There is not much I can add about what needs to be in a good exec summary but I can share some “secrets” of how most VCs engage with exec summaries. Keep in mind that this is real world advice, which is not necessarily what you need to win in the BPC but then you are trying to build real startups as opposed to startups that win competitions, right?

VCs have a love/hate relationship with executive summaries. Actually, most VCs either love or hate them. Personally, I hate them. Most, even the ones by good teams, are terribly written so, statistically speaking, it’s a waste of my time to read them. If I was making an initial decline or investigate further decision on exec summaries alone, I wouldn’t have engaged with some of the great startups I know. Therefore, I prefer to look at a presentation and skip the exec summary.

Exec summaries are rarely read. They are skimmed, typically with the purpose of making a quick decline decision. Choose your words carefully. Don’t have extraneous content. Highlight key points. Use a graph or diagram, provided it would be self-explanatory to someone who knows nothing about your business. Use simple analogies that relate your technology or business model to successful companies. Be humble when you do that–VCs don’t want to see another startup which thinks its approach is analogous to Microsoft’s or Google’s or Facebook’s.

Be conscious of your goal. It is to get to the next level, ideally a face-to-face meeting. You need to sell enough to get there but no more. Don’t over-educate or over-sell. It will lead to a wordy and heavy exec summary. Avoid the common hyperbole such as “this is a $56B market” or “we have no competition.” Statements like these only make you look immature.

Be explicit about your team building goals. This advice is especially important for teams with fewer “done it before” execs. I think it would be fair to put MIT $100K team in this broad category. As a judge in previous years, I’ve been disappointed to see founding teams with too many chiefs (CEO, CFO, CTO, CSO, CMO, CPO, etc.) none of whom would be hired in those positions if the funded company were to do an executive search. VCs want to know that the founding team knows its limitations.

Tune your exec summaries for the investors you are talking to. Who said you should have only one version of the exec summary? Typically, a very early stage startup has a lot of options and its future will in some way be influenced by its investors. How you pitch to an angel group for a $500K seed investment is not how you’d pitch a VC with a $1B fund. The angel group and the large VC have different business models. They want to invest in different companies. In some cases, your company could be a fit for both, as long as you are flexible and open to the options, but your story needs to be different.

Under-promise and over-deliver. Do not make big claims in your exec summary, especially about the near future, unless you are absolutely certain you can deliver on them. For example, don’t say you’ll have a distribution deal with Large Vendor X negotiated in the next 90 days if the probability is less than 90%. You’ll likely be talking to VCs for many weeks or months. Your credibility depends on making promises and keeping them.

From Oregonstartups.com Blog

The most important reason for having a good elevator pitch doesn’t have anything to do with investors. Yes, having a concise, compelling elevator pitch can help get an investor’s attention. Or get prospective team members excited about your company. And it’s useful to have that well-rehearsed answer on the tip of your tongue when you get asked the “so what do you do?” question at the next cocktail party.

But none of those are the most important reason for having one. My experience in working with a lot of startups over the past three years at OTBC is that entrepreneurs who can’t give a concise, compelling and clear answer to the question “what do you do” don’t understand their business as well as they should.

A fuzzy elevator pitch reflects the fuzziness of the entrepreneur’s thought process about the business. It usually means they don’t have a clear idea of one or more of the central aspects of the business, like who the customer is, what the compelling unmet need is, how their solution is unique, or how they’ll make money.

Some lack of clarity at the beginning is understandable. When you’re in the “idea” stage, thoughts are still coalescing. But if you’re ready to build a team and start designing a product or delivering a service, you really need to have an effective elevator pitch. Otherwise, you don’t have a clear idea of what you’re building and why. And with that kind of a start, you probably will not be happy with the results.

So spend the time to develop a concise and compelling elevator pitch. And if you’re having trouble doing it, ask yourself: what part of your business do you not understand well enough?

From Venture Capital Cafe

The current economic crisis marked the end of the Web 2.0 era and the comeback of the “Business Model”.  Having a business model is no longer enough:  it better be solid if the company wants to survive the current downturn.  Even with millions of users, Facebook and YouTube still struggle to monetize their traffic.

So when does a good business model translate to a tangible investment?

As the venture capital pool dries up, I recommend start ups to get the mindset of an investor. Suppose you were a venture capitalist considering an investment in a company that offered:
– a clearly specified product or service (and I can’t stress “Clearly specified” enough)
– with a large potential number of paying customers (paying doesn’t have to be through a direct purchase, but you still have to make money somehow)
– at a price well above what it would cost to produce and had the know-how and means to deliver this product/service at a handsome profit (meaning that you would earn more than you spend while getting customer satisfaction)

Would that be enough to make an investment decision? What else do you need to know?

You would probably need a good business model. One that offers genuine choices of:
1) Who is the target customer? Why was that segment chosen?
2) What is the product? What would the company consider as a conversion? Is it registration or click on an ad? the choices a start up makes in the product development process are critical, and they need to be aligned with the company’s strategy
3) How is the company planning to deliver the product and maximize margins? Would you be interested in a road map? Does the company have a marketing plan? How is money allocated? This step goes even deeper, to the hiring decisions and business development efforts that the start up is planning to take.

Answers to all of these questions should be easily found in the company’s business plan. An investor doing due diligence would probably go one step further. First, make sure you can pass the ‘narrative’ test - meaning that your product choices coincide with the brand and customer, creating consistency across the brand. Then, only after everything else seems to ‘make sense’ you will have to pass the ‘numbers’ test. Investors will look for consistency here as well, and even though cash flow numbers are only projections, they will verify that the financial statements in the business plan add up. External consistency is needed as well, so make sure you’ve got the latest market knowledge. Plan your projected sales numbers conservatively, and base them on research reports from eMarketer, Forrester, PEW, Hitwise, Gartner, etc. Finally, a business model alone is not enough, it must be part of a strategy, that also addresses competition, differentiation and barriers to entry.

From YoungEntrepreneur.com Blog

12) Customers Repeat For Three Years Or More

The main reason why most businesses fail is that they run out of cash. You can run a profitable business but because people take too long to pay you, the business shuts down. When you’re in startup mode, cash is king!

Venture capitalists like to see that you have a way to make ongoing revenues from your existing customers. Once you sell a client do you have to go out and few new business or can you continue making money every month / year from them? If you can build a recurring revenue model from your products or services it will help put your company on solid financial grounds as well as help you secure VC funding.

13) Easy To See $20 Million In Three Years

VCs like to see companies grow quickly. If you get venture capital funding, where do you see your company in three years? If you’re not around the $20 million in sales mark then you might want to consider changing your business model or looking at a different source of funding (friends, family, angels, etc). You have to have a plan to get there in three years and be confident that you can achieve the goals you set out.

14) Significant Barriers To Entry

What is in place to prevent other companies from copying what you’re doing? Assuming that your product takes off and is the next iPod, what measures are in place to make sure that people can’t come along and offer the exact same offering as you. Do you have patents in place? Do you have exclusive agreements with suppliers? Have you tied your customers into long term contracts? Showing VCs that you’ve thought about how to protect your business from competition will show your sophistication and increase the chances of landing the money investment.

From YoungEntrepreneur.com Blog 

From YoungEntrepreneur.com Blog 

6) Synergies With Other Portfolio Companies

When you’re doing your VC research, take a look at what other companies they have already invested in. Is there a way you can help those companies grow? Are there synergies that you can see for a mutually beneficial relationship?

The venture capitalists have already invested money into their portfolios and want to see them succeed so if you think there is a potential fit to share resources, partnerships, customers, media, etc. bring it up!

7) Valuation

Venture capitalists typically like to take sizable positions in your company. Don’t expect to get rosy valuations from them - especially if you’re still in startup mode. Sure you could be worth a lot some day… but right now you’re not and you’re only able to sell future potential so much. Expect to give up between 30-60% of your business in most cases. Unless you are already well established and don’t need much money (in which case you probably aren’t talking to venture capital firms), you will be giving up a significant portion of your company at a valuation far less than you think you’re worth.

Remember the idea behind sourcing capital is that you’re owning less but of a much bigger pie than if you try to do it all yourself. 10% of something is worth much more than 100% of nothing.

Honesty, Passion, Good Story

These are some of the soft factors that venture capitalists look for. At the end of the day the decision to invest or not is made by people are people are governed by their emotions. Venture capitalists want to see that you are honest and they feel like they will be able to work with you in a trusting relationship. If they don’t think they can trust you, forget about receiving funding no matter how great an idea you have.

They also want to see that you are passionate about the business. You’re not in it just for the kicks of running a business - you truly love what you do and will give anything to succeed. VCs know that you will come across multiple challenges as you build your company and if you don’t have the passion to move forward then they’ll worry that you’ll give up too soon. Express deep passion and excitement with what you do at every step of the way.

Finally, you want to show that you have a good story to tell. How did you come up with the idea? How did you get your first customer or your first partner? How was the product / service developed? If there is something unique about your story it will help you stand out and get remembered.