Startups and angels: Along the way to success

What's Your Alternative?

There's a comment here from an earlier note that asks "...at what point does an innovative idea or product become worthy of an investment?"

I would ask you to consider another question: "What's the alternative to a third-party (i.e., not friends and family) investment for my startup?

I asked an entrepreneur this question the other day.  He was looking for several hundred thousand dollars essentially to go and try an internet idea.  After a short discussion, I think he generated some great insights about ways to get to the same place on little or no outside investment.

There's always another way. 

In my case, in the first company, it was early customer selling that provided the startup cash. 

Most companies start without investors and never have them.  That's not because there isn't enough money; it is because the companies don't need or are not appropriate for funding by high-expectation, high-risk investors.

These companies find capital primarily by finding customers and understanding trade-offs.  They get a purchase order, open for business, begin working on projects to generate cash, or in a thousand other ways.  

Their alternative is not to keep looking for investment for years, but rather to find ways to create a real alternative. 

Sometimes that early growth capital is precedent to a big investment.  (Not often, but sometimes.)  An example of that is pre-revenue science start-ups with grant funding.  Other times, early success and acceptance allows a company to look for growth capital on much more favorable terms had they not had the early success.  (Remember Vermeer?  Look it up.) 

Other times, early success means keeping the equity "in the family" of entrepreneur and colleagues.

For those who don't figure it out some people just keep looking.  After some period of time, absent any change in the company's results, those in the know have heard the story so often that they ignore it.

If you like snipe hunts, join the boy scouts

Many of us who've been in the boy scouts (and other organizations at the same age) may remember the age old tradition of older, wiser scouts sending the younger, inexperienced ones on some version of a "snipe hunt."  You - the younger, inexperienced member - spend the evening being directed from place to place in search of the elusive snipe.  It, you are told, is just around the corner, or was "just here," and if you hurry, you can catch it.

Of course, in the end, it's a big joke. 

A lot like the experience first-time entrepreneurs have with so-called "investors."

"Oh, I don't invest in xyz, but so-and-so sure will be interested."  And on it goes. Because the reality is that no investor of any sophistication is going to be interested in the startup as configured.  Doesn't mean that it's DOA, but that it has major flaws.

Instead of accepting some responsibility to provide an honest critique, they engage in a snipe hunt and think it's an easy way of avoiding a further discussion.

Perhaps it's not always solely the fault of the investor.  It's amazing how many people I talk to about start-up ideas can't get past the "sell all the time" mode.  It is pretty tiring and doesn't make me want to be very helpful. 

On the other hand, if I stop and consider the impact it's possible to have, I will (usually) attempt to be of some help on the subject of "why not." 

Most of the time, "why not" is too inexperienced, not knowledgeable about investor expectations, doesn't understand deal structures or finance, hasn't gotten a handle on customer reaction, or is just too early.  Sometimes people have been badly counseled by attorneys to try and sell non-standard structures.  Imagine.

The "what now" part is harder.  Like so many things in this category, it depends.  If you have had experience in doing a start-up, (or, second best have access to someone who has) you can probably determine whether you are on a snipe hunt or a legitimate search for the right fit for your company.

In many cases, if you are in the latter situation, you will find you are spending a lot of time understanding what type and stage of companies your target investor is in, what kind of experience they have, and who they know.  If, on the other hand, you are talking to whomever will listen, and nothing seems to be going very well, get out your snipe catcher.

Bootstrap your venture

At last week's Business Plan Competition at Marquette University, the keynote speaker, Greg Gianforte, CEO of Right Now , talked passionately about the keys to bootstrapping businesses. 

Greg is the well known author of Bootstrapping Your Business, and a frequent speaker on the topic.  In addition to RightNow, where he is currently the CEO, he's started four other companies, including BrightWorks, successfully sold to MacAfee (prior to RightNow.)

It seems to me that bootstrapping is an overlooked technique, and it should not be.  A successfully bootstrapped start-up allows the entrepreneur to retain more equity (Gianforte hung on to 60% up to the IPO) and provides a lot more control and freedom from competing goals of various investors.  Listen to him talk about the principles he applies.  In a brief hallway conversation, he told me, several times, "there's always another way" to get going, aside from very early, and very expensive, capital. 

If a start-up, all things considered, can bootstrap, it should.  

Here's a podcast (will download to your iTunes library). It's about 35 minutes, and well worth the listen.  Greg Gianforte at Marquette University BPC, 2009.

Enjoy.

Entrepreneurship for everyone

Marquette University today approved the creation of a Graduate Certificate in Entrepreneurship, which will be offered through the Graduate School of Management starting in fall 2009.  I'm really pleased with this step forward.  It provides an opportunity for a broad audience interested in entrepreneurship.  It also allows students in the program  to combine entrepreneurial studies with advanced thinking in their own area of interest.  It's application-practitioner based and, i think, will be in high demand.

 Here's the official announcement:

“The program will instill entrepreneurial thinking across campus in many disciplines with the aim of providing students with the skills needed to create a business — innovation, entrepreneurship and business acumen developed within a context of social responsibility,” said Tim Keane, director of the Kohler Center for Entrepreneurship in the College of Business Administration.

Applicants will be required to have a four-year undergraduate degree from an accredited institution that fits Marquette’s standards of admission to a graduate business degree program. Students are not required to take the GMAT or GRE. Candidates must also write a letter of intent.

Certificate students will take 15-16 hours of coursework at Marquette, including three core entrepreneurship courses and two elective courses in a professional area such as business or engineering. Students must also complete a business plan. It is expected that most students will participate in the Kohler Center for Entrepreneurship’s annual Business Plan Competition.

For more information, contact Keane at (414) 288-5722 or Dr. Jeanne Simmons, associate dean of the College of Business Administration/Graduate School of Management, at (414) 288-7145.

How does your marketing react to the economic crisis?

At one of our catalog companies, we're reacting as you might expect - better deals on shipping, more sales, and, though we think our service is exceptional, we're cranking it up a notch.

This seems like the logical reaction - along with trying to lock down special deals with vendors, landlords, and others - as well as volume discounts for big customers.  And there is an interesting question.

I think it's fine to reward good customers for volume, but you walk a thin line.  As long as you do not disadvantage smaller customers, and your "smaller customer" offers are competitive, it seems ok.  But if you disadvantage smaller customers to reward big ones, you risk your smaller customer's business.  This is problematic, especially, in businesses that have small customers who give you virtually all their business but they're just, well, small.

I flew Frontier Airlines the other day and their reaction to the current situation is counter intuitive to me.  Since October, they've reserved all of the seats in the front half of the airplane for their high mileage frequent fliers, begun selling tickets at high markups if you want to check baggage, and penalizing changes at twice their level of last October if you aren't in the club.  In other words, because of the nature of their product, they are disadvantaging smaller customers in order to reward the big ones. 

It's the retail equivalent of "if you don't spend a lot with us, you can only buy the outdated leftovers."

To me, a small customer of Frontier, the message is clear - we don't want you - go somewhere else.

And I will.

But, the point is, they had better be sure that the big spender will carry them and those they drive away won't be needed to bolster their business in the coming recovery.  We'll see.