First Impressions Matter

We are in the process of evaluating the applications for Angel funding for our current round. Like most investor groups we use Gust as the platform for entrepreneurs to load their company information. Overall, I must admit I am disappointed in many of these applications. Many of the applications look strong in terms of idea or concept. Some apparently have traction. Some claim to have traction, but don’t support that claim. However, the real problem is that for more than 90% of these applications, it is the first time I am exposed to you. The application is my first impression. And first impressions matter! Here are a number of items that are problems.

Incomplete applications. Gust is a standard format platform. The executive summary, financials section, team composition are all fairly straightforward. Missing items or incomplete items leave a bad first impression on me. If an entrepreneur does not provide all the information by the deadline, then it requires substantial explanation. Leave a note somewhere on the document telling me when the document will be completed, and why you require the additional time. I understand, we are looking at a moving target, but at some point I need to review a snapshot.

Financials Section. On Gust, the financials section is where the entrepreneur asks for funding and offers a summary of projections. It includes a place to upload documents. Upload your documents. I expect to see a spreadsheet with details of the projections.

  • I don’t want to see a pdf file. With pdf I really can’t see the basis of your numbers. Load an Excel spreadsheet with assumptions and a polished look and flow.
  • One tab of sales projections is not enough. In addition to the assumptions tab, there should be at least tabs for a cover summary, a cash flow projection, hiring guide, balance sheet and revenue models. You need a minimum of five and don’t overwhelm me with 20. I don’t need that level of detail…yet.
  • Hidden tabs that include details I need to review are a minor inconvenience. Why should I work harder on your application? Make your data clear and easily accessible.
  • On the positive side, I have seen a few spreadsheets, that have a nice summary up front, a tab with an assumption table linked into the spreadsheet, a hire/HR table and clear, bottom up projections that go over time until past cash flow positive. The revenue projections are important and should not be overlooked.
  • Spreadsheets are a complete topic for another blog. For now, I will admit that spreadsheets are something of a work of fiction, because they are guesses. But the closer the entrepreneur comes to being correct about these numbers, the higher my confidence level in the venture.

Articulating the Value Proposition. Don’t make me guess what your real value is to customers. If you are not perfectly clear in articulating the product to the target market, then how will I know you will be able to effectively sell the product/service?

Proof Points – Gust does not ask for this, but it is important that you be very specific as to the stage of your venture’s development. This will come out in due diligence. But if you have a finished product or channel partners already lined up, that leads to a much better impression for investors.

Know the Rules of the Game. An understanding of how our Angel group operates will benefit the entrepreneur immensely. For example, if our average investment is $400,000 and you are seeking $900,000 then be certain how you can fill out the rest of the round. I don’t particularly like building piers. I want to build a bridge to the next round. If you have funding that supplements ours, then great. However, know that we prefer to lead rounds unless the terms of the other funding is sufficient. So, be careful uploading the other term sheet – know what we like.

Stage of Development. Don’t hide the point that customers aren’t paying or you don’t have any customers yet. Be honest and forthright and just tell us exactly how you will conquer the world. Make me take a bet on you through truth telling.

Traction. Traction is right. Traction works. Traction clarifies, cuts through, and captures the essence of the evolutionary spirit. Traction, in all of its forms …has marked the upward surge of saving the world (thanks to Gordon Gekko for the quote).

Traction is the basis of all that is good in a startup. Traction is the market validation of a value proposition with its target market. Traction shows proof points on its business model. Traction is based in real sales (not a give away product) and has evidence of other proof points – channel partners, a supplier base or existing value chain.

No Faith Based Entrepreneurship. I am really not interested in what you believe. Save that for church. Show me the proof. All that matters are evidence based startups.

Get these right and investors will be your friend.

Disclaimer: These are my own views and not those of any investor group that would have me as a member.

A Meditation on Entrepreneurial Strategy

Most of contemporary strategy literature is based on big company strategy. Larger companies focus their strategies on a cost based model because costs are within their realm of control. They almost never think about the revenue side of the equation. After all, one can control costs, but the customer controls your revenue. This is where entrepreneurial training differs, and provides a winning strategy.

If you think of strategy in terms of costs you can win only half the battle. A recent Harvard Business Review Article by Roger Martin, calls this The Big Lie of Strategic Planning. Martin clearly sees the entrepreneurial view, to focus on the sources of revenue, i.e., customers as the key element of strategy.

Henry Mintzberg called this differential—intended strategies versus emergent strategies. Entrepreneurs work in the emergent section, because they are very opportunistic about revenues. Good entrepreneurs learn quickly that you cannot control the future, but you can try to reduce the uncertainty in getting there. Strategists would call this the resource-based view of strategy.

Resource based strategy states that an organization should use the strongest competencies of a firm to determine a strategy. Entrepreneurs think about what they could be doing with the resources in hand in order to find the opportunities. The planning school holds the thought about what the organization “should be doing” corner of the spectrum rather than the “could be doing” corner. Other strategists might view this as the Blue Ocean strategy. Swim to where no one else is playing; find a niche where there is no competition. Entrepreneurial strategy might also fall into the Michael Porter School of Positioning strategy, which is very analytical.

For information of the various schools of strategy read Henry Mintzberg’s book Strategy Safari. Unfortunately, the entrepreneurial school has changed dramatically since the book was published and it shows less relevance for entrepreneurs. However, this book is recommended as a great summary on the various strategic schools of thought and it is still relevant today as a great primer on the major thought patterns in the strategy discipline.

A good strategy (or whatever term is used – mission statement, mantra, culture) communicates behavior to employees. This strategy communicates what decisions should be made and the boundary limits for what should be the focus of the organization.

Another way to determine and validate a strategy, entrepreneurs may prefer the VRIO framework as popularized by Jay Barney. Are you building something Valuable? Is it Rare? Can it be easily Imitated? And can your Organization implement on the concept?

Possibly, the most important considerations for a startup concern (1) whether a strategy is necessary, and (2) at what point does a strategy become necessary for an organization. Should every company act like entrepreneurs and be opportunistic? Early stage startups do not necessarily engage in long-term strategies. For them, it comes down to tactics and execution. Execution trumps all organizational strengths every time.

The bottom line is that entrepreneurs should talk to their customers. Entrepreneurs have a venture. A business is created when the product or service of the venture can reach at least twenty customers who will make a purchase at a price that provides sufficient margins. If the entrepreneur doesn’t have a product and a price then they don’t have a business…yet.

The Last Mile

Fitness experts and athletes know that when they are lifting weights, the number of sets and repetitions within each set vary according to weight. On normal days their weightlifting tends to be three sets of 10 to 15 repetitions. Good athletes understand that the first eight of ten or thirteen of fifteen reps do not make the muscle grow. It is always the last two or three reps that causes the growth. They put all of that work up front, just for the last few reps.

If you have ever pumped a bicycle tire then you understand that after during the first ten pumps, the tire still looks flat, like nothing has changed. The same is true for the athlete. Work too hard in the gym and their muscles react and feel fatigued. That reaction is called over training. Over pump a tire and it explodes.

The same is true with entrepreneurs. It takes a significant amount of work upfront to understand customers, markets, and value chains in order to ultimately lead to a business model. Validating and testing customers as well as building prototypes is just preparation to get to the starting line. What about that last lift to finish? That’s just one more repetition to get to a first sale. And it is that last “rep” that is the hardest.

The same is true in all sports: Running a yard short of goal doesn’t make a touchdown, hitting the goalpost doesn’t score a goal, landing a golf ball an inch from the cup doesn’t matter at all. Nothing matters until a score is made.

Sports are games of inches, preparation, and work, and so is a startup. Entrepreneurs need all that preparation in order to travel that last inch and beyond.

The Entrepreneur as Magician

We want our startups to act convincingly with passion and a compelling vision for their invention or process. We want them to suspend our disbelief and stunningly convey the magic of their innovation. A magical story is the single best way a startup can acquire the talent required to build a successful company.

Passionate people join startups when magic is invoked. Good people want to work in great environments with great leaders who bring their magic to that business. This type of magic is an honest and creative vision of the innovation with a vision about how it can change the world.

Magicians tell stories during their performances. For both the magician and entrepreneur, story telling is about engagement. Magicians need a story to set up the trick; entrepreneurs use the story to bring relationships and talent onboard.

Sometimes, a magician undersells and overstates the difficulty of the trick. Similarly, entrepreneurs may under promise and over deliver. Entrepreneurs are very good storytellers. They tell stories about products that define a path to the future, a problem solved, and a job accomplished, or increased efficiency. These stories paint an exciting picture of the future and these stories are what it takes to make early sales possible.

Entrepreneurs use good story telling setups. They map the benefits of the product back to customer needs and mesmerize future customer while doing so. If you think about it, stories are much more memorable than statistics. Everyone remembers a good story or compelling image. Do any of you remember a statistic from a commercial for a product or service? I don’t.

Magicians use small props to divert attention away from the real magic. Similarly, startup entrepreneurs effectively use limited resources to magically pull a rabbit out of a hat. They know that if they can’t pull off that trick, there is always a plan B.

As Elmer Fudd will tell you, wabbits can be very, very rascally and… tricky. The startup environment is tricky as well. Entrepreneurs need to learn to navigate its puzzling waters, pivot when necessary, and be ready to take advantage of new opportunities. Ready to execute on plan B.

Magicians use their talented assistants wisely. Magicians’ assistants make their boss look good. Startup entrepreneurs must also employ their assistants in order to efficiently build the business. Warning to both magicians and entrepreneurs: Never cut your assistant in half. Make the work fun and don’t overwork your assistants.

Magicians engage the audience during each of their tricks. They often invite an audience member onstage to participate. Good entrepreneurs engage their target audience – customers—early in the product development cycle as well as the sales and marketing process. Engaging customers’ interest is the single best goal for startups. Early involvement in the process helps prospects listen and buy.

Last of all, magicians and entrepreneurs both develop a special rapport with their audience or customers and receive appreciation. They also show their appreciation as well. When entrepreneurs show customers how special they are, the customers will return for more.

Remember that as a startup entrepreneur, your job is to show the passion and convey the magic of your innovation.

Entrepreneurs Are Not Risk Takers

This is the first of a two part section on entrepreneurial risk.

Risk is not the same as calculated risk:

I often tease my Economics friends that their theories only hold “ceteris paribus”—“all else held equal.” What relevance is this for entrepreneurs? Entrepreneurial activity does not operate in a vacuum. Everything is always in motion. Entrepreneurs have more balls in the air than a circus juggler. In fact, startups can never operate “ceteris paribus.”

As a teacher of entrepreneurship, I always told my students that the market is always your guide. Don’t overly focus on one concept with your eyes in a blinder. Your journey is not a sprint but rather a marathon. Before starting on the entrepreneurial marathon, learn the rules of the game. Know your industry well so that you can play better. Understand the strategies, business models and nuances. Focus on uncertainty reduction. Reduce the risks of a mistake. Most successful entrepreneurs use many sources and concepts to reduce the risk factor.

Startup behavior is really not about taking risks, but systematically thinking about potential losses and pitfalls thus, reducing risk and uncertainty. Startup activity is a calculated risk that includes all possible factors, not excluding variables. The successful entrepreneur decreases uncertainty through a number of ways. The entrepreneur should think then know how much is required to stay alive until becoming cash flow positive. Perseverance is a genuine entrepreneurial trait, but at some time the founder must realize when it is time to stop. Saras Saravathy calls this concept “affordable loss.” Spend only what you can afford to lose. The same concept holds true in negotiation: Your BATNA (Best Alternative to a Negotiated Agreement) is to the negotiation what affordable loss is to entrepreneurs.

There are many ways to reduce risk in a startup.

The first is to get a good mentor. Get two or three mentors. A Mentor is a person whose hindsight becomes your foresight. Use their wisdom.

Get out the door and go network, meet people. Meet the HIPPOs—the Highest Industry’s Paid Persons Opinion. These are the smartest guys and gals in the room. Sometimes money can’t buy these opinions, but if entrepreneurs can offer something really interesting and exciting – like a cutting edge product. A HIPPO may be hungry for this new knowledge and be interested in helping your project. After all, HIPPOs need that information to stay on top of the food chain. Industry knowledge is a key success factor. If your research can offer something to the HIPPO that they did not already know, then you may have your foot in the door to success.

There are other basic risks that must be addressed. Is the targeted market big enough to support your growth business? Can you find and retain the appropriate talent. Is your intellectual property sufficiently protected? Can your team execute and deliver? Can you manage your accumulated financial losses until you are cash flow positive? Do you know all the premises behind your financials, cash position and cash flow to survive the turbulent start? Do you understand where every dollar of your funds goes and how that spending action adds value?

Understanding the underlying processes, and flow of you’re your company before embarking on the entrepreneurial journey will pay off when you are ready to launch. Knowing these key characteristics is all about reducing the risks of a startup.

More in the next post.