Saturday, December 13, 2014

The Right Budget for Startups





“In preparing for battle I have always found that plans are useless, but planning is indispensable.” (Dwight D. Eisenhower).


Make no mistake, every company, business or organization needs to develop a plan for how it intends to achieve its goals. Even though your plan is likely to be useless the moment you leave the building, or to borrow another military quote: “even the best plan is useless once the first shot has been fired”.


Nevertheless, the insights, knowledge, preparation and coordination that come out of the planning process would remain relevant and serve you well in responding to the changing circumstances you would face.


This is true for large corporations as well as early stage startups.

However, in my humble opinion, a startup company requires a different type of plan than that of a company with a proven, stable business model. I’ve discussed that in length in my previous posts.


In this post I would like to focus on a critical part of the plan—the budget. A budget expresses strategic plans of business units, organizations, activities or events in measurable terms. It should detail what human, capital and financial resources would be required, and when, to successfully execute your plan. It should also describe how you intend to spend the cash you have been allocated over the period of time of the plan.


Here again I believe that startups require a very different type of budget planning than that of an on-going business; Different in its objectives, planning process, and the level of its financial details.


A company (or a business unit) with a stable business model would typically be focused on growth. That could include revenue growth, profit growth, and market share growth. For a period of 12 months ahead, it has fairly good visibility into its business, and a low likelihood of major changes.


Thus, its budget serves the management team as a tool to effectively allocate and manage its resources in order to achieve the company’s financial goals. It’s also used to identify trends and changes and respond to them in a timely manner. Another use of budget is as a performance measurement tool for managers and teams.


A startup is an entirely different story. As Steve Blank defines it, “a startup is an organization formed to search for a repeatable and scalable business model”. This means that it has no visibility into its business, and is likely to undergo several changes before it finally finds the right business model.


Having said that, startups still need plans and budgets, but for very different purposes than those of on-going businesses.


To begin with, startups need to develop a business model that describes how they intend to create value for their target customers, deliver it to these same customers, and generate revenue and profits in the process.


Out of the business model (the plan), should be derived the startup’s customer development plan, and product development plan. These are the two core activities that should eventually result in a product-market fit and a “repeatable and scalable business model”.


To fund these activities startups typically raise money from investors. Although, in some cases they can use a bootstrap approach and fund it directly from its founders and/or early customers.


In order to know how much money they need to raise from investors, entrepreneurs need to develop a detailed enough plan and budget.


Now, this is where it gets tricky. What is detailed enough? I’m sure there are several different opinions and answers to this question. My answer is: it depends. It depends on what stage your startup is in? How many unknowns and uncertainties are in your plan? What do your prospective investors expect? Etc.


If you’re an early stage startup, that is trying to develop its minimum viable product (MVP) for its first (lead) customer, then I argue that there are still many unknowns in front of you. Therefore, you should acknowledge that in your plans, and list all the assumptions and hypotheses that you’re making and how you intend to test them.


If you don’t have a very detailed definition of your first product, it’s impossible to accurately estimate how much money you will spend on R&D each month, for the next 12 months. Doing so might give your investors the false impression that you have a high degree of certainty in your plan, only to be disappointed later when you make your next pivot.


You better off developing a likely scenario, based on reasonable assumptions and well documented hypotheses, and use it to develop a plan that details your key milestones for the next 12-18 months. Next, you can develop an estimated budget for the resources and capital you will need to execute this plan, and reach the milestones you’ve defined.


Such a budget should be broken into the relevant categories for your plan and milestones. For example: product development activities, such as SW development, HW design, test & QA, etc., and customer development activities, such as business development, partnerships development, and marketing.


Moreover, the main objective of such a budget is to provide a reasonable estimate for the amount of money you need to raise. Thus, there is no point in making it a monthly budget. Quarterly budget would be as good and more credible. It would require less of your valuable time, and the results should be the same.


Once you’ve secured the funding required to execute your plan and move your startup forward to its next major milestone, such as first customer deployment, or MVP release, and you know exactly how much money you have, it’s time to develop your actual work plan and budget.


This work plan needs to be detailed in order to specify all the key tasks, their duration, and their associated resources: people, capital, and cash. You will need to manage and execute this plan using the same program management tools and disciplines, like any other company, perhaps with less resources, and greater speed and efficiency (e.g. agile development).


At that time, your budget needs to represent the actual work plan and with as much detail as required to ensure that the money you have raised lasts you long enough to successfully complete your plan, and raise the next round of investment.


This is a true survival need. The #1 cause of premature death of startup companies is running out of cash. Your budget’s primary purpose is to avoid that from happening. Thus, it needs to be a useful tool to effectively manage your limited cash as you execute your work plan.

Happy budgeting!

 

 
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Saturday, June 21, 2014

Your Most Valuable Asset





The purest treasure mortal times can afford is a spotless reputation. -William Shakespeare


I firmly believe that your personal reputation, as well as your company’s reputation is your most valuable asset. It enables you to attract and retain the right customers, best people, and good investors. That’s why you should vigilantly protect it and continuously work on building it.

 
The way to a good reputation is to endeavor to be what you desire to appear. – Socrates

This is true for any company. In particular, startup companies face many critical dilemmas, especially in the early stages. One dilemma is which investment offers to accept?


This is a tough dilemma since early stage startups are in a constant survival mode. They find themselves continuously in a need to raise funding in order to survive and move forward to the next stage in their lifecycle.


Startup founders and CEOs spend a significant amount of their time searching for the right investors, building relationships, and pitching their ideas and plans. This is often an exhausting and frustrating effort.


That is why they find it hard to turn down an investment offer. They know they need the money. They know how hard they have worked to finally get an offer, and how long it might take, and challenging it might be to get another one.


And yet, sometimes “No, thank you” is the right answer. Sometimes it’s best to walk away from an investment offer in order to preserve your reputation. Some call it “bad money”. I also call it a “toxic investor”.


A “toxic investor” is one that brings with him a high risk of bad reputation. Such an investor may give you the money you are asking for, even at a good valuation. However, they are a long-term threat to your company and its future success. They drive away good and reputable investors, both in the current round, as well as in future rounds of funding. They tarnish the reputation of the company and its leadership team.


A “toxic investor” may be an investor that has gotten bad reputation because of the way they deal and cooperate with other investors. Another reason might be that they sabotage the company’s decision making process, or use other bad practices.


Worst yet, sometimes their bad reputation comes from actual illegal activities (money laundering, SEC violations), or a suspect source of money (illegal businesses).


Whatever the reason for their bad reputation, they should be avoided like the plague. I would like to offer the following tips for avoiding a “toxic investor”.


·       Due your own due diligence – This can be as simple as a search on Google for any information related to the investor. Also, talk to fellow entrepreneurs, or other investors to learn what is the perception and experience with this investor.
Try to learn about the sources of their funds, what is their typical investment amount and stage, do they have any other investment partners, what is their decision making process, and style.


·       Check references – In many cases credible investment firms or VCs will have a list of their portfolio companies on their website. Contact those you’re familiar with, or might be relevant to your situation, and ask about their experience and lessons from their engagement with the investor. Check for the things that matter most to you and your company.
If the investor has no list of companies he has invested in, politely ask for references. It’s a legitimate professional request, no different than when hiring a key employee to your company.


·       Listen to your instincts and gut feelings – They are usually right.

 
Whatever the reason, if there enough red flags the right decision is to simply walk away and look for another investor, no matter the cost (opportunity cost). Your reputation is more valuable than money.


Benjamin Franklin once said: “It takes many good deeds to build a good reputation, and only one bad one to lose it”.
 

Saturday, March 22, 2014

Beware of the Trojan Horse Investor




We are all familiar with the historic mythology of the Trojan Horse.

Sadly, in recent years we’ve also been introduced to its contemporary version in the form of Trojans, malware programs containing malicious code that, when executed, carries out actions determined by the nature of the Trojan, typically causing loss or theft of data, and possible system harm.


But there is another type of Trojan horse, less familiar though just as malicious and harmful. This is the Trojan horse investor.


The Trojan horse investor is someone who presents himself as a credible startup investor, however has a very different agenda. His purpose is to take over the company and lead it in a direction that suits his own interests, and not necessarily those of the founders or the other (minority share) investors.


Unlike a typical financial investor or a VC, who invests in the company because they believe in the founding team, their idea, and its business potential, a Trojan horse investor has a very different motivation. He seeks to take over the company and its IP and use it to achieve his own business objectives.


His Modus operandi is quite simple. For example, let’s take an early stage startup that’s trying to raise a round A investment of $2m in order to develop their product and take it to market.


The Trojan investor offers to make a considerable investment of say $1.5m. Such an investment is typically hard for an early stage startup to ignore. It’s not entirely what they need to develop their product and go to market; however it’s a good start and may last them for a year.


However, this “Trojan horse investment” comes with some very specific terms of conditions, including a relatively low valuation that guarantees the investor a large share of the company. It also includes some veto powers that essentially limit the company’s funding options in the next round, such that they are forced to take additional funding only from the “Trojan investor”.


Thus, a year after their round A of $1.5m the company runs out of money. They don’t have a product yet, nor any customer deployments, not to mention actual revenue. Their bargaining power is weak and valuation low.


At that time, our Trojan investor comes to the rescue offering them additional funding at a low valuation, which they are forced to take in order to keep the company running. Now, his takeover is complete and he has obtained full control over the company, in terms of equity, and board representation.


Game over!


The startup founders, who worked hard and risked everything to start the company and create its IP, are now left with a very small share of the company, no control over its direction, and no influence in its operations.


For the Trojan investor this approach is more advantageous as compared to other alternatives, such as acquiring the company, or paying it NRE to develop his product. In the investment approach he ends paying much less than a straight up acquisition. On the other hand, unlike an NRE payment he gets his product, as well as the entire company with its IP.


So how can entrepreneurs avoid this Trojan investment? Unfortunately, there is no “investors’ antivirus” that you can install and run. And yet, I would like to offer a few suggestions:


1.   Review any offer or term sheet you receive with a trusted legal adviser to understand the potential risks, as well as the proposed terms and conditions. Also, review worst case scenarios of how your next funding round might look like, in terms of valuation, equity, and control, if you take this offer.

2.   Consult with your current investors. They are your allies and have a strong vested interest in the success of the company.

3.   Never give any single investor complete control of your company, in particular on critical issues such as funding, strategic directions, or key hires.

4.   Trust your guts. If it smells fishy, or feels wrong, it’s probably wise to politely say no and look for a better offer.

 
So beware of the Trojan horse investor. He can turn your dream into a nightmare.
 

Saturday, March 8, 2014

Customers, Investors, or Employees, Who Should Come First?





Much has been said and written about the dilemma of who should be your company’s first priority: customers, investors, or employees?
 

To be sure, this is a real dilemma for any company, including startups.


A company has three main constituents: customers, investors/shareholders, and its employees. Obviously it needs all three, and moreover, it needs all three to be happy and satisfied in order to succeed.


And yet, you can’t have three #1 priorities. So who should you rank as #1?

This is not just semantics or a mission statement exercise only. This ranking affects your long-term priorities, operational plans, trade-offs, and daily decisions.


In the 90’s the mission statement of “maximizing shareholders value” was very popular among US companies. This became the mantra of company leaders and executives. Needless to say, it didn’t inspire and motivate employees, nor did it delight customers. Eventually, it didn’t lead to higher value for investors either.


Later on, that mantra was replaces with “customer focused”. Everyone became, or wanted to be, customer-focused. Granted that makes a lot more sense than “shareholder focused”. However, treating customers like kings and employees like pawns is not a recipe for sustainable success.


For example, in the US retail sector, Sears is ranked amongst the worst in employee satisfaction rating and is losing money. On the other hand, Nordstrom is ranked high in employee satisfaction and is also highly profitable. This is just one example out of many.


I believe that employees should always come first. My rational is very simple. Happy and motivated employees perform better. They develop better products to meet customers’ needs, provide better service to customers, and find innovative ways in which to make the company perform better, and be successful.


This in turn makes customers happy since they get better products and service. Happy customers purchase more, remain loyal to the company, and recommend its products and services to their friends.


This makes the company successful and profitable, which of course, delights its investors and shareholders.


Thus, my ranking is:


1.   Employees

2.   Customers

3.   Investors


What’s yours?
 
 

Saturday, February 8, 2014

To Pivot or no to Pivot, That is the Question





Every startup has its own unique story, including different challenges, circumstance, people, and often results. And yet, there is one thing that’s common to the majority, if not all startups, and that’s the need to make some change and detour from their original idea and plan.


That change is also known as a pivot. Steve Blank defines a pivot as: a substantive change to one or more of the 9 business model canvas components.”


Having said that, in order to succeed, startups need to maintain focus and execute their plan to perfection. Otherwise, they risk getting late to market with their product, just to see another startup (or company) beat them to it.


Time to market is a critical element for any company, and even more so for startups that always have limited funding and resources. Being late to market could spell death to a startup company.


Also, zigzagging too often adversely affects execution, and results in longer time to revenue, higher burn-rate of cash, and frustrated development teams.


Moreover, to quote the late Steve Jobs: People think focus means saying yes to the thing you've got to focus on. But that's not what it means at all. It means saying no to the hundred other good ideas that there are.”


But that’s much easier said than done. How do you decide when it’s time to pivot and when to stay the course? How do you pick between several good alternatives?


In the Lean Startup approach, Steve Blank suggests that anytime you discover that any one of your initial hypotheses was wrong there is a need to make a pivot and change the hypotheses. That makes good sense.


However, what if it’s not clear that your hypothesis is wrong? What if you simply come across another good option, such as another good idea, a new potential market, etc.? How do you decide then whether to pivot or not?


I would like to offer the following simple approach. When you reach an intersection in the road, and must decide whether to stay on the path you’re currently on, or take the other path, you need a simple and effective decision making process.


It starts with having a clear purpose for your startup. What are you about? What would be considered as success for you? Without that, it becomes very hard to make the right choice.


Assuming your purpose is clear, and still both alternatives seem to support it, you next should look at your immediate objectives and priorities. Those change as your startup progresses. An early stage startup that’s looking to raise seed funding needs to consider which path will enable faster and better investment options. Growth stage startups are looking for ways to accelerate revenue growth and increase profits.


Therefore, your decision making criteria will be dependent on your current priorities and objectives. I suggest making a short list of criteria in order to simplify and speed up your decision making process. The longer you take to make your decision the greater the chances that your team will become confused, and start to lose focus.


For example, let’s take a case of an early stage startup that set out with an idea to solve a very specific problem in market A. They develop an innovative technology that uniquely solves this problem, have developed an early prototype, based on this technology, and have successfully completed a proof of concept. This led to high interest and demand from their target customers.


In the meantime, they realized that this technology has other potential applications in very different markets. Moreover, some customers in market B have expressed great interest in their technology. They have a high-priority need that until now could not be addressed with existing products.


Our startup is now faced with a dilemma. Do they continue in their current plan and go after market A, or should they pivot and start with market B?


In this case, I would consider the following decision criteria:

1.   In which market would they get faster traction, and earlier revenue?

2.   In which market are they likely to raise money faster (and better)?

 
For an early stage startup market traction is huge when it comes to raising money, or better yet, creating bootstrapping opportunities.


One way to determine that is to check in which of the two markets is your idea/product a must have for your customers? Where is it higher priority that will cause them to want it ASAP, and be willing to pay for it? Where are there less (or seemingly no) viable alternatives to your product? That’s the market you want to start with.


To use the famous line from Hamlet, to pivot or not, is the startup version of “to be or not to be”. And if you want to “be” (a success story), you should make the right decision in a timely manner.

 
Good luck with your next pivot.

Saturday, December 7, 2013

C is for Culture

 
 


I recently read a great post by a founder and CEO of a startup that failed.
He candidly and skillfully shared his lessons learned from the failure of their venture.


One of his important lessons was the need for a clear and simple articulation of a company culture. He used the term: culture is your cofounder.


I think it’s more than that. You are your company’s culture and it is you.
Leaders define the culture of their organizations. Their choices, actions, priorities, and values set the tone and example for others to follow. That becomes the de facto culture of the company, no matter what is written in the “About us” tab on the corporate website.


Moreover, your company’s culture is defined from day 1. It’s not something to be developed by your HR department when the company has grown into a mid-size enterprise. It’s set formally or implicitly by the way you conduct yourself, treat your co-founders and people, engage with your customers and partners, and deal with your investors.


Make no mistake; your company culture is as important as your IP, and technology. It’s the personality of your company. And like any personality it can be attractive or repellent, and even downright offensive.


Your company culture should help you attract and retain great people, passionate customers, and valuable partners and investors. It needs to send the right positive messages about the company and the way it goes about its business.


Those companies who are known for a positive workplace culture tend to perform well, as evident in a new ranking recently released by Great Place to Work Institute. Among the top performers on the 2013 World’s Best Multinational Companies list are culturally-strong technology companies such as NetApp, SAS, and Google.


On the other hand, bad examples can be easily found everywhere, and most notably on Wall Street.


I personally think that when it comes to articulating and defining your company’s culture less is more. Big words and long lists of values often come across as fake and empty declarations. Rather, I prefer simple, authentic, and short sentences that can be understood and remembered by everyone.


For example: always do the right thing, and treat everyone in the same manner we want to be treated ourselves.


Regardless how you decide to phrase your culture creed, it needs to be consistent with your daily actions, priorities, values and choices. It should also be timeless.


If I can borrow from Mahatma Gandhi, be the culture that you wish to see in your company.

Saturday, October 5, 2013

What Makes a Successful Founding Team?





I’ve written before about the importance of picking the right co-founder/s for your venture. I cannot overemphasize the importance of this decision. And yet, even if you’ve chosen great co-founders you still need make sure that you and your co-founders are functioning as an effective team.


Based on my experience, and that of other entrepreneurs, I believe there are four critical elements to a high-performance founding team.

 

1.   Mutual trust. This is by far the most important element of any team. You and your partners need to have complete trust in each other. Otherwise, don’t even start your company.


2.   Full Confidence in each other. This means confidence in each other’s skills and abilities to perform their respective roles and responsibilities professionally, successfully, and with high quality results.

In order to move fast and meet your goals you will each need to take on a significant role and responsibilities in your start-up; lead a certain discipline or task; make the appropriate decisions; work independently. This requires the other members of the founding team to have trust and confidence in each other. Otherwise, your team’s progress will be slow and you will miss your goals, which will lead to disappointment and frustration. Moreover, you will be perceived as a dysfunctional team by investors, partners, and your own people.


3.   Shared vision and success goals. If your vision is to build a great and lasting company, while your co-founder is seeking a quick exit, you are bound to have significant disagreements in almost all aspects of running your company, including what’s the right business model, who are the right investors for your start-up, how to build your organization, and more.

A common vision and definition of success for your company should be established early on in your work together. Don’t skip this important discussion, since it will come back to bite you.


4.   Symmetric level of commitment. This topic is rarely talked about, and yet I believe it’s very critical for a healthy and positive team dynamics. An asymmetric level of commitment is when one of you is fully committed to the start-up, working fulltime to move it forward, with no salary, while another partner is doing it part-time still holding on to his daytime job, including salary and benefits. This may seem harmless enough, or at worst a petty issue. Believe me it’s not.

When one of you is risking everything, sacrificing her (and her family’s) quality of life, while her partner is taking no risk and sacrificing nothing, it’s a very real and personal issue. It can lead to conflicts in key decisions regarding fund raising, company formation, and equity distribution. It can poison the team atmosphere and cause resentment among its members.

An asymmetric level of commitment can undermine all the other three critical elements above, starting with trust.

Therefore, ideally all co-founders should commit to leaving their jobs and dedicating themselves to the start-up at the same time. If there is a situation where one of the founders needs to stay in his current job a bit longer either due to contractual or personal obligations, make sure there is a clear deadline after which he either joins the founding team fulltime, or is taken off the founding team (will not be considered as a founder). Although this may cause some discomfort among the team, it’s better to deal with it early on then later, when it threatens to destroy your company.

 

A great founding team is by far the most important element to a successful start-up. More than a great idea or a brilliant business model. The best idea in the hands of a dysfunctional team will be wasted. On the other hand, a great team can start with a bad idea and eventually arrive to a good idea and the right business model.


There are many challenges and struggles to overcome when you’re building a new company. Be sure you’ve got the right team, based on the right foundations, in order to improve your chances to succeed.


Good luck!
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