Tuesday, May 17, 2016

The Founders Prenup Agreement

Founding a startup company is much like getting married. In fact, the relationship between founders is often described as important, intricate, and complex like a relationship of a married couple.

Indeed, much like a marriage, the quality of the relationship between the founders can determine the success of the venture.

Much has been written about the importance of selecting the right partner to start your company with. In this post I would like to focus on a less popular topic, but equally important, and that’s the founders agreement, or the founders “prenup agreement”.

When you and your founding partner are at the beginning of your venture, everything seems rosy, exciting and full of promise. Much like a loving couple before their marriage. What could possibly go wrong?

And much like a couple before their wedding, it seems very awkward at such wonderful and optimistic times to discuss and prepare an agreement that is intended to formalize the relationship and address possible issues, future contingencies, and conflicts.

And yet, that’s probably the smartest thing you can do before you incorporate your company.

Here are some valuable tips from my own experience, and that of other entrepreneurs.

  • Don’t delay! Make sure you get the agreement done, and signed, before you incorporate the company, and/or raise money. If you let it linger for too long, it might never get done, which could result in major issues down the road, and even with an ugly break-up later.

  • Lawyer up! This is not a DIY project. Yes, you are smart enough to start a company, and even invent a breakthrough product, but this requires the advice, input, and writing of a professional lawyer, preferably one that specializes in startups, and has done similar agreements in the past.

  • Be specific, very specific! As the old saying goes, the devil is in the details. Wherever needed, be very specific. For example, don’t write that each founder can hold a full-time job elsewhere until a significant financing round has been completed. Significant is subject to interpretation, and each founder can interpret it differently. Instead, define a specific amount, for example $250K.

  • Address potential conflicts, but keep it simple. It’s important to anticipate and address potential issues, such as asymmetry among the founders (i.e. one has another job, and one is full-time in the startup), what happens if one founder decides to quit, or is terminated, etc. However, as in any agreement, you will never be able to cover all possible scenarios, and there is value in keeping the agreement simple and clear. So, decide what is truly important, and what you can leave out of the agreement.

I know it’s not the most pleasant experience in the early stage of a new venture, and yet you will be happy you did it, and did it right.

Tuesday, May 3, 2016

How to select your target market

Often startup companies develop a technology that has multiple applications and potential markets. By now, most entrepreneurs have learned that a startup company must focus on a single market, at least in its early stages (I would argue that this holds true for latter stages too).

Trying to address multiple markets, with conflicting customer needs, can spell disaster to a startup company, and an early demise. Trying to develop several products at the same time, or develop multiple marketing and sales channels early on, often results in a very high burn-rate, which leads to depletion of company’s cash, and a premature death of the company.

The challenge then becomes how to select the best market out of all the possible options. But how do you know which market is the best one? What is the right set of criteria to use in making this crucial decision?

In this post, I would like to offer a set of market selection criteria, which I have developed based on my own experience, and that of several successful investors.

Following are my five criteria for selecting the best target market:

1.  Size of opportunity.
This includes the overall size of the market (TAM), your serviceable share of it (SAM), and estimated share of it (SOM). For example, are we talking a billion potential customers/units, 100’s of millions, or just a few millions? Is it a mass market, or a niche?
2.  Value proposition.
In which of your potential markets is your value proposition strongest? Where are you a nice-to-have and where are you a must-have?
3.  Time-to-Money.
How long would it take you to generate first revenue in each of your potential markets? This also implies how much money you would need to raise to survive until you can generate revenue.
4.  Risks.
Which market presents the lowest risk? This includes technology development risk (which product is more complicated to make), competitive risks (which market presents tougher competition), and market risks (uncertainty, regulatory risks, disruption, consolidation, slow growth, etc.).
5.  Funding.
Which market (and business model) would be more attractive to investors, thus making it easier for you to raise money?

I’m sure these are not the only, or even the best set of criteria. Indeed, I would be happy to receive your feedback and suggestions for other criteria.

Bottom line, whether you decide to use my proposed criteria, or come up with your own, what’s important is to make a timely decision and focus on one market, and even one application to get your startup running and get successful market traction as fast as you can.

Tuesday, September 8, 2015

The Foundations of a Great Start-up

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 own experience, and the painful experience of other entrepreneurs, I believe there are four critical elements to a successful 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. In short, this means you need to be able to depend on 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. For example, what’s the right business model, who are the right investors for your start-up, how to structure 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 minimal or no salary, while another partner is doing it part-time still holding on to his daytime job, including full salary and benefits. This may seem harmless enough, or at worst a petty issue. Believe me it’s not. Many start-ups failed due to this issue.

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.

All the best!


Tuesday, August 4, 2015

It’s Good to be Down

As we’ve all come to know, life is a series of ups and downs. We all strive to have more ups than downs; make the ups last longer and the downs as short as possible.

When we’re up our confidence is high, we’re happy, satisfied, and our overall outlook on life is very positive. Conversely, when we’re in a down period, our confidence is low, our self-esteem is low, and our perspective turns negative. For many a down period is a period of depression.

However, as hard as we might try, it seems that we cannot prevent having down periods in our lives. I believe it’s like our mistakes. They are there for a reason. Mistakes are how we learn best. They are a survival mechanism. We can also turn the down periods to be significant learning and improvement experiences.

To begin with, we can try to understand what is it that got us to this down period in the first place. Was it something that we did? Or that someone else has done to us? If it’s the former, then that is an opportunity to improve ourselves. If it’s the latter, then perhaps we can learn from it about other people’s behavior, and how that behavior may adversely affect us. This knowledge can help us change our own behavior, or choose more carefully the people we work or associate with.

But what if the root cause to our down period was not people related? For example, what if it was triggered by a specific industry event, or a local economic problem, as some countries are experiencing these days?  In such cases we can learn how to reduce our exposure to similar problems in the future by learning new skills to increase our value and demand, or change our career altogether.

However, sometimes we just need to accept that there are things beyond our control. For example, global catastrophes (like the financial crisis of 2008-11), or natural disasters (like tsunamis or earthquakes), that can adversely affect us no matter what we do. And yet, even in these types of down periods we can learn how to survive, persevere, adapt, and eventually come out of them stronger and better than before.

Moreover, downs can be a life detoxification period. They are a humbling experience that allows us to learn what truly matters in our life, where we should spend our valuable time and what to ignore. We can use down periods to clarify our values and priorities in life, and review our goals. Often things become clearer when we remove hubris and hype.
Bottom line, down periods can be great opportunities for learning, improving, and creating the next up period. I believe that taking this approach will result in longer ups and less downs. And that is our goal after all.

Tuesday, July 7, 2015

Fighting for Independence

An important part of my time is invested in a great program called A3I. This is the world’s first startup accelerator that is solely dedicated to improving the lives of people with disabilities.
The purpose of A3I is to encourage and assist entrepreneurs to realize their ideas that aim to solve problems, and address the important needs of people with disabilities. The goal is to create a more inclusive society where people with special needs can lead a normal life like each and every one of us.
I serve this program as a member of its steering committee, as well as a mentor to some of the entrepreneurs. It’s one of the most rewarding experiences I’ve had in my life.
It’s so refreshing and inspiring to meet entrepreneurs that really want to make a difference. That are not driven by hype or financial rewards. It also reminds me time and time again what really matters in life, and how we take so many things, like our health, and personal independence for granted.
I recently met with one of the startup teams for our weekly mentorship session. We discussed the unique value proposition of their idea (we use the “Lean Startup” concept and Business Model Generation as our framework). I asked them to try and put themselves in the shoes of their target “customers”, and imagine how their lives will be different after they start using their proposed product, and why. What significant impact would that product have on the lives of their customers?
And then one of them said: “independence”. And that’s when it hit me. How we take this basic need for granted. We are so used to being independent in our lives. We can go anywhere; choose what to do and when; dress ourselves in any clothes we want; communicate with other people at will; shop for what we need. It’s hard for us to imagine our lives without this basic independence.
But that’s not the case for people with disabilities. They are not independent. Far from it. Moreover, their dependency on others is also adversely affecting their dignity and self-esteem. Many of them are courageously fighting for their own independence. But they need others to join that fight.
We need more programs like A3I and more entrepreneurs who are willing to make the commitment and sacrifices that are required in fighting for the everyday independence of people with disabilities, the same independence that we enjoy and have come to take for granted.

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Saturday, February 14, 2015

Looking for Mr. /Ms. Dependable

One of the main challenges for any organization is finding the right people. This is true no matter the size or type of organization, or the business it’s in.
It’s crucial for start-up companies where every person matters and hiring mistakes can be very costly.
In fact, I’ve written before that in my humble opinion, a leader’s most important task is to select the right people and place them in the right position within their organizations. That will enable the company to perform at its best and be successful in the long-run.
But who is the right person? What are the main attributes or skills that make her “the right person”? That is the most critical element of recruiting or selecting the right people for your team.
I personally place high value on people that are trustworthy; fast learners that can take initiatives and lead them; problem solvers (not just problem reporters); effective team players.
However, if I can only choose one attribute that sums up the kind of people I look for my team I would say: dependable.
These are the people that no matter what you know that you can rely on to get the job done. They will find a way, and they will always come through for you, and for their team.
The dependables are those you will take with you to any company you go to.

They are the backbone of your company. They are a select few, so if you are lucky enough to find them you must do what it takes to retain them.
As leaders we are only as good as the people we have on our team. That goes for companies too. My advice: find people you can depend on.

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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