Nesheim Online

IS A STARTUP INCUBATOR ACCELERATOR FOR YOU? Some lessons from serial entrepreneurs

The latest startup fad is about "accelerators".

The last generation was dubbed "incubators". The lessons about them, from serial entrepreneurs, is worth thinking about before you choose to go that route for your first enterprise.

The current rush to try using a startup accelerator is well documented.Try reading about it in this Wall Street Journal report: "Start-Ups Crowd Accelerators".

So is an accelerator right for you?

Here are some things to ponder that serial entrepreneurs have learned about startup accelerators:

• They sound great to first-time entrepreneurs. What could be better? Great people instantly welcome you, offer free advice and quick access to real cash. Compared with going it alone, living on your savings for months before getting real money from angels or venture capitalists, that is very attractive. Yet there are some sobering realities to ponder before leaping into an accelerator.
• Their money is expensive. For $12,000 you would be charged 5% to 10% of your startup. That could be worth $2 million of you sell out later for, say $20 million. If you had kept that yourself, it would have gone to you, or you could have used it to attract needed employees.
• The great helpers are busy doing other things. Helpers in accelerators are mostly people wishing they could join the next Facebook. Or they are in the business of selling services such as legal and accounting help. Few have the deep experience the first-timers is eagerly seeking. If you are willing to settle for that level of basic business assistance, then you'll find it at the accelerator. It can be helpful, but it is not from the amazingly talented people pool that you might be expecting to pick from.
• The cash is a drop in the bucket. Your startup can not do much with $10 to $20 thousand of cash. Good technical people are able to find good jobs paying good salaries. Ditto with marketing and business development people. They are looking for full salaries that will use up your accelerator cash in one month.
• You still have the heavy lifting to do. After your initial idea gets scrubbed, worked over, and modified, you still have the hard work to do yourself. It is up to you to execute your first idea and begin the process of transforming it into something very valuable to end users and customers. Your accelerator advisors will be busy with a dozen or so other startups. It is up to you to find the missing people, recruit them (with no money for salaries), and get them working for you. Same goes for developing the product/service, preparing the marketing and so on.
• Other solutions can be free. Advisors and mentors are available who do not work in an accelerator. They include experienced people from the venture community: serial entrepreneurs, lawyers, angel investors, accountants, human resource recruiters, and venture capitalists. I've seen such people welcomed by first-timer entrepreneurs and seen them receive outstanding advice (and they get an offer to return for more) at no cost (stock or cash). Why? Because each knows what it is like to be a first-timer, is willing to contribute advice (as they sought in the beginning) and want to not miss a great idea for a great startup.
• Other solutions can be more useful. Try considering some of these and compare them with an accelerator:
  • Early contact with angel investors often opens a link between first-timer and a very experienced business person. That can lead to a small seed round of financing, with more to follow.
  • Starting with an "advisory meeting" with a great venture capitalist can cement a relationship that leads to a business plan that wealthy private business people finance (often in large public corporations that the venture capitalist financed years earlier).
  • Classes in entreprenership can be found in nearly every school. Taught by experienced people, they cover the basics in depth of what you need to be successful. The cost of the courses are very low and rich in content. Some are online and self-paced.
  • And you can simply spend three months doing "informational interviews" with CEOs and core team members of startups. You'll be amazed at how much you learn listening to them over a cup of coffee or lunch. A few have written books.
  • The nice thing about all of these is that you have not spent any cash or given away any shares.

BOTTOM LINE: "What is my alternative?" is the first question a serial entrepreneur asks him or herself when thinking about doing the next startup. Accelerators have their place in the startup world, but are not the be-all for everyone. To move from idea to clever plan that has a chance to contruct an unfair competitive advantage you'll need a lot more help than can come from an accelerator. Serial entreprenurs know that. So try contacting a few and give your alternatives consideration as you plan your next step.

I wish you The Best on your Adventure!

SPONTANEOUS STARTUPS (PART 2): Learn from a real $300 million example

Spontaneous Startups just happen. Often very well.

Today I'll share an amazing example of a real new enterprise that spontaneously rose from nothing to sales of over $300 million (and climbing).

EXAMPLE

The startup is Wayfair.

Its on-line service sells "everything for the home."

Why don't you know about them? That's part of their story and it's a clever one, filled with excitement, risk and extraordinary success.

I highly recommend you read the well written story (just click on the Wayfair link above) in which the two founders, Niraj Shah and Steve Conine, tell how they moved from startup idea to startup idea until one day they found a very special idea for their new enterprise would become Mayfair. It simply "occurred to them".

As you dissect this amazing saga (it took years and a lot of hard work), keep the following characteristics in mind, they'll help you glean extra value from your thinking, they will generate things to apply to your own startup:

• Stalled with several startups, bailed (wisely) one after the other, until they got The Big Idea.
• Took no venture capital until success was very clear, years after starting.
• Stayed focused, did not get distracted during early formation years.
• Looked and looked and looked for a better idea than the one they had at the moment.
• Techies made the move to marketing savvy as a natural consequence of their processing of ideas.
• Settled on a very simple idea, yet one with huge potential.
• Bold vision: "determined to think big -- really big."
• Flanking Strategy: moved into uncontested territory, a new market not yet dominated by a Gorilla.
• Profitable from Month One.
• Quick to follow successful step after successful step (and to not repeat failures).
• Creative with cash flow management.
• Learned how to do the (retail merchandise) business by doing it.
• Avoided attacking Gorillas.
• Figured out what customers were frustrated with, solved that problem.

I'll leave the rest of the story thinking up to you. Read, think and repeat several times how you analyse this Wayfair story. Each reading offers to you the chance to glean a fine harvest of stimulating ideas for how to do a Spontaneous Startup.

BOTTOM LINE: Wayfair is a find example of how to do a Spontaneous Startup. You can do the same. Study the process the founders went through. That is where the low hanging fruit is waiting for you. When you "get it", you'll know the secrets that made serial entrepreneurs serial winners. And you'll be able to use your idea to build an unfair competitive advantage.

I wish you The Best on your Adventure!

SPONTANEOUS STARTUPS: They just happen (and often do, well)

Spontaneous Startups are a special class of new enterprise.

They are the ones that just happen.

One or two people. No business plan, no MBA, no VC money, no whatever else, just that sudden "Hey, why don't we do XYZ?!" And they go do it. Often very well.

I've recently realized there are a lot of amazing entrepreneurs out there who "didn't have a clue" about what they were getting into. Something triggered in their brain one day and presto! Out came a clever idea that became a clever new enteprise.

They are so fresh and different from the classical venture capital backed startup to IPO model that I had to pause and dwell upon them. Like a breath of fresh Spring air, I found them stimulating and inspiring.

My research has revealed so many of these Spontaneous Startups that I decided today to reflect on them for you and supply a real example to think about.

SPONTANEOUS STARTUP IS

Here is what makes a Spontaneous Startup so special:

• Sudden. There is no gradual effort leading up to the formation of The Idea for the new enterprise. It springs up with a loud "Surprise!"
• Wherever. The Idea can occur anywhere. On a plane, in a classroom or shower, watching television, during a sporting event, even on the job as you work.
• Instantly compelling. The Idea is immediately appealing to the founders who sense it is will also be appealing to many paying customers.
• Personal Product/Service. Sports clothing, baby seats, racing bicycle parts, casual digital games and other ideas resonate naturally with the founders.
• Mostly consumer. Industrial startups can be born as Spontaneous Startups, but most are ideas about selling something to ordinary people (or they are about supplying a product/service free to end users and making money via the classical Internet advertising business model).
• Clever. Something is triggered that jumps out as at least novel, or very new, if not extraordinary.
• No Special Education. While founders of this kind of startup range from high school dropouts to PhDs, the founders appear to include relatively high portion of people with no college education.
• Venture Capital Missing. Founders got started with their own savings, typically in the form of going without salary. They begin work in their homes and rented apartments. Cash is precious.
• Quick Time to Launch First Product. Months rather than years are consumed to get from start to first sales.
• Quick to Profit, Mostly. Most are profitable after a few months of first sales. Exceptions are in Internet centric businesses (e.g. mobile photo sharing: Instagram) which race to be first to get the gorilla share of end users in the new market category.
• Hyper Growth, Mostly. The first product/service catches on and spreads like wildfire, with sales following with the same remarkable growth. Exceptions like Linkedin do seem to require decades to get established before the hyper growth occurs, and thus have to get additional funding from wealthy angels.
• Friends Do It. The founders and early core of employees are friends. They may have worked together, but more are simply social friends, often very close friends.

 EXAMPLE OF A REAL SPONTANEOUS STARTUP

I have a real Spontaneous Startup for you to think about. It was born in Norway and is thriving. It is Onepiece.

Here is their story, from the startup's spontaneous beginning.

Early one Sunday morning in 2007, Henrik, Knut and Thomas, three Norwegians in their twenties, fantasized about the ultimate chill-out wear that would be perfect for a lazy day at home.

They all agreed on the merits of the sweatsuit for recovering from a night on the town. "But without the tight waistband and the pressure to go jogging," Thomas said. Knut had been staring at a light bulb when, eureka, it all became clear:
"Why not sew together a hooded sweatshirt and a pair of sweatpants? Let's make it so big that no one in their right mind would think of working out."
"If we can skip the waistband, I'm all for it," said Thomas. "But how are we going to get into it?"
"No sweat," replied Henrik, "we'll just put in a big zipper."

And with that the OnePiece Jump In was born. The three friends dropped everything and invested all their savings to realize an idea they believed was unique and brilliant. They made the loose-fitting, all-in-one hooded sweatsuits in soft, thick cotton fleece in a wide variety of colours and patterns.

For two years they sold the OnePiece to friends and marketed it to high-school seniors in Norway. Then, in autumn 2009, some bloggers wrote about how much they loved the OnePiece, which triggered other bloggers to rant about how much they hated it. Fuelled by massive debate in social media, the OnePiece Jump in became a huge trend in Scandinavia in 2010, and is now catching on in England and other European countries.

"We were as surprised as anyone when people started wearing the OnePiece at clubs and it became a fashion and lifestyle statement," says Thomas, who has left university to devote all his time and energy to the OnePiece. "I think that the versatility of our jumpsuit and the fact that it is extremely comfortable are the main reasons for its success."

Even as the OnePiece wave hits country after country, gaining a foothold, Knut, Thomas and Henrik are busy developing new ideas and concepts. To be sure, the OnePiece won't be their last innovative fashion item.

BOTTOM LINE: The class of new enterprise known as Spontaneous Startup is large and filled with exciting fresh business ideas. This kind of startup is able to be created by nearly anyone. The specialness of a Spontaneous Startup opens doors for many budding entrepreneurs looking for a way to do a real startup. The ones that succeed seem to be intuitively able to build unfair competitive advantages (which says a lot about the intuitive brains of the founders of this class of startup). Think about a Spontaneous Startup for your own new enterprise. It may be just what you are looking for.

I wish you The Best on your Adventure!

TWIST YOUR STARTUP IDEA UNTIL IT SOLVES A BIG PROBLEM: "Better" is living death

This past week I was working with teams of four or five techies in my startup Entrepreneurship class at Cornell University.

What struck me was how tricky it is to get techies to see the difference between "better" and "BIG".

Great startups find BIG problems to solve.

Companies that get started and go sideways focus on making something BETTER.

Words ending in "er" are four letter words to VCs and experienced startup employees: faster, better, cheaper are not firing up their eagerness to join your new enterprise.

The founders who focus on solving a basic problem that ails a huge number of people produce the great startups. That takes courage and conviction, confidence and determination. There is a lot of emotion in making that decision.

To test your idea, ask yourself "Has this been done before?" Then ask "What that is similar has been done before?" Great ideas for startups find that idea is fresh, new, has not been done before. And the similar solutions are old generations of clunky solutions. You want to move from a ho-hum idea on to one that is very exciting, that has a lot of "WOW!" in it.

TWIST YOUR IDEA : 

Use your first idea to begin a process of altering it week after week, twisting it into different forms that solve different problems. That twisting process will advance your initial idea, most likely shifting it to focus on a very different problem to solve. That is what serial entrepreneurs are terrific at doing.

EXAMPLE:

Here is an example for you to think about: "Build a better game" is not going to lead your startup to greatness. But as you ponder building new games, you realize there is big decision you have to make: On what devices (computers, game boxes, smartphones, pads) should your game run on? It is a lot of work to make a game run on one operating system and one device. How about a dozen in various combinations? Now that is a BIG problem needing a solution.

So how about creating a language that can be used to build one game that works on the many different devices?

Sounds great!

But hard to do (good barrier to competitors).

That is Exciting!

And yes, there is a startup that is focused on doing just what I have mentioned. It is Game Closure. The company has built HTML5. It is a set of standards that lets Web browsers understand animations, videos, graphics, and other multimedia content without the need to download a plug-in like Adobe's Flash.

You can imagine how you might have come up with this idea yourself: as a game developer you grew frustrated at the basic problem of cross platform game playing software coding. You set out to solve it with a couple of ways, tried a few in the lab, kept on thinking and twisting your idea, and then "presto!" you get the idea that we have just discussed.

That is how to move from an initial idea to a great idea. Twist your first idea round and round until it transforms into a solution for a really BIG problem.

That is how you attract the great people and great financial backers.

BOTTOM LINE: Beginning with your initial idea, start twisting it and keep on going until it becomes -- in its transformed shape -- a solution to a BIG problem. That will be the foundation for building an unfair competitive advantage. It is how serial entrepreneurs do it. So can you.

I wish you The Best on your Adventure!

THREE BASIC HARD-KNOCK SCHOOL LESSONS FOR STARTUP CEOS

Streetsmart CEOs learn lessons from the struggles of others.

Here are three for your brain to cogitate on today:

1. Never sell Swiss Army knives. The new Galaxy Note is a "phone-tablet hybrid" making its debut. What are reviewers saying about the device? Here are one harsh declaration: "makes you look like your're talking into a piece of toast." And it is seen as "all of the above", meaning it is mixing smart phone with tablet with mobile device. In other words, it combines a lot of gadgets into one device. What is a Swiss Army knife used for? After opening all the gadgets, the user sets it on the desk and soon it is a great paperweight. Period. End of wonder. What does your product need? That is simple: it must have Focus + Wow! One thing done with wonder. You win. Swiss Army knife products lose.
2. Winning Number 2 companies (Chimpanzees) have to be radically different to thrive. RIM's Blackberry is a great example. What does it need to do? Not be better than or similar to the iPhone. No. Instead be crisply different. Let Apple sell to kids. Rim is "For adults only" or "Industrial strength". RIM's security is much stronger than Apple's. Corporations prefer that. So contrast the adult phone with the kid's phone. And thrive as a strong Number 2, a healthy Chimp existing in the shadow of a strong Gorilla. And try to pick a market for your startup that is not yet dominated by a Gorilla. In an early emerging startup market, if you begin to fall behind a leader, remember to strive to be clearly different.
3. Confidense with how your business model can make money trumps jumping off the cliff blindfolded. Pinterest has $37.5 million of venture capital invested in it. It's VCs are bragging that the startup's "monetization strategy isn't in the oven and i's not even off the baking table." Do you believe that? I don't. And neither do the VCs. They did not invest with their eyes closed. It is simple to calculate right now the amount of regular users needed by Pinterest to generate the annual revenue needed to create the huge value required for an IPO needed by the VCs to get rich. That is simple arithmetic, a simple Excel model to build. Sure, the precise method by which the company sets up the ads will be a work-in-action (think Facebook's on-going experiments and slap-backs by the privacy-sensitive Facebookers). So get out Excel and build your Business Model for your new enterprise. Investors (and smart potential employees) will be asking you "How will your startup make money?" The stronger your answer, the lower the risk and the higher the value of your startup will be to investor and talented employees. It's worth the hard work.

BOTTOM LINE: Watch, read, and listen to other entrepreneurs and innvators. Study the marketing wars. Then apply what you learn to your startup. It's how the Great Ones rose to success. It became part of their unfair advantage. You can do it too!

I wish you The Best on your Adventure!

"PROVE IT!!" IS THE NEW STARTUP MANTRA: Back to the Future circa 1970

"Prove it and then we'll consider investing."

"I want to see how the app catches on before I jump ship."

"We will get this thing launched and then figure out how to make it sensational."

Those are comments I've heard often from investors and talented people as 2012 begins to emerge.

To me they signal we have arrived in a fresh startup era, one that reminds me of the "good old days of the 1970s." Back then software startups were getting hot (and got even hotter when the personal computer ushered in the 1980s boom). Investors (not yet dubbed "venture capitalists") were cautious, wanting to see the software running before signing the check. That process launched a wave of successful startups running large applications and new databases. It became a tsunami as the PC followed Apple's arrival.

Central to the process was "Proof of Concept" followed by "First Product Launch". After those two steps, investors signed checks.

Today, I find many two and three man techie teams coding at night and on weekends. Often working remotely from each other, their friendships link them to the focused effort: get this thing up and running, then we'll find some seed money.

The good news for entrepreneurs is that this process opens the door for more ownership (percent). You take the risk for the earliest phase of the new enterprise and thus keep those seed round shares for yourself (e.g. Zuckerberg with Facebook.).

The bad news is that you have to finance the early stage by yourself. That reduces the number of people willing to join you. And it slows development time to market. And it makes it likely that you'll find a lot of competitors emerging the same way.

I'm back from Cornell University where I again saw this phenomena at work. It is here to stay. So plan on it.

BOTTOM LINE: We are in a fresh modification of the traditional process of launching a new enterprise. Investors are expecting to put money into potentially large deals only after they have shown success with an infant product or service. The "success" of the initial launch is what attracts the people with the money. It is tricky to do, partially because you need some friends to join you without being paid. Serial entrepreneurs know how to do this. You can figure it out. So get started, it will be a solid first step on your way to building an unfair competitive advantage.

I wish you The Best on your Adventure!

SHOULD YOUR STARTUP ACCEPT THE SALE PRICE FROM A BUYER? Some tips on negotiating to a successful conclusion

 What can you do about selling your company at a good price?

Below is an email I received recently from an entrepreneur whom I respect, and some of the tips I gave him.

======================

From: Mr. O
Sent: Tuesday, November 29, 2011 10:06 PM
To: john@nesheimgroup.com
Subject: Some questions about M&A

 Hi John,

 Hope you are doing great.

I am shooting you an email because I believe you are the best person who can address some of the questions I have about the process of Mergers and Acquisitions. I've read your blog, but could not find the information I am looking for. So I thought of emailing you directly.

 I am interested to know your thoughts on what the negotiation steps are after the acquiring company makes an offer to the target company. 

How much room is there for negotiation before the acquiring company decides to turn its back?

Let's assume here the offer is on the low end of what the founders had anticipated. Are there specific steps to negotiate the offer up without hurting feelings?

 Looking forward to your take on this.

 Thank you,

Mr. O

 ===============

Hi Mr. o,

Good to hear from you, seeing that good mind of yours in action.

 ABOUT M&A

= It is about process.

= The process needs daily managing to keep it moving forward to the final goal. Expect to be 100 percent consumed with the process. (Your startup business will suffer).

= Final goal is a Decision: Sell or wait or shut down. Start with a realistic assessment of what you should do about each of those alternatives. Put a number on each in monetary value.

= With an offer to purchase on the table, start with an honest assessment of “How can we continue without selling?”

= Use that assessment to draw a line in the sand on the selling price: “We will not sell below this price.” And keep that a secret, of course. This is your Deal Buster number.

= Expect to get closer to -- but not to close up -- the gap between Your Higher Price and Their Lower Price.  You will not get to your Higher Price, ever.

= Document a list of the reasons for  your Higher Price: patents, brand names, trademarks, licenses, contracts, leases, technology, working IT infrastructure (make or buy economics, e.g. web site, ecommerce), location, customer base (existing), new customers (growing rate), business model (translate customers to money), competitive strength (market position versus competitors), compelling product/service, working company (people who get along together, like their work, get things done), management core team (track record of accomplishments with this company), strategic partners (handshakes, contracts), advisors (special talents), board members (wisdom and perspective, network of connections). Put value on each of those in monetary terms. There will be more here than you (and the Buyer) realize.

= Compare your list to that of “similar” companies, private and public.

= Use valuations of any other private companies that you can get your hands on. Related or  unrelated will work. Use multiples of revenue to set values, ignore profit  valuation methods. Even multiples of public traded stocks in the same general industry will be helpful to you.

= Lock up your emotions. This is about money. Period. No one hurts anyone in business, that’s for shrinks and priests to deal with. Simply be a business professional during the M&A process.

= Expect to get to do at least one round of Give and Take on the sale price. The first attempt will tell you how open the buyer is to yielding ground. "We think we have assets you might not be aware of that are worth more than your initial offer suggested and we'd like to discuss that with you tomorrow." is a good way to open the next round of discussions. No one likes to overlook something of value, so the Buyer will typically listen (eagerly).

=  Competition is your Best Friend: look for an alternative buyer, immediately. The leaks in your search will spur the buyer on, in your favor. You might even find a better priced buyer.

= Measure the Make or Buy alternative for the buyer: how long ,with how many people, would it take the Buyer to duplicate your business? Put a monetary number on that.

= How much more, greater, can the buyer make of your company (than you alone)? Put that Opportunity Value into monetary terms.

= Measure the Cost of Time to Market: How much sales and profit will the buyer lose or gain if it does or does not buy your company?

= Get your Champion Inside the Buyer to get excited about buying your company: s/he will have a special reason to make the purchase (find out that reason, and appeal to it daily, e.g. major promotion, chance to run a business, company hero [others have failed in his/her company], produces a Big Winner for his/her company, etc.).

= Talk to people who have sold and bought other companies, private or public. Listen to their stories and learn.

= A lawyer experienced with M&A can be a super asset to you in this process. Don't use a first-timer.

= Practice your negotiations by talking with advisors and friends, before you make the phone call to the buyer. That is a good process to use to get any reluctant board members on your side.

= Remember this  is a process that requires daily effort and management to push it to a conclusion.

Hope that helps you a bit, Mr. O.

(And by the way, there is a lot more to negotiate after you agree on a number: e.g. Your role or contract, ditto for the other people, etc.

========

BOTTOM LINE: Selling your company is part of a negotiating process. It is intense, emotional and draining. Your basic business will suffer. Get the deal done or ended ASAP. If you prepare, then you will be able to increase the sale price. Know when you will leave the room, what your Deal Buster price is. You will be amazed how many people out there have done this. Contact them and learn. Focus on managing the process daily, be professional, put the emotions in a closet until you are finished, and keep going until it is over. Serial entrepreneurs have sold their companies successfully. So can you. It's part of the winning entrepreneur's unfair advantage.

I wish you The Best on your Adventure!

 

 

 

 

IPO GROUPON: How much did the employees get?

I'm in the midst of dissecting the Groupon IPO prospectus. It's a real messy story, of a series of acquistions that created and grew the startup to IPO in less than four years.

My first set of self-generated stats has shown me something remarkable: The 10,000 employees got a very low ownership compared with the founders and early investors.

My analysis so far shows:

• There is only 7 percent of the company reserved for future stock options.
  • LinkedIn had 15 percent.
• There is only 4 percent of the company that has been sold to employees via stock options. And the bulk of that was optioned to top executives.
• The value per employee of the 4 percent was (at IPO pricing of $20 per share) $60,000. Mason, the CEO was valued over $1 billion.
  • LinkedIn value per employee was $617,000 and the founder CEO Hoffman was valued at $900 million

The gap between the top brass and the workings is stunning, the kind of thing in principal that The 1 Pecent Demonstrators are upset about. I've seen a lot of IPOs in my years, but this wide-gap sharing of ownership is a first-of-its-kind for me in venture capital backed new enteprises. (There may be more to come with Zynga and Facebook. If so, it's a new chapter in the history of modern startups).

Next week I'll have more time to dig into the swamp and learn more. Right now I've got to pack my bag and get ready for flying ithaca, New York to do final exams at Cornell University this week (I always look forward to seeing what cool ideas the students have come up with for their startup plans).

BOTTOM LINE: As founder CEO, give some thought to the gap between you and employees when designing your stock option plan. If you see a gap as large as that of Groupon, expect to be a target for critics and probably employees (who may leave for greener pastures). Planning a fair, competitive and motivating-retaining stock option plan is what serial entrepreneurs do well. It's part of their unfair advantage.

I wish you The Best on your Adventure!

STARTUP VALUATIONS CONTINUE HOT: What should you expect for your new enterprise in this market for money?

If you have what is hot, you are hot, at least in today's money market for venture capital.

When a founder understands the numbers VCs are seeking, better deals can be negotiated.

HOT RACE

The VCs are in an intense race: they desperately seek the next Billion Dollar Valuation Startup. To miss the next Google, Facebook, or GroupOn is death to them. One miss of the next Gorilla will drop the ROI on a venture portfolio to bank deposit rates. Such a mistake will slide their fund down into the ranks of The Other VCs, to be forgotten by all but a few. When they try to raise fresh cash to invest, the institutions with the big money "will pass" on investing via their new venture fund. Thus the race is one of desperation for VCs.

Entrepreneurs can take advantage of that, negotiating more favorable terms (price, liquidation preferences, stock option pool, etc.), getting deals done swifter with the venture partners of choice.

But there is danger in all of this, the danger of over-reaching, of "too much greed". Critical observers are frequently objecting to the high valuations of private rounds of "the hot startup deals". Their concern is valid, namely that the basic business may not be able in the future to generate the revenue and profit that supports billion dollar valuations today. For instance, take a look at today's blog from TechCrunch on this issue.

DEALMAKING

So how aggressive should a founder be in when cutting a deal this market?

I suggest this market for hot VC money is looking for deals that can get a return on capital of 100 times each dollar invested. Those numbers correspond to data I've been looking at in recent private and IPO deals. Take a look at the high ROI multiple for LinkedIn VC rounds (as compared with my long term Standard ROI earned by VCs over decades of deals):

Then look at how those multiples translated to ROI measured as percent per year. Here you can see the VCs got ROIs all around 100% p.a. (interest equivalent of 100 percent per year in the bank).

 

In other words, today's VCs are seeking tiny startups that can become giants of tomorrow as measured by ultra high ROI ambitions. Their return on investment target is the equivalent of 100% per year interest rate. The corresponding multiple per year will decline as the IPO date arrives because the risk reduces over time as the company grows larger, generates profit and turns cash flow positive, but the price per share for each deal will be set to earn a very high percent per year ROI.

Yes, that sounds terribly high. But it is what happens during such feeding frenzies.

As I've blogged before, the startups that get early money have convinced investors that the business is "scalable" (huge market, open, growing, no dominant Gorilla blocking the way), has "traction" (showing rapid adoption by end users and customers) and has "WOW!" in its offering (highly compelling to end users). Lacking one of those will put your finance raising efforts far behind other startups.

BOTTOM LINE: Entrepreneurs can take advantage of the current flurry of VCs eager to finance the next great Gorilla. The numbers needed in your plan must convince the people with the money that your deal will generate for at least early investors the equivalent of a very high return on investment, in the order of a 100% interest rate. Those thin air, high altitude numbers are the result of a fresh wave that is heading toward the beach. VCs are determined to ride it to riches beyond measure. It's up to you to get them to pick your startup to ride. Serial entrepreneurs know how to do that. It's part of what made them skilled at building unfair advantages.

I wish you The Best on your Adventure!

STARTUP DUD: Find a new use for the engine/technology

"What do you do when you launch your app and end up with 100 users?" That's the central discussion point of my talk this morning with a budding, bright entrepreneur.

What should be done next seems obvious at first to many observers: Stop.

• But if you've put in two years of no-for-pay work with two other guys, giving up is not easy.
• So when should you stop?
• What should you do with what you've built?
• What can be done to succeed in spite of the dud on launch?

Yes, even the best, the world-class pros launch products that are duds. Dead on arrival. Go nowhere. Get slammed by the bloggers. Get Twitted to death, mercilessly.

For a touching example, so you get the picture, look at a story about the film Conan the Barbarian (dud). It was sent to me by a serial entrepreneur I greatly respect (Thanks KT). Read and think a moment about how the lead writer went through the post-launch-blues. Download Conan Writer Describes His Emotions to a Boxoffice Failure.

1. So the first lesson is: Expect less than a spectacular win. Remember, startups are statistically going bankrupt (i.e. over 60% of venture backed new enterprises go out of business). Good news: you are not alone. There are a lot of others you can learn from out there, they'll help you step on fewer startup landmines. Start talking to them.
2. Next: Start thinking about what you could do different (VERY different) with what you have built. Here is a metaphor I often use with techies: "Okay, let's admit the idea is a dud. So what do you have to work with? Technology you say? Well,think about it as an engine. Then start looking for what vehicle you could put that engine into: passenger sedan, SUV, light truck, spare generator, green machine, and so on." Here is where you have to have guts, think boldly, take whacks on the sides of your heads, brain storm, do out of the box. Often the Second Time Around produces something Great.
3. After this, test each New Idea for how much "WOW!" it has (compelling reason for the end user to use/buy). This is classical startup work fron here on. I'll not dwell on it here.

My point for the day is simple: Even the Hollywood greats launch duds. So do serial entrepreneurs. You can use such events to make a decision about what to do next.

Sometimes it's best to close shop and find a job (e.g. wife expecting second child, parents aging needing closer attention, have less than 6 months rent in the bank).

More likely it is time to intensely search for something very different, something to apply what you have built, something to solve a Really Big Problem (that others have overlooked - see my August 22 blog on Flanking).

All of this is part of being lost in The Wilderness of Undistinguished Startups. Your Core Team now has to have the courage to know you are lost and screw up the guts to think boldly to find a way out.

BOTTOM LINE: Launching a dud is common. When it hits you, get through the emotional process of accepting reality and depression and recovery. Then you can start to get creative and figure out what to do with what you have built. That's how serial entrepreneurs think and behave. It's part of their DNA, what they use to build unfair advantages.

I wish you The Best on your Adventure!