[This article is based on some assumptions: you have a business worth funding; you have the motivation that inspires investment; that you have access to a “reasonable” pool of funding.]
About 4 years ago, a good friend of mine asked me to help her figure out if and how she could raise some funding for her business. She didn’t have a “tech startup” per say, rather she was a UX/UI designer, and a very good one.
She wanted to raise money because she was starting to hire people under her as contractors to help her with her workload, which was designing graphics and interfaces for startups in San Francisco. The company has nice revenue growth, some proprietary software tools (CSS, Javascript) and a bit of cash in the bank. This is not a vanity business.
I said “Sure, that could be fundable. How much are you raising?” She just gave me a puzzled look.
People wonder if it was pretentious to assume a design firm could be fundable. I tell them absolutely not – if gourmet coffee is fundable, then of course digital design was and can be a fundable, scalable, “productizable” business. The real question: Is it scalable? If is that what you want – a bigger company? Investors? why? are you ready???
Those questions caused her to go away for a few months; that happens a lot when I ask questions. She eventually came back with some great answers to my questions. My only feedback was to double the ask; ask for twice the amount she felt she needed. That kind of shocked her again. Good.
Why ask for more? So many reasons. Costs are hardly ever lower than you estimate. It’s never good to run out of money, as we all know. Also, real investors know when you’re not estimating your costs correctly and that turns them off. Believe in yourself.
Often fundable founders don’t agree with me on this point. They say…
I don’t want to give up more equity
I can do it with less
Investors will say “no” if I ask for too much.
And here are my responses:
Fight for a higher valuation, use outside experts
Over estimate all costs
Be bold
If you wait until you’re running out of money it will cost you more. Also, you can possibly sell a little bit of your own stock to investors, give yourself a six figure bonus.
Im my book HACKING THE CORE, I write about using Creativity and Innovation to help startup founders achieve that elusive goal – sustainable business growth, along with a few other things like profitability, a fun place to work, personal fulfillment.
That’s an oversimplification, but the idea is to expand your horizons, “think different” to enhance your chances for success as well as personal fulfillment along the way.
Innovate. Be creative. Discover something no one else has. Go where they’re not.
The book also talks about Wantrepreneurs and Cantrepreneurs. In my consulting work I can identify these types of people. They’re usually struggling, losing their company, walking backward towards the edge of a cliff, failing daily. Yet they’re unwilling to change their thinking.
Creativity and innovation don’t actually make sense to them in a practical application because it threatens their status quo. Deep down, change is bad to them.
Their brains are wired to do things their way – no matter what. Usually their way is to mimic someone else’s or their own successful tactics from the past. Crazy, right?
Every entrepreneur wants to innovate but some just can’t. Even in the face of doom and bankruptcy they can’t change. Another type of cantrepreneur.
They ask for help but only to help them do things their old way, and not to bring new innovation to the problem.
Why? Because that’s a threat to their self image, their power, their reputation as being the authority. Their position as the boss.
There are other people who are totally open to change, reinvention, pivoting, innovating, threatening their own beliefs, listening to others. These are the real entrepreneurs. They’re happy to be wrong. They have much better odds for success.
Here’s the intro on iBooks, Amazon and other online sites for my new book, released in April 2017.
– – – – –
Hacking The Core explains entrepreneurship in the tech startup world in a refreshing way. Pulling no punches, the author draws from 2 decades of experience as a startup CEO, strategist, M&A consultant and investor.
The book explains how to tap into the creativity and innovation that we all have hidden inside of us and how to apply it to launching and growing a startup business. It looks at all areas of a business launch to uncover areas of innovation, differentiation, design thinking.
Hacking The Core is based on principles of common sense, honesty vs. “fake it ’til you make it” and humility in success. It will show you how to lead instead of follow trends, how to create true disruption in and market segment.
There are several personal anecdotes from the author and explanations of his own motivations and mentors in his long startup business path.
Tom Nora is an entrepreneur, startup CEO, blogger and business mentor. He has led and mentored over 2 dozen venture-backed technology companies, 5 of them as President and CEO. He has extensive experience in funding, mergers, acquisitions and IPOs.
In 2011 Tom launched The Scalable Startup in Santa Monica, California to help tech startups launch and grow by providing mentoring, funding, community and strategy consulting. The same year Tom also started publishing the popular blog The Startup CEO.
In 2014 he decided to write a series of books on the startup world and his experiences. This was in response to the continuous requests for help he receives from early stage entrepreneurs and future entrepreneurs. Hacking The Core is the first of these books to be published, focusing on innovation and originality.
Tom is also a lifelong fine art photographer and oil painter.
How do I deal with my partner’s very extreme mood swings, knee jerk reactions and short temper?
tl;dr. Put it into a larger context, agree on a set of guidelines for acceptable behavior and communication.
Extreme emotions are never a good thing in a business setting, especially among partners. There’s an unwritten agreement among a leadership team that no one will go outside certain bounds of anger, mutual respect, and patience.
Usually when this happens there are other issues like lack of trust or perceived unfairness. In a partnership, often one member feels that they are doing more than the other(s), possibly feels incompetent and is trying to hide it, has personal issues or possibly several other problems.
The best thing to do is to lay it all out, talk about it, figure out definitively how to stop it. Don’t let it go on. Honestly discuss what is happening on both sides, and reinforce your desire to work with each other. If that doesn’t work, changes are needed before you damage the business.
How do you know?
I’ve stepped into the CEO role at several companies and have seen the emotional pain it causes founders to let go of the control and lose recognition. The problem usually resolves itself over time with building trust and paying proper attention to it, but not always.
There was an article recently in VentureBeat about how much control the startup CEO founder has over his/her board of directors. Unfortunately, this actually isn’t true in most cases, especially for first time founders, for many reasons.
Many factors come into play in early board formation including the founder’s goals, investors, cofounders, early appointees, family, friends. A well designed board can be the critical driving force in making a startup successful; while the wrong board can create disagreements, misdirection, angry members, awkward board dismissals, power struggles and can actually bring a company down.
First time founders usually aren’t sure how to populate the board, and first money from FFF (friends, family, fools) blinds them a bit to their best instincts.
Typical Pre-Funded Board
Here is the typical order of board formation before any professional funding comes in:
1. Founder/CEO
2. at least one Co-Founder
3. FFF
then maybe…
3. a “grown up” – former boss, relative, early (non-professional) investor
4. industry luminary
This is the group that must help grow the company properly, attract professional funding and make industrial strength business decisions. Most of this 1.0 group don’t have much experience, i.e. what it means to be on a board, how to optimize it, what the points of leverage are, what a natural disagreement is vs. a problem of discord. Usually the group is not experienced or cognizant enough to optimize this asset early on.
A Better Way
Here I’ll lay out some key steps to making this organization an asset rather than one with little to negative value.
Step 1 – The Founding Team It’s fine to have the founder and maybe one cofounder on the board; after all that’s all you have to draw from. The key to success here is to STUDY the topic, learn everything you can, follow proper board.
Also, internally you can determine if and when you actually have something worthy of funding – you must have a real business that is operating – product(s), spreadsheets, a team, Revenues?; asking outsiders to get involved too early can be the kiss of death. I see this happen a lot.
Step 2 – Get Outside Help In any startup ecosystem these days there are many people who have an interest in your business. The word “Startup” now gets their attention. Among these people are professionals that can get involved as a board member, but how do you do it? Which ones should be advisors instead?
Are there consultants that help with this? If you’re near Stanford or in San Francisco, every other person you meet almost seems appropriate, but don’t be fooled. You want people who are qualified but also who come to you via an organic process – you read about them, stumble upon them, meet them.
Listen to these signals. For example, in Los Angeles right now the problem is that a majority of those you meet fall below the level of “qualified” – they’re out there networking but have never sat on a real board or led a startup. Keep asking around and you’ll find the right people. And remember, make sure you have a real company first.
Contact me if you have a going company and this is a hole for you, I’m one of the people I mention above who can help. But not if you just have an idea, or are thinking about starting a company, those are a dime a dozen.
By most measures, we are in crazy times right now in the tech startup world. We have thousands of new companies every week, hundreds of funding rounds over $100 million every month, and so many $1 billion exits or calculations that we’re getting used to them. A $1 billion valuation used to be a big deal for a web based company that wasn’t one of the top few.
Everyone thought Facebook was nuts when they walked away from such a deal. But now the funding seems to be flowing everywhere, at many levels, and that almost anyone who starts a startup will be successful, will be “big”. Unfortunately, this is very far from the actual truth; we just don’t hear about the 95% that fail and lose all of whatever money is invested.
The frenzy at these higher levels, and the continuous stories of first time entrepreneurs in their early 20s who magically start these amazing companies is creating a demand at the bottom of the funding market, like the pyramid schemes in Southern California in 980 (see below). Look out for this trend, put your wallet away.
Unsophisticated investors, which means family, friends, co-workers, etc. or also called triple-F – friends, family and fools, who have a few thousand dollars they would like to put into the startup “market” are the fuel at the bottom of the market that get things started. It can be anywhere from $5,000 up to $500,000. They help to make ideas into reality, hoping for the higher returns of the early investors. You’ll see many dentists, doctors, parents, Hollywood actors in the crowd. They have a lower probability of return, as expected, but now are losing their money at higher rates than ever before. We don’t hear about this much because they’re embarrassed; who wants to talk about it and admit that they made such a mistake?
This market is reminiscent of the rampant pyramid schemes in the 1970s. Here’s a description from Time Magazine June 16, 1980 issue:
For $1,000 each, 32 newcomers buy slots on the bottom row of a pyramid-shaped roster. Each new player pays half of his $1,000 to the person at the pinnacle, who ends up with $16,000. The new player also pays his remaining $500 to the person directly above him on the next tier, which contains 16 people. Since each person on that tier gets paid by two of the newcomers, he ends up with $1,000, thus recouping his original investment. As more people buy in, the players move up the chart. In time, theoretically, each person reaches the top—and $16,000.
Amazing, huh? The only problem was that the need for newcomers increases exponentially, thus the name pyramid. You needed 32 new people every night, and as the word spread new groups popped up everywhere in L.A. It fizzled out within a couple of weeks, but went on for years in other parts of the country.
Skip to 2013…
Two years ago in the California startup world there was a lot of buzz, or anti-buzz, about the impending pop of the current hyperactive tech market and unsophisticated spending of . The concerns took many forms, one of which was named “Series A Crunch”, another was the gratuitous use of the word “bubble”. Series A is the second round, the one after the seed or other small amount of ignition money. It’s the round that graduates of accelerators seek. It’s also “professional money”, not triple-f.
I remember being asked in a startup panel I was on by the moderator “What do you think of the Series A crunch?”. I replied, “Do you know what a Series A Crunch is?” She tried to explain but didn’t in fact know what it was. That was a sign to me of startup overhype, everybody mimicking each others phrase of the week.
Fast forward to today, 2015, when we’ve been in a possible “end of the boom” for over 3 years. We’ve been hearing the word bubble for that long, people trying to predict a crash, mostly out of envy for not being able to harvest any cash from this current crazy market. Seed funding is at an all time high rate and it has that scary phenomenon of feeding on itself.
There are a number of articles floating around again about the lack of Series A money in the market, which is usually required to take a company to ROI.
At the same time people are bragging about how easy it is to raise seed funding of up to $1 million. Almost anyone with a web based working “app” or mobile app can get funding. No business plan, no ROI. Sometimes you’ll need to show traffic/traction/conversion, but not usually. There are plenty of triple-F investors anxious to empty their 401K or add another mortgage, take a “risk”, for the chance at those 8 to 9 figure exits they keep hearing about.
This is also reminiscent of the late 90s when unsophisticated investors lost billions diving into the dot com boom just before it crashed fairly rapidly. The difference is now it’s not crashing so visibly. There are admittedly many more successful growth startups on the Internet than ever, the second renaissance of the web, but the statistics for success are much worse than ever.
If you look at CrunchBase, almost every day you’ll see a new funding of over $100 million. Almost every day. That’s enticing to a potential angel. You’ll also see several others from $10 to 50 million. This has become the holy grail for that 401K earning slow interest.
But here’s the problem. Most of these investments will return $0. Not 80% or 50%, zero. In this flurry of amazing new Internet startups, a higher percentage are failing after the seed round than ever before, probably close to 99% vs about 85% 20 years ago. That means almost every unsophisticated angel investor is losing their savings and adding new debt to their life.
Why will so many people lose their money and why is no one talking about it? Here are the reasons:
It’s very easy now “look real”, i.e to create and deploy an Internet and/or mobile app live on the web or a phone. I get pitched one every day.
We’re still in a terrible job market, no matter what the official statistics say. I’ve met more broke unemployed professionals in Beverly Hills and Santa Monica in the past 3 years than ever in my life. They have nothing to lose. Why not start company.
The Triple F effect. Friends, Families and Fools. Those are the people who will give you funding based on no actual research or due diligence.
Erosion of true self analysis. One very critical part of succeeding in a business is being able to critique yourself as a business. As part of the new startup world people are avoiding this process. It’s become a casualty of “fail fast” and pivot and other buzzwords.
The bottom line is that people with no experience or particular expertise in almost anything will most likely fail. So get some expertise involved before you go get that wire transfer of $100,00 for the son or friend or co-worker you want to help.
