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Startups shouldn’t count on bridge loans.

indexIn the startup world S.O.S. means ‘save our startup‘ and the most common life saving device is a bridge loan. Typically a current investor will pony up just enough capital to get the company to either breakeven or the next funding event. But more often than not bridges are simply a way to allow a CEO to stay in a state of denial hoping that a magical solution will present itself. Worse yet, bridge loans send a VERY bad signal to future investors. Fred Wilson explains it:

“So bridge loans are often bad investments made defensively. And so they are red flags to other investors. When a new investor looks at a company and sees a bridge loan in place, they will understand that all is not well… And it will make closing a financing more challenging.”

It takes a startup about six months to raise a major investment round. If you haven’t made significant headway during the first ninety days it is time to take a good hard look at your burn. Your most important job as CEO is to save the company. It may be painful, but you must start cutting costs – renegotiating agreements with employees and vendors – whatever it takes. You need to get your burn rate down so that you can cut it completely if you end up running out of runway.

Of course, most CEOs (including me) don’t start cutting deep or fast enough to prevent the need for a bridge loan. Ironically, VCs know that the bridge loan is almost ALWAYS a bad idea a ‘bridge to no where’, but they can’t help themselves. So if you need to take that bridge loan make sure can find a way to ensure that it buys you the time you need to save your company. Oh, and start looking for a new role within the company or a new job because your days are numbered. The best way to explain the need for a bridge to a new investor is to introduce him to you – the soon to be former CEO – they will only consider the investment if they can convince themselves that you were the problem.

 

 

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Tinder + More Features = Failure (Courtem)

phone-imgWhen the Tinder mobile app hit the dating scene it was an immediate hit. Today more than 50 million people use Tinder to find a match. These 50 million people generate a billion profile swipes each month (right or left) making 12 million matches per day. Four brothers in Dallas decided to clone Tinder and make it even better by requiring that users propose a date in order to connect. Unlike Tinder which lets you indicate interest by simply swiping right (awaiting a similar swipe), the Courtem app requires you to propose a time and date for each match (or court in their terminology). This is so smart, but I argue it is a bridge too far for most users to cross.

Tinder is successful because it has such a low barrier to entry. There is almost no friction. You either like someone or don’t. Courtem requires you to make that decision like/dislike and then propose a real world date with a specific time and place. I might think you are cute, but am I really ready to commit to a real world date? Most people I talk to aren’t even close to making that sort of commitment until AFTER they chat.

If you asked me to bet on the chances for success for Courtem I’d give it a .01% chance of success. These guys are too clever by half. They’ve created the perfect feature that will make it more likely to find a match, but less likely to create a scalable business. Of course Mark Cuban totally disagrees with me (he is on their board and has an equity stake in the company) and it is hard to bet against him. What do you think?

 

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Founders Fund Portfolio of Sin? Betting on Vice over Virtue.

miamiviceThe Founders Fund, a venture capital firm founded by Peter Thiel, announced they are investing in a cannabis company who sells Marley Natural brand marijuana. This was shocking to me because Founders Fund is a tier one, best-in-class venture capital firm. They’ve invested in startups you may have heard of like Facebook, Airbnb, SpaceX and Spotify.

Superstar venture capitalists like Peter Thiel, Ken Howery, Luke Nosek and Geoff Lewis (who is the lead partner on the Marley deal) NEVER get involved in so called ‘vice’ investments like pornography, drugs, tobacco, gaming and defense – until now. Don’t get me wrong, you can make a fortune in ‘vice‘ investments, providing OUTSTANDING returns for your investors, but firms like Founders Fund have had HUGE success focusing on their core manifestos. Did they need to take this risk? Was it worth it? I’m not certain, but it smells like a mistake.

The Founders Fund Manifesto, written by Bruce Gibney, describes two main objectives:

  • finding ways to support technological development (tech is the fundamental driver of growth in the industrialized world).
  • earning outstanding returns for their investors.

The manifesto suggests a strong belief that cynical and incremental investment thesis’s BROKE venture capital and that the Founders Fund method is the shortest route to social value. Does this investment provide any social value whatsoever? Does it support technological development? I bet it will earn an outstanding return (assuming the GOP doesn’t take control of the White House). Founder Fund claims they invest in smart people who are solving difficult problems. Well they picked a doozy this time.

As an investor where do you draw the line? If you there is a new porn provider that has built a great platform to deliver porn over the internet AND you are convinced you can make a fortune for your investors should you do the deal? For me it seems like a mistake to invest in a company that distributed illegal (at least on a Federal level) drugs to consumers. Maybe I’m totally off base here, but

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StartupMuse Mentorship Month 10

startupmuseTen months ago I started my twelve month mentorship experiment. Initially called TEN and now called StartupMuse, my program offers entrepreneurs three different mentorship programs.

  • Basic – $199 (6 entrepreneurs)
  • Standard – $499 (3 entrepreneurs)
  • Premium – $999 (14 entrepreneurs)

I had started out limiting my group to ten, but after Ethan (my son) suggested adding three different levels and prices points my group expanded to 23 members. About half of the companies are really thriving. 25% are struggling and the other 25% are headed to bankruptcy/insolvency. My original goal was to add $1M in enterprise value to each company within a year. Two more months and I’ll report my results. In the meantime I’ve been having a blast. Such an inspiring group of entrepreneurs.

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Hardest part about being a entrepreneur? Focusing.

I66hzR_KYou know you’re an entrepreneur if everything you hear or read makes you want to start a new company. If you’re not careful you’ll end up starting a new startup every month like Pieter Levels. Ten months ago he declared to the world that he was going to start 12 startups over the next 12 months. In my experience the hardest trait, but most important trait in an entrepreneur, is the ability to say NO to ideas. Instead, I believe, commitment to a single idea for at least 13 months is key to achieving any level of success.

I have a new idea for a startup almost every morning while I’m in the shower. For example this morning I was listening to NPR and was shocked to hear that the demand for rescue dogs is outstripping supply. Shelters are having to import ‘rescue dogs’ from other states including Puerto Rico. It occurred to me that I could build an online service for shelters to list all of their available dogs. The underlying rescue dog search engine could be embedded in the shelter’s website in an iFrame allowing for a more perfect way to match potential owners and pets all over the country. I went so far as to actually talk about the idea several times today until I realized that I was ‘stealing’ mental energy from my BIG idea – ViewMarket.

Startup ideas are fragile. They need 100% of your mental and physical energy to come to life. Pieter’s idea to start 12 startups in a year is ‘cool’ but it is unlikely to create a ‘hit’. I’d love to do ‘a’ deal with Pieter, but I’d be hard pressed to commit my time to working with him if I knew he was ‘cheating’ on me with 11 other startups. Commit. Pick. Focus.

Update: Pieter reached out via Twitter and suggested that “you need market validation before focus”. I agree completely. You need to validate your ideas before spending the next 13 months of your life trying to bring them to life. BUT, make sure you’ve invalidated your first startup before starting the second startup.

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Should you quit or pivot?

college-adviceThis morning I had a heart to heart with one of the entrepreneurs I advise about whether or not he should pivot or quit. His startup had raised a few hundred thousand dollars and managed to build an MVP, but struggled to secure customers and additional investment. His investors weren’t impressed by his inability to get customers to sign up for their service and were unwilling to invest additional capital. The question? Should he come up with a new idea and pivot the company or should he shut the company down and come up with a new idea and start over with a clean capitalization table?

What do you think? What would you do? Have you ever faced this sort of quandary? Love your comments. If I get a few comments I’ll share my own experience with this issue and the advice I shared with the entrepreneur. Cheers! Happy New Year!

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Negotiating the No-Shop Clause

noshopOne of the entrepreneurs I mentor got a termsheet from a local investor and expects to get another one before Christmas. The termsheet has an expiration date and includes a no-shop clause. For those of you unfamiliar with the term, a ‘no-shop’ is clause in a termsheet between an entrepreneur and a potential investor that bars the entrepreneur from soliciting termsheets from other investors. In other words, the entrepreneur cannot “shop” the deal around once he executes the termsheet. I recommended he attempt to remove the clause from the agreement.

In most cases the no-shop clause is VERY expensive for a startup and costs the investor nothing. Most startups begin raising money about six months before they’ll actually need the money. If you sign a termsheet with a 60 day no-shop on the third month of your fund raising process you’ll be out of money before you’re allowed to start raising money again. You can’t blame him for asking for it, but I’d recommend you attempt to negotiate its removal. If you can’t get it removed you should attempt to modify it to include a ‘cost’ for the investor.

On several occasions I’ve been successful modifying a ‘no-shop clause’ in two specific ways. First, I’ve asked that the no-shop begin only AFTER the other party had begun third-party legal or accounting diligence (i.e. engaged outside lawyer or accountant) incurring fees. Once an investor has gone ‘hard’ on a deal and has real skin in the game it isn’t unreasonable for them to ask for a no-shop. Second, I’ve asked for a break-up fee equal to my third party legal or accounting costs incurred as a result of the transaction in exchange for a no-shop provision. Again, if an investor wants me to take my company off of the market so he can evaluate the deal all I’m asking is that he have some skin in the game. Alternatively, he can elect NOT to ask for a no-shop provision – usually the best option. Finally, you should make the no-shop provision as short as possible. You need to keep raising money until you close. Never stop shopping your deal (unless of course you’ve agreed to stop for a period of time).

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Yes, the CEO of your startup is an idiot.

imagesEarlier today a Quora user asked me if it would be appropriate for an employee to let his CEO know that he thought he was a bad CEO. The question made me laugh, so uncharacteristically I answered it. It occurred to me that all CEOs are bad, but some seem good because they’re supported by great teams. I contend that if your CEO either is or seems like an idiot you suck as an employee, but I am getting ahead of myself.

When I was in my twenties and started working for other people it never took much time for me to realize that everyone I worked for was completely out of touch. The problems we faced were so obvious I knew that if I were in charge I could easily fix everything. It made me realize I couldn’t work for other people. I knew that I needed to start my own company. Of course the moment I did I realized how much of an idiot I had been. Being a CEO is perhaps the hardest job you can imagine. If everyone would simply do exactly when you told them everything would work splendidly. The problem is that you aren’t hiring robots, you’re hiring humans who have their own agendas.

CEOs have three primary jobs. The first is to ensure that there is enough money in the account each month to make payroll. The second is to recruit the best and brightest employees to join his company. The third is to enunciate a vision and SOMEHOW convince his team to help him execute that vision. The third is by far the hardest.

Assuming you are not the CEO, your job is to help the CEO execute on his vision. Agree or disagree as long as you accept a salary from the company you owe the CEO and the company 100% loyalty. Seriously. If you don’t respect the CEO or aren’t willing to help him be successful you need to leave the company ASAP. It is up to the board of directors and shareholders to fire the CEO – not you. Instead of taking the time to complain about him, work with your peers to find ways to help him be more successful. He IS an idiot unless you can help him win. You’re an idiot if you can’t help him be successful. Help him win and you’ll win. Or quit already. But don’t, please don’t, keep complaining about how your CEO sucks.

 

 

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Finding a Co-Founder: Fadi Bishara CofounderNetwork, Part 3

Over the past few weeks I’ve been reaching out to services that help entrepreneurs find co-founders to conduct interviews with their founders for another project. Here is my third interview:

143dd12Name: Fadi Bishara
Title: Co-founder and CEO
Company: Blackbox.vc formerly CofounderNetwork

Q: Why did you start Blackbox.vc/CofounderNetwork?
A: I started the network because I knew many founders with successful track record who were interested in launching new ventures but did now have the mean and network to find and engage ideal cofounders. I thought with my experience in the talent search and selection for startup, I could connect members in an efficient way based on knowing the persons and making the connection (manually) based on that.  Such match is difficult to be automated and based on keywords and data algorithm.

Q: Why are co-founders important?
A: Cofounders are crucial in getting any project off the ground, no matter how talented an entrepreneur is, s/he still needs to have another person who joins their mission.  Several reasons could be listed:
a) if a founder has a difficult time convincing another founder to join a project, the viability of such project/idea is questionable and would make it much harder to convince investors to take capital risk and support the project.
b) investors have a ‘hit by a bus’ theory, so they are concerned if they invest in one person, what might happen if the person is no longer able to fulfill the promise for personal of health issues in order to build a team and carry on the vision.
c) often founders have bold and daring visions, where the line between genius and insanity is blurred, to validate a basic test of reality, two or three cofounders are more likely to be in agreement on a vision that is real and possible although big and ambitious yet still grounded in reality.

Q: What is your single best piece of advice for founders looking for co-founders? 
A: My advise to founder when looking for cofounders is to never view cofounder as someone they can “hire”. The choice must based on the following 3 criteria in the order:

  1. cofounders must have full trust and respect for the other founder(s)
  2. cofounders must have common motivating value (build to flip, or build awesome product, or build to make an impact and change the world)
  3. cofounders complementary personalities and skills

Once you’ve convinced yourself you’re onto something compelling enough to quit your job it is time to convince someone else to quit their job and join you as a co-founder. First, realizing there are very few successful startups that started with a single founder is important. Starting a company is a lot of work and your going to need a lot of help, but more importantly if you can’t convince your friends to join your team you might take a step back and take a good hard look at your plan.

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Finding a Co-Founder: Shahab Kaviani of CoFoundersLab, Part 2

Over the past few weeks I’ve been reaching out to services that help entrepreneurs find co-founders to conduct interviews with their founders for another project. Here is my second interview:

22959f1Name: Shahab Kaviani
Title: Co-founder and CEO
Company: CoFoundersLab
Description: CoFoundersLab is a Maryland-based startup focused on bringing together entrepreneurs with the aim of launching a startup together.

Q: Why did you start CoFoundersLab?
A: I saw how popular startups were becoming in around 2010, and noticed how many new accelerators were sprouting up, along with the increasing in early stage investing. I thought to myself, how can this work if the failure rate for startups is so high -estimates are 75-90% failure rates. When I studied why startups were failing, I learned from Dr. Noam Wasserman at Harvard in his book, Founders Dilemma, that the biggest culprit of failed startups are founder related. If I could just help people find a better matched co-founder we could really create value for startups, investors, and the jobs that would follow.

Q: Why are co-founders important?
A: Co-founders help get you through your tough days, they also compliment you by bringing skills you’re lacking in. I think the moral support is so important. If you are raising outside capital, most investors want to see teams as compared to single founder companies.

Q: What is your single best piece of advice for founders looking for co-founders? 
A: Take this decision very seriously, and be pragmatic about. CoFoundersLab will help you take personality assessments, skills inventory, etc. to inform your decision so you make your choice more with your head and less with your heart. I would add that finding someone respects your craft and there’s a very high level of mutual respect is essential to a healthy partnership.

Once you’ve convinced yourself you’re onto something compelling enough to quit your job it is time to convince someone else to quit their job and join you as a co-founder. First, realizing there are very few successful startups that started with a single founder is important. Starting a company is a lot of work and your going to need a lot of help, but more importantly if you can’t convince your friends to join your team you might take a step back and take a good hard look at your plan.

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