Startup Advice

Focus your investors before they distract you. . .

funny_seagull_poo_aa101Yesterday I was listening to one of the entrepreneurs I mentor telling me a story about one of his favorite investors/directors. The investor is what I call a ‘seagull’ – he flies in, shits on you and flies away. I must admit that I am horrible at managing investors and board members – my advice is to do as I say, not as I do. Here are a few ideas for both investors and directors (often the same folks):

  • COMMUNICATE regularly with each investor/director by sending a monthly progress/update email. Spend 30 minutes detailing all your accomplishments, challenges and go-forward plans. You don’t want to wait until your next board meeting or until they email you asking what the hell is going on.
  • ASK each investor/director for help each month. Think about how each investor/director can help you – perhaps with a product launch, a candidate for employment or a business development deal. If you keep them busy they will be a LOT less likely to get in your ‘business’. One of two things will happen – you will get much needed help or he will hide from you.
  • MEET (in person or via phone) with each director PRIOR to each board meeting. Show him your agenda and ask him if there is anything he’d like discussed at the meeting. If there are controversial issues to be discussed determine where he stands. If he’s on your side enlist him to meet one-on-one with directors who might not be on board yet PRIOR to the board meeting.
  • DOCUMENT each interaction with your investor/director. The day after your board meetings email an overview of what happened and what decisions were made to each director. You will approve the minutes at the next board meeting, but you’d be surprised how time can change your perception of history. Do the same thing EVERYTIME you engage with your investor/director – a quick followup email detailing what was accomplished and what everyone has committed to do is VERY important.

Let me know if you have any ideas to improve your investor/director relationships.

How big is your market?

Each week I’m working closely with my TEN companies and there has been a recurring theme recently – understanding the ACTUAL size of their markets. Has an investor ever asked you this question:

“How big is this market?”

If you’re like me you’d say something like:

“According to Forester the XYZ market will be $20B by 2016.”

Of course this answer is complete bullshit. The real number – the one YOU need to understand is very simple.

Total # of customers * price = market size

market-sizeMy conversations with my TEN companies are confidential so I can’t really give you any specific examples from them, but I can reveal to you a conversation I overheard this morning while writing this post at Cafe Express on McKinney. On the right side of the table in a blue button down shirt an investor sat and asked the entrepreneur on the other side of the table how big the market was for his fitness/gym mobile application. It was clear he didn’t really have a rational answer – he said BILLIONS (the US gym market is actually $21B). I was REALLY tempted to walk over to the table and tell them the actual market size – Hint, it’s not $21B. It took me five minutes to come up with a rational answer – all you need to do is ask the right questions and type them into Google.

First, I asked Google how many health clubs there were in the US. The answer? 30,500. The entrepreneur has two different revenue models – one selling to the software/application to the gym directly and the other taking a cut of fees generated by each user of the application. Assuming the software is sold to the gym at $150/mo and assuming you sold to every gym in the US the total market size for this business would be: $54,900,000/year.

Assuming, instead, that the software generates a cut of every member at a particular gym you need to know how many people in the US have gym memberships. Google says there are about 50,000,000 people paying for gym memberships – so assuming you generate $1/member/month the total market size for this business would be: $600,000,000/year.

So the BEST CASE market size for this business would be between $54M and $600M. But you need to be rational – what percentage of the market do you REALLY think you can capture? 1%? 5%? 10%

Assuming 1% the best case market size = $6M/year
Assuming 5% the best case market size = $30M/year
Assuming 10% the best case market size = $60M/year

Grabbing 10% of the entire market in the next three to five years would be a HUGE feat so we can agree the best case market size would be less than $60M. Now that we understand the potential market size for each revenue model which one would you pick? The first model enables you to focus on a MUCH smaller customer base – i.e. a universe of 30,000. It also puts the onus and responsibility of getting their customers on the app at the feet of the gym owner – the startup gets the money no matter how many members actually use the app. So this model might be easy one but you’d be trading potential upside in exchange for ease of implementation.

Of course my point is not about this particular thought exercise, but in general – do you REALLY understand the real size of your market? If you don’t you’re missing a real opportunity. Get busy…

 

 

 

 

 

Update on ‘TEN’ my Mentoring Program

Ten-Logo-2Back in April I announced my mentorship experiment I called ‘TEN’. The plan was simple, find ten entrepreneurs and spend a year working with them on their businesses. The idea was that by spending MORE time with FEWER entrepreneurs I could make a more significant impact AND have more time to work on my own startup. Time for an update.

After announcing the program I had more than 40+ applications and quickly selected the first ten with plans to bring them on over three months. To date I have ‘turned up’ five entrepreneurs, had three drop out before starting and had one fire me. The companies include:

  • 3 Tech Startups (two seed funded)
  • 1 Medical Startup (seed funded)
  • 1 Real Estate Business (going concern)

I’m charging $1,000 a month (12 month commitment) and ask for a modest ‘advisor’ stock option. Next week I bring on the final entrepreneur from the original ten and I’m not sure if I will try to replace the four open slots. If someone REALLY wants to get in I will consider opening one of the slots, but its definitely going to be on a case-by-case basis.

As for the entrepreneur who ‘fired’ me? As Kevin O’ Leary would say, “You’re dead to me!”

d38m5pp

In all seriousness, I only spent an hour or two talking to the entrepreneur and we discussed the various options. He was convinced he wanted to raise more capital and ‘run’ his company. When I found out he had an offer to buy the company for a REAL number I made the case that he could do BOTH – i.e. take his money off of the table and run the company. He thought about it for a week or two and decided to take my advice. He then informed me that he didn’t really need anymore help. My only thought? KARMA IS A BITCH. Seriously, if you’re about to negotiate a seven to eight figure deal isn’t that the moment when you’d actually want some advice – especially advice that only costs you $12,000! I have attempted to buy and sell several companies – sometimes I was successful and sometimes I wasn’t – but in each case I came away with useful experience. Anyway, I got my ego bruised a little bit on this one, but life goes on.

Announcing ‘TEN’

For more than five years I’ve been actively involved in the Dallas startup community. During that time I have advised scores of entrepreneurs; however, I’ve often wondered how valuable my advice really was. For example, in the last thirty days I have ‘touched’ almost 100 different entrepreneurs. Touches include emails, voicemails, texts and face-to-face meetings – 100 unique connections over 30 days. I’m giving advice, making suggestions, referring employees and investors, but there is no way I have enough information about 100 entrepreneurs and startups to give any sort of valuable advice and I wonder how valuable my referrals are? What do I REALLY know about these people/companies? Truthfully, I have no idea. Additionally, I am spending a LOT of time providing this potentially dubious advice – maybe 20 hours a month. I decided that something MUST change so I am starting what I am calling TEN.

Ten-Logo-2My plan is to select 10 entrepreneurs I will spend one year coaching, advising and supporting. These entrepreneurs will be hand selected by me based on just a few factors including: how well I think we will get along, how coach-able they are, how relevant my experience would be for their business and how bullish I am on their endevour. Here is the plan:

  • 1 group meeting per month (2hrs+dinner, think EO, YPO, Vistage)
  • 1 one-on-one meeting per week (1hr)
  • 4 quarterly trips to Silicon Valley, 2-3 day (vc/angel networking)
  • 1 graduation retreat, Fri-Sun (city/venue selected by group)

The focus of these meetings will be on:

  • building teams, advisory boards, and BoDs
  • developing products and services (mobile, web, infrastructure)
  • raising capital
  • selling
  • marketing and pr

Interested? I’m going to charge you, a LOT. I’ve learned that people rarely value anything they get for free. I don’t plan to take on a single company that I don’t think I can add at least a million dollars in value within twelve months so hopefully you will be able to stomach the deal. The monthly fee for the engagement will be $1,000 (compare to a typical board member at $40,000/yr) plus a small equity component (whatever you are giving advisers). The term will be 12 months with a termination clause. If you do not want to continue for any reason you must pay the remaining term at 50% or find someone to replace yourself in the group that a majority of the group will approve. So basically you pay $12,000 for 100 hours of my time – a pretty great deal if you ask me.

I’ll be putting the first TEN class together in the next couple of months. If you are interested let me know by applying here: TEN APPLICATION

 

Investor Referrals – HELP ME HELP YOU!

Remember that scene from Jerry Maguire where he tells his client, “HELP ME HELP YOU!”

Each day I get a message from an entrepreneur asking for help finding an investor for his or her startup. The message goes something like this, “Working on the next big thing, can you refer me to a few local investors?” In variably I will put this request in my ‘to-do’ mailbox and forget to respond. Sorry? Not sorry? Here are 9 things I need so that I can you can help me help you:

  1. Explain the stage of the product/service: idea, prototype, mvp, revenue, growth, exit…
  2. Tell me about the team: how many people, functional skills, full-time/part-time…
  3. Explain the funding you seek: seed, angel, series a, series b
  4. Tell me how much you are going to raise: $100, $250, $500, $1M (whatever)
  5. Tell me the form of the investment: common stock sale, preferred stock stale, note…
  6. Tell me who you’ve talked to previously and their thoughts
  7. Tell me how you plan to spend the money – i.e. what are the use of funds?
  8. Tell me your future fund raising plans after this raise.
  9. Send me your fund raising docs (if available) and your deck (a must).

You may not have all of this information, but send as much as possible. Save me time. If I can help I will. If you make me send you an email asking for this information – well I’m not going to. I might send you this post and ask you to try again. But no hard feelings right?

Should you share your idea?

Top-secretYou’ve got an idea for the next big thing, a new iPhone application that could change the world, and you’re looking for developers and/or looking to raise capital. You are not entirely certain where to turn so you reach out to local entrepreneurs who have ‘been there and done that’. I get calls like these all of the time. Prior to 2008 most entrepreneurs here in North Texas were scared to share their ideas without getting an NDA in place beforehand. This put them at a HUGE disadvantage over their peers on the West Coast where collaboration and community have a long and distinguished history. Slowly but surely, the startup community in North Texas has morphed and has become very collaborative and supportive. But, every once in a while you’ll run into someone who is still clinging to the old, secretive ways of the past.

In fact, just yesterday I got a message from an acquaintance who told me he was working on a an app and asked me to put him in touch with local investors. I suggested he send me his deck and I’d make a few introductions. His response? He wouldn’t send it unless I signed an NDA (he obviously doesn’t read my blog). He explained that someone with experience could steal the idea in a second. I’m not sure why, but I felt really offended at the time. I guess part of the reason was that I was mid-move – surrounded by boxes and movers – but it felt weird to have someone asking for a favor AND at the same time explain that he didn’t trust me.

At the end of the day ideas are worthless – execution is priceless. When you’re starting a company you need as much help as possible. You need mentors, advisers, peers, partners, investors, vendors and friends. If you keep your ideas a secret it will be impossible for anyone to actually help you. Could someone steal your idea? Of course, but as I’ve said before your potential competitors are more likely to become partners. You’re far more passionate about your idea that anyone else – and most people want to partner with people with passion. Additionally, keeping your idea a secret may actually create more competitors. I explained my thinking in a post a few years ago, but Chris Dixon does a much better job explaining it than I did in his post, “Why you shouldn’t keep your startup idea secret.

Please quit asking me to sign your NDA!

ndaEveryone in Dallas seems to be doing a startup and lots of these people call or email me to share their ideas with me. More than a few of these entrepreneurs ask me to sign an NDA before they are willing to ask for my feedback and/or advice. The quick answer is that I don’t want to sign your NDA. Feel free to solicit free advice from me, but please quit asking me to sign a contract.

Anil Dash wrote a pretty good post titled, “One more time: No NDAs“. Anil points out that a lot of people feel the same way. His reasons were pretty good and worth repeating:

  • When you ask me to sign your NDA, you’re basically saying, in writing, that you don’t trust me. It’s your prerogative to say that, but it’s a pretty lousy context in which to ask for a favor.
  • I have to pay a lawyer to review a document without having any idea why I’m making that investment. No, I won’t “just sign it” without having a lawyer look it over, because it’s a legally binding document whether a lawyer reads it or not.
  • If your idea’s that good, it’s probably not that rare. I hate to be the one to point it out, but protecting your idea in general is a fool’s errand — good execution is hard to find, but good ideas are cheap.
  • I could get screwed through no fault of my own if some other random person walks up to me and blurts out the same idea that you’ve had. Being exposed to the risk of a lawsuit even if I haven’t done anything wrong sucks.
  • If I couldn’t be trusted with your idea, you’d already know about it. There are folks who don’t like me, or who are annoyed by me, but if I’d broken somebody’s trust in regard to their work, I guarantee it’d be just about the first thing you’d find when you Google my name.
  • The biggest value I can probably offer you is that I would talk about what you’re working on. If I honor your NDA, and I meet a great investor or potential employee or valuable partner for your new venture, I wouldn’t be able to tell them about it.

When should you raise money? NOW! [updated]

Garrett Camp, the co-founder of Stumbleupon, recommends, “Stay self-funded as long as possible.” I think I have been quoted saying the same thing, but over the past few years I have come to realize that you can wait too long to raise outside capital.

When I founded LayerOne I raised money first and then built the company. Since then I have been starting companies using my own money including my last company – ShopSavvy. Our investment strategy was to look at the company each month and determine if it makes sense to keep investing. While we had the resources to grow the business, there was a limit to those resources and I think we should have raised outside capital to increase the pace of growth. Ironically our success in user growth and engagement made it more difficult to raise money from early stage investors. It was not uncommon to hear a VC suggest that he wishes he talked to us earlier.

We grew a lot on a small amount of money, but sometimes I wonder if it would have been smart to raise outside capital earlier. Raising outside capital provides credibility to your business giving you instant access to the blogosphere (TechCrunch, VentureBeat and so on) and access to potential employees who pay attention to what deals investors are betting on. Using your own money doesn’t win you any access, credibility or friends.

The upside to not raising outside money? You don’t have to raise money, period. Tim O’Reilly said, “Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.” Raising money makes me feel like I am visiting LOTS of gas stations – usually not getting any gas.

Now that I am doing it all over again with my latest startup, HAUL, we have decided to go ahead and raise a small amount of money ($750K) from a few smart angels (Dave McClure, Christine Tsai, Dave Matthews, Joel Fontenot). These early investors are valuable for a few reasons a) potentially ability to refer clients, b) potentially able to refer potential hires, c) potentially able to make referrals to VC firms for the Series A and (perhaps most importantly) d) social proof that the deal is smart. Within a short period of time, perhaps 6 months our plan is to raise a $5M series A investment from one tier one firm (perhaps with a co-investment from a strategic). The idea is to get everyone in the same boat together until it makes sense to raise the huge round or do a strategic deal.

When I was updating this post I realized that I wrote on this topic last year in November in a post titled, “When should you raise money?” (hmmm, I’m not too creative with titles). I suggested that when I started my next deal I’d do a few things…

  • participate in an early stage accelerator
  • raise a small angel round from Dave McClure
  • raise a series A from First Round, Benchmark or Andreessen Horowitz

Turns out we did the first two. After the holidays we will try to do the third. Go back and read that post (it was a lot better).

Are Accelerators Derailing Entrepreneurs?

Generic 1960s pic of a father and son scene.What if the advice entrepreneurs are getting from mentors/investors who participate in accelerators is wrong? How is an entrepreneur to know which advice to follow and which advice to ignore?

Fred Wilson is talking about mentor/investor whiplash in context to accelerator programs in his latest blog post. In it he answers the age old question of how much an entrepreneur “react to the feedback they are getting advising them to do things differently, pivot, change the product, change the strategy, etc.”

For the last few years I’ve been on the ‘mentor’ side of the equation and I’m always concerned that the startups I advise will actually take my advice. Whenever I warn entrepreneurs that I don’t really know what I am talking about they can’t help but chuckle, but the sad fact is that I’ve spent almost NO time actually working on or in their business.

My advice when it comes to advice? Listen to it. Absorb it. Evaluate it. Then either incorporate it or reject it. Whatever you do, don’t do anything immediately. Reflect on advice and consider the source. Fred’s advice is likely better than mine so take a minute and go read his post.

The Dallas Startup Scene is on Fire!

Back in 2005 I read about other startups in Dallas, but I didn’t really know anyone else actually starting anything. What was missing? I think we simply didn’t have the people and places to connect the community. Fast forward eight years and one could argue that Dallas is a lot more connected than the Bay Area – I’ve spent a lot of time in both places and the energy in Dallas is really exciting. Turns out there is a LOT going on thanks to a growing group of dedicated connectors like Eric, Mike, Molly, Austin, Tiffany, Nick, Trey, Jennifer, Gabriella, Stewart, and Michaela. But what about the places? Two weeks ago a friend of mine quit their corporate job to stick their toe into the startup waters. We jumped into my car just after lunch for a quick tour of the Dallas’ startup scene – turns out you can actually do that today.

weldssFirst we drove over to see Austin and Tiffany at Weld. In a short time they have turned an empty office/studio on the edge of the design district into a vibrant community of creative entrepreneurs. The energy generated by this growing group of startups and creatives is simply amazing and inspiring. Austin is the idea guy and Tiffany is the glue that keeps it all working. I love stopping by for their art shows and mixers – simply a great scene! If you haven’t visited them yet – get in your car and get over there.

weld

weld2

 

commonNext we headed over to Common Desk to see what Nick has put together for startups in the Deep Ellum area. More than 26 startups call this coffee shop style co-working space home. The design and ambiance are great and more importantly there are a lot of people stuffed into the space building really cool stuff. Again, I highly recommend taking a look if you haven’t seen what Nick has built. Oh, and by the way, Nick has his own television channel to show off what he is doing, check it out…

901563_10151287128281184_702373882_o

Common_Deskcommondeskwide16

twcOur next stop was the TechChurch, home to Tech Wildcatters and Health Wildcatters – two early stage accelerators for startups. Located in a former Catholic church, the facility is now home to several startups as well as each TWC and HWC class. Gabriella, Stewart and Michaela are the instigators and keep the wheels on this place. I love stopping in to catch pitch practice or simply to catch up with the latest startup news. Make sure you check out the bell tower if you make it by.

977986_10151331234776184_1460756695_o

decgggOur next stop was to Trey and Jennifer’s new collective space, The DEC, located inside of Softlayer’s Catalyst Space down in the Lower Oak Lawn area. Robert and I decided to make The DEC home to HAUL, my latest startup. There are just a couple of other startups in the space right now, but when it officially opens next month I have a feeling it is going to be BIG.

922458_10151321008721184_99997669_o 920881_10151320925771184_1268467506_o 921522_10151331065456184_126657556_o

Finally, last week Tech Wildcatter’s held their annual Pitch Day at the Grenada – more than 700 entrepreneurs gathered together to watch the 11 graduates of the 2013 class give their final ‘pitch’ before going out in the world on their own. It was amazing seeing everyone together. Are you loving Dallas as much as I am? Tell me about it…