Cynthia Kocialski

6 Warning Signs a Start-Up Isn’t On Course

Posted by Cynthia Kocialski Starting Innovative Businesses No Responses »

Oct 042011

Start-up failures are rarely caused by one big disastrous decision. Instead they are due to a series of missteps. Often entrepreneurs aren’t sure what’s wrong, but know that the company isn’t progressing as expected. What are the warnings signs your start-up is getting off on the wrong foot?

1. Great Team… Not-So-Good Leadership
A team with the right credentials is not good enough to make a start-up successful. Most founders don’t even get this far, those that do have made a self-conscious effort to build a team. But team building doesn’t just stop when you’ve attracted the key players.

There is a difference between assistants and a team. Team members each perform their primary job function in an independent manner to achieve organizational goals. Assistants are directed and do what is asked of them, they are not independent. Too many times, I’ve seen start-ups hire a great team, but then treat them like assistants, micromanaging everything that they do. Have you ever worked for a founder that’s a control freak? Have you ever experienced the CEO with a technical background who won’t let the sales and marketing do what they do best? I’ve even seen founders read the emails of their top management team so they can be certain to be kept abreast of every issue. Unfortunately, these CEO and founders won’t listen to their team about their behavior; the result is the team members get frustrated and move on to another company. A clear sign is when the team assembles to discuss an issue, and the leaders are speaking for more than 20% of the time.

2. Carrying Stealth Mode Too Far
We’ve all heard a start-up say they are in “stealth mode”. It’s another way of saying we don’t want to tell you what we are working on because we are afraid some other company will beat us to market..It doesn’t matter if you are first to market; there is more to gaining traction with customers than just launching the product. Second, this just leaves the impression that the start-up doesn’t know how to market the product, or the team is just a development team with no marketing person.

I’ve seen start-ups present to investors and then say that can’t be forthcoming about the details because the investor hasn’t signed an NDA – not a good idea with investors.

On rare occasions it’s because they are still engaged in discovering exactly what the product or service is to be and don’t want to discuss a half-baked product idea. – may be a reasonable excuse.

How can you convince people to join your start-up adventure unless they know what you are doing? How can you define a product without interacting with potential customers? Entrepreneurial teams should ask themselves how many of the features that are being implemented because potential customers actually mentioned them?

3. Product Development First, Marketing Second
Very early start-ups don’t need execution as much as they need to discover what the business is to be. A start-up often begins with a fairly good notion of what is the problem faced by customers, what is the product, and how they will market the product. But they blindly pursue their original concept. In fact, they squirrel themselves away in their offices, developing the product, having little contact with the outside world. They define a robust, feature rich product, agonize over perfecting every feature, and delay the introduction of the product in the market. Once it’s near completion then they start to get serious about marketing Development and marketing need to both be first.

In a start-up, development activity is very easy to track – number of features, features implemented, features integrated, features tested, versions available, problems reported, problems fixed, upgrades released, and so on. Rarely have I seen tracking implemented and reported for pre-release marketing. I think it’s because it’s usually a one person job function. Someone should be asking how many customers have been identified and contacted, meetings scheduled, and so on. It’s harder to not engage the customers when status must be given about it.

4. A Few Customers Do Not Necessarily Make a Business
Many start-ups find their first one or two customers and it’s time to celebrate. As optimism and euphoria set in, entrepreneurs extrapolate the future with grow curves. As the expression goes, don’t count your chicks before the eggs have hatched.

First, professionals evaluating a business look closely at the customer base. If 80% of the revenue is from a few customers then this is a dangerous situation. Lose just one customer and the business falls apart. There was a networking start-up just a few years ago that had gone IPO and was the darling of Wall Street. Their first product was used by Cisco Systems and Nortel, who accounted for 80% or more of their revenue. The start-up was never able to develop a follow-on product as successful as the first, and attempts to broaden into other markets failed. When the systems of Cisco and Nortel reached end-of-life, the company faltered and was sold for assets. Worry if you have too much revenue from one customer.

Second, as much as we all like to believe we can anticipate obstacles and overcome them, sometimes you are just caught in a tsunami from outside your industry. Take catastrophic economic events such as the subprime mortgage debacle, topped off by the lingering recession, and subsequent national fiscal and monetary policies – sometimes you are in the wrong place at the wrong time. Those revenue predictions may never materialize.

5. Find the Problem and Solve It
Founders just exiting academia tend to exhibit this behavior. They’ve worked on some interesting technology in college or in graduate school, and now they want to start a company. They have this wonderful technology, but need to apply it to something. They become a technology, struggling to become a product that is in search of a problem.

Another scenario is entrepreneurs see a big market and a problem that plagues many customers, but can’t figure how to solve the pain point and end up developing a product that doesn’t address the real problem customer are experiencing. I’ve seen several start-ups lately trying to solve the seemingly universal problem among mothers with their biggest problem of lack of time; every mother wants to clone herself at will. These start-ups products are scheduling software to help them organize their lives better. It’s just a new twist on the calendar software and it’s not addressing the real problem.

6. Thinking Time Is On Your Side
If your start-up’s product is in a competitive industry, time is never on your side. Everything takes much longer than expected. If I’m going to meet with a potential customer for a B2B product, it could be weeks before I am able to get the first in-person meeting – I’m out-of-town and their out-of-town, everyone professional and personal lives are very busy. And that highly anticipated meeting with the most promising prospect could turn out to be a dud. Don’t wait to talk to customers serially; get to as many as you can, as quickly as you can. The marketing rule of thumb for B2B is to contact 10 potential customers per day or 40 per week; to be thinking every morning what I can do today to further the marketing among customers. For B2C, it’s finding out where you customers are congregating and engage with them. I just attended a Sports Marketing conference where the pro sports teams were discussing their social media effort. Why? Because that’s where the new generation of fans are. To be successful as a start-up, it has to be bold and aggressive enough to win. Founders can’t succeed running race at a lackadaisical jogging pace.

About the Author
Cynthia Kocialski founded three tech companies and has been involved with dozens of other startups. She has written a book about her experiences in start-ups companies, “Startup from the Ground Up, Practical Insights for Transforming an Idea into a Business”. Cynthia can be reached at cynthia@cynthiakocialski.com. For more information about entrepreneurship and start up companies, visit Cynthia’s blog at http://www.cynthiakocialski.com/blog/

How The Education System Can Take A Great Leap Forward With Technology

Sep 202011

Many start-ups are targeting the education market, as technology makes it easier and more cost effective to bring education to the poorer regions of the world. It’s one of the hot investment areas and where there is profit, there is progress. Education is key to economic wealth and as Horace Mann so aptly stated, “Education then, beyond all other devices of human origin, is the great equalizer of the conditions of men, the balance-wheel of the social machinery.”

But what about the richest countries whose education system haven’t changed in generations and are under budget pressures? The government has grant programs for those start-ups looking to improve the American education process and today, investors think favorably of government funding as it does not consume equity in a start-up. On the downside, investors don’t like the education system because it is notoriously cheap, has long sales cycles, and is risk averse. With such government emphasis on education improvements, the investors are sure there will be some start-up winners.

Last year, my local school district anticipated a budget shortfall and asked parents for suggestions. When I took a look at the school district’s budget, I saw their problem. They needed to cut millions from their operating budget, yet 85% of their expenses were labor. It simply wasn’t possible to reduce the budget in the non-labor areas by the amount needed.

Let’s step back for a moment and take a quick look at what happened with telecommunications. When telecom and networking were taking a great leap forward in the bubble, the developing countries skipped the landline infrastructure and went directly to wireless and cell technologies. Now landlines are in decline in the developed countries as wireless became more cost effective, capable and preferred by customers.

Education is likely to follow suit. We have been dabbling with distance and online learning for more than a decade. The technical capability is there, now it’s just a matter of adoption. The poorer and developing countries will lead the way and start with using technology to educate the masses more efficiently. Eventually this trend will transition into the US school system.

As a parent, elementary school children aren’t capable of being self-directed learners, they will always benefit from the constant daily attention of teachers. As children become older, they are more capable of being self-directed and by the time they get to college, students spend little time in the formal classroom setting.

So why isn’t this transition made sooner in the education system? Why can’t middle school and high school students spend 2 to 3 days per week, accessing online, distance learning programs and not being taught by costly teachers?

Automation in any process produces consistency. Now there are continual complaints about the disparity among the schools in the US, some districts score well on the standardized test and some don’t. Wouldn’t a system encompassing partial online learning produce more uniform results? It does in manufacturing plants.

In my experience, when you have a severe budget problem and labor is biggest component, there are usually two things that happen: automation replaces labor and/or a less expensive source of labor is found.

Education is poised to take a great leap forward, which means this is a great opportunity for start-ups. My daughter is being taught like I was taught, and I was taught the way my parents and grandparents were taught. Is it time we updated the way we educate our children? The immediate market opportunity is in the non-public schools and abroad in developing countries, and whoever gets the biggest market share in those segments will be ready to capitalize on the opportunity in the public school systems.

Micro Venturing and Crowd Funding – Hot Alternative Startup Funding Trends

Posted by Cynthia Kocialski Funding Innovation 1 Response »

Sep 062011

Green technologies… an ambiguous term… it could imply the latest technical breakthroughs to save the environment or it could mean the hottest funding trends available to entrepreneurs who want to raise capital for their new Internet and software start-ups.

The Internet removed barriers so companies and individuals could market their products and services directly to consumers. Social networking made it easy to approach consumers because now our connections, be they ever so distant, provide word of mouth referrals. Then somewhere an entrepreneur questioned the rules and extended these concepts into an application no one expected – if customers can be sold online, why not seek funding for projects and start-ups online too? And crowd funding and micro venturing was created.

What is crowd funding? According to Wikipedia, “crowd funding, also known as crowd financing or crowd sourced capital, describes the collective cooperation of those who pool their money and other resources together to support efforts initiated by other people or organizations.”

Crowd funding websites are sprouting up, such as Profounder, Kickstarter, or RocketHub. These sites focus primarily on funding the creative arts projects. If the crowd was willing to fund creative projects, the obvious question was why not technology and scientific projects too?

Micro-venturing is a close cousin of crowd funding. It allows small investors access to investing in start-up companies at the early stages, and entrepreneurs are able to find large pools of potential investors. Often these websites have to be approved by the Securities and Exchange Commission as they are match making between private investors and start-ups, performing the due diligence on behalf of investors, and handling the legal filings and paperwork.

And just like crowd funding websites, these seem to be sprouting up all over as well; websites such as Micro Ventures Marketplace, the Funding Store, CapLinked and Crowd Cube.

One question about crowd funding is how does the collective group benefit from the funding? Are they simply paying for a purchase far, far in advance, similar to pre-ordering an upcoming release? Is it more akin to charitable donations to support the arts? Will they receive an equity stake in the start-up? What about revenue sharing? What about profit sharing? It is certainly an alternative funding approach that is in its infancy, and many different compensation methods are sure to be tried.

The traditional venture capitalists and angel networks are in turmoil. The industry is changing. Today, micro-financing, super angels, micro-VCs, incubators and the like are providing alternative sources of funding to start-ups. And given the difficulty of raising funding, many start-ups will dabble in these latest trends.

Innovative Business Models – Making a Deal that’s Irresistible to Customers

Posted by Cynthia Kocialski Business Ideas, Starting Innovative Businesses No Responses »

Aug 232011

Start-ups are where a new product idea meets its business. Start-ups don’t fail because they cannot develop or produce the product. They fail because the business model doesn’t work. Entrepreneurs often struggle with this aspect of the business at the beginning. A crucial initial consideration must be, “how and when do we make money?”

Many entrepreneurs don’t know how to price their product or create an appealing offer for customers. Their first inclination is to offer the product for free and to build an audience, then they’ll figure out how to make money. A big lesson learned from the dot-com era was there is unlimited demand for free. However, free to the customer is not free to the start-up. The start-up still needs to provide support, they still need to get feedback from the customers, and this requires labor costs.

The Freemium business model is very popular with consumer Internet start-ups. It’s where some customers get the product for free while others pay a premium for more features and add-ons. Initially, there won’t be enough paying customers to cover the expenses for the non-paying ones. For these online sites, only 5% to 10% are paying customers and 90% or more are non-paying customers. Most bootstrapped and self-funded start-ups quickly determine that the Freemium model works for investor-backed start-ups where someone else is paying the bills during this period, but for them, it is not a viable option.

Pricing Should Be Based On Value Not Cost

One of the ways to make money is to simply sell the product directly to the customer for a one-time fee. A common mistake is pricing the product on costs rather than the value to the customer. Start-ups begin with the premise of a desired minimum margin and base the price of the product on the mark-up. A second way is to price the product to be in line with similar or complementary products from other providers, but this is following the leader, and it’s difficult for a small company to do business like a large player.

The Customer Problem Solved Can Be Pricing

Many start-ups have built their customer base because of their pricing models, not because of their products. For years, software was sold on a perpetual licensing structure. This meant that the customers purchased a license that was valid forever and then they paid a small annual maintenance fee for upgrades and support. Customers disliked this model. It meant that had to pay very large upfront fees and the cost benefit was realized over multiple projects. EDA and CAD software were such products. I can remember putting out purchase orders for millions to secure licenses and the initial license fee could easily be 25% to 33% of the first project’s budget. Along came a start-up with term licensing model – you get a license for 3 years. It dramatically dropped the costs and customers preferred it.

Another example is summer camps for kids. Summer camps typically charge for one full week and there is no refund once registered. Parents dislike the refund policy because camps can be cancelled by the provider, but parents cannot cancel the camp even though registration is often several months in advance. The full week can create conflicts is a child’s music, tutoring, or swimming lessons, which are usually a couple of hours a week and also require long-term contractual obligations. One camp offered a drop-in, pay by the day model with no prior reservations required. Parents can even get a discount by buying blocks of days. If all the days in the bundle aren’t used, the parents receive a refund at the end of the summer. Every parent loves them. They have drawn huge campers quickly and have become the largest camp in my area, drawing droves of campers away from every other camp. Instead of copying their model, the other camps responded by raising their prices substantially to reflect lost enrollment, further pushing more parents to the new camp.

Opt-Out Versus Opt-In Subscriptions

With Internet products and services, many start with an opt-in subscription model. The offer a free trial period and then ask users to sign-up for a paying subscription. Many have learned that the opt-out has a greater impact on the bottom line. In an opt-out structure, the user provides a payment method and if they are dissatisfied with the product, they can get a refund or cancel their subscriptions. Under an opt-in subscription, 50% of customers can drop out after the free trial. While with opt-out subscription refunds and cancellations rate can be as little as 5% and triple the number of paying subscribers.

Advertising Schemes

Internet start-ups are quick to include advertising in their revenue stream, sometime almost exclusively. A website needs a big audience to be supported by advertisers. Advertisers become interested when a web property has hundreds of thousands of users. It takes a million users to attract large ad firms and about three million users before unsolicited request for proposals come to the website. It’s not just web properties that want to use advertising as their main source of revenue. I encountered a start-up that provided electric car plug-in recharge stations and their intended primary source of income was from advertising. While advertising can complement any businesses revenue stream, it takes large volumes to support an organization and it takes time to build such an audience. Advertising is often 5% or less of total revenue.

Lock-Ins

Many businesses use a lock-in scheme to keep customers coming back. An obvious form is the contractual obligation. Sometimes this takes the informal form of an annual membership fee, which keeps consumers not wanting to double pay when switching services. Sometime it’s an effort consideration. If your electronic database can’t be ported to another service with an easy click of a button and would have to be re-entered, then this too is a form of lock-in.

Payments and Financing

When products are considered expensive by the customer then offering a payment option can substantially increase revenue. A health start-up offered a product for $1,200 and 80% of their sales was on the installment plan. Likewise, there’s an Internet start-up that offers a service for $50 per year. Although they have a monthly payment option, 80% of their customers prefer the one time annual payment. Similarly, online training courses are offered as 3 monthly payments of $100 per month or 3 monthly payments of $1,000 per month.

Flip Your Competitors’ Model

In most industries, a pricing model becomes traditional. The bigger players adopt a pricing model, and then everyone follows. Consider cable television companies, they give customers the set top boxes for free and make the money on monthly service fees. Unless a start-up is well backed by investors, this isn’t a feasible model. Flipping the model may work better. Ask customers to pay for the set top box and then give them free lifetime service. If the service takes off, then offering the first few thousand customers free monthly service will be insignificant in the overall revenue stream.

Mixed Revenue Stream

Many businesses get their revenue from several different sources. Some start-up will offer both products and services. I have found that 20/80 is often the case depending on the industry, some are 20% products and 80% services, or vice versa. Internet based businesses also tend to have different mixes. For example, subscription sites will have 80% from subscriptions, 15% technology licensing, and 5% from advertising. On line training websites get revenue from one-on-one coaching, on-line classes and webinars, advertising, and conferences – with the bulk of revenue coming from conferences and on-line classes. Membership organization have the same type of mixed structure, the IEEE trade associations receives only 9% of its revenue comes from membership with 38% from conferences and 36% from periodicals.

Growing Your Business

Start-ups need to consider how they plan on increasing revenue in the future. Is the company going to move up the food chain and increase their price? There are businesses that start as the low cost provider and then increase their pricing as they become more established. This may create difficulties as the customer who bought at the low price isn’t likely to be the same customer willing to buy at the high price, and thus a new business model may be needed. Many online marketing firms starting out by offering their service for less than $800 per month, then they increase pricing to $2,000 per month, and finally they high end of the market is the $50,000 annual fee. Instead of increasing volume, they have elected to increase pricing, but by doing so they have changed who their customers are. Yet, others grow by holding at their price point and increasing volumes. They are scaling to the same customer profile.

Revenue Killers and Enhancers

There are other considerations in building your business model. Procrastination is the biggest killer of sales. Even if your start-up has a great product that’s a perfect fit and is coupled with a superb offer, customers will delay. Consider adding a scarcity element such as a limited time offer or a limited number of openings. In recessionary times, price is biggest factor in choosing a product or service. Consider reducing the risk of saying “yes” by offering a money back guarantee. Many businesses fear they will be giving back too much, but in actuality, few people will ask for a refund even if the product is not right for them.

The product itself isn’t always the reason a customer buys. Often it’s how the product is offered. Innovation doesn’t have to be about technology. The business model translates innovation to economics.

Will Innovations Create the 4-Hour Work Week? And Do We Really Want It?

Posted by Cynthia Kocialski Innovation Management, Technology Advantages No Responses »

Aug 072011

The start-up community is about innovation and technology, much of which accelerates the process of creative deconstruction – a phrase coined by Joseph Schumpeter whereby “a market economy will incessantly revitalize itself from within by scrapping old and failing businesses and then reallocating resources to newer, more productive ones”. But where is this process leading us in today’s world?

Innovation Creates Economic Wealth
One way for national economies to thrive is based upon technology, inventions, and innovation. This is one way to create the wealth of nations. Hence, we stress the importance of STEM (Science, Technology, Engineering and Mathematics) in our educational system. The abundance of natural resources, such as oil or gas, within our borders is a matter of luck. National economies based on natural resources often struggle because they are afflicted with Dutch disease – a condition where the demand for the natural resource dominates the country’s monetary policy and makes their other products less competitive in the market.

Innovation Increases Productivity
Venture capitalism has shown that where there is profit, there is progress, and the greater the potential profit, the swifter and deeper the progress. Automation is both the result of progress driven by profit and the necessity of innovations driven by the shortage of labor. We want to produce more at lower costs, usually with machines or technology replacing people.

The machinery invented during the Industrial Revolution dramatically increased the availability of goods through machinery, production, and transportation – and consequently lessened the need for the labor provided by human beings. This has had profound implications on the society. As we continue to improve efficiencies in production with the Computer Age, the Internet Age, and unknown future technologies, the need for human beings in production declines as automation increases. Consider that after World War II, the United States with six percent of the world’s population produced over 50 percent of the goods. Today, social media is about connecting people more efficiently than before. Smart utility meters will eliminate the meter reader from our neighborhoods with usage read over computer networks. We, as human beings, are capable of producing far more with much less human interaction.

Population As A Counterweight
Medical and health sciences have given us the ability to increase the average life span of individuals. People are living longer. Centenarians are becoming common. Yet there are still mandatory retirement ages. Does it really make sense to retire at 55 or 65 years old when people will live 100 years or more? And if you consider that people don’t enter the workforce until 20 years old or so, are we really expected to be non-productive for the majority of our lives? We have created a society where people must work to earn a living so that they can provide themselves with the basic necessities of life. The irony is that as the population is increasing, the need for the population to engage in production is decreasing.

The Effect of Globalization
Globalization has given us a greater flexibility on where production of both tangible and intangible goods can be done. When China rejoined the world economy, the cost of its labor market and goods was far below the level of industrial nations. Entire factories were shut down in Europe, disassembled piece by piece, transported and rebuilt in China. Communication and networking technologies have allowed call centers, customer support and people-oriented functional organizations to be located anywhere in the world. Intangible products where the output is the result of human intelligence such as engineering designs and software programming can be located across the globe. Medical tourism can deliver many healthcare services to people far away from their homes and outside their countries. Production moves to where labor costs are the cheapest.

The northeastern US declined when manufacturing moved to the southeast, large companies flocked to take advantage of the highly educated workforce in Eastern Europe when the Soviet Union collapsed, more recently work moved out of industrialized nations into China and India. What’s next? Is Africa the next potential source of cheap labor in the future? And even if it is, as we automate more and more, do we need the large workforces available in places like Africa? Does the availability of cheap labor give nations less of a competitive advantage in the future? Consider if all the jobs for the US and Europe were moved to China and India, there would still be an oversupply of labor in these countries. And in areas where there are large populations, the cost of employing low cost labor is more profitable than purchasing and utilizing capital equipment.

The Depth of Human Knowledge
Will creative deconstruction really work in the future? Can we realistically redirect the workforce a.k.a. the “human” resource? Consider 200 years ago, the amount of training a scientist received was quite little by today’s standards. To be a scientist now, one must receive a Ph.D and often requires post doctorate studies in order to be employable in their field – one is often in the early 30′s before they start practicing their chosen field. If their job function is eliminated via creative deconstruction, can they be “retrained” for another 10 years?

The Quagmire
Has this left us, the human beings of the world in a quagmire? What happens if we take everything to its maximum effect? Medical science strives to eliminate disease and keep people in peak condition for their entire lives. So what if everyone reaches more than 100 years old and capable of being highly productive for most of those years? As Moore’s Law states, productivity doubles every couple of years. Innovation and inventions will continue to produce goods with less labor. The global population doubles every 60 years. We have become far better at improving manufacturing efficiencies and productivity gains. The necessity of labor is dwindling rapidly with every generation of more productive technology. The issue is not so much over population, but under employment and weak economies. How do you employ a large number of people when it takes fewer people to produce everything? Will the 4 hour work week become a standard?

As an industry, venture capitalism had matured over the previous decades. Many VCs have said why solve the small problems when it costs as much to solve the big ones. Look at the huge funding going into clean and green technologies so we can save the planet, but can the planet survive the human population?

Forget the Investors: Bootstrap Your Way To Success!

Posted by Cynthia Kocialski Funding Innovation 1 Response »

Jun 282011

You may think of a great idea for a product or service concept and then think about developing a business around the concept. Inevitably, the next thought is about funding and attracting investors to the project. This is often the very first test of a person’s true desire to be an entrepreneur because funding is often very difficult to obtain. The odds are low that a new business will get investors. If the project isn’t fundable, will you find another way to get the business up and running? Can you bootstrap or self-fund your start-up?

The Myth of Venture Backing
One of the top reasons cited for business failures is undercapitalization. This is a myth. Undercapitalization is the scapegoat, the factor easy to blame. If having lots of capital was the key then those venture capital firms with billion dollar funds would have a spectacular track record of start-up successes, but they don’t. It takes more than deep pockets to make a start-up thrive and become a Fortune 500 company. The fact is that bootstrapped companies have just as much chance of success as any other company.

Venture-backed companies have ample funding to hire public relations firms and to attract lots of media attention. So it may seem like the only path to building a corporation is to secure funding at the onset. This isn’t reality. Many start-ups are bootstrapped or self-funded. In fact, in the past decade, only 40% of IPOs were ventured-back start-ups and in the good years that number only peaked at 65%. So what really is the difference between being venture-backed and bootstrapped?

Investor Financing Versus Bootstrapping
Venture-backed firms start by hiring a team while bootstrapped start-ups often start with one or two people who find a way to prove their concept cheaply. Bootstrappers find those critical first customers who are willing to try it before spending lots of money. Apple was started by Steve Jobs and Steve Wozniak. They built the computers by hand, showed them at clubs and incorporated as a business some time later.

There are many other examples. HP was founded by Bill Hewlett and David Packard in a garage, a home-based business. Michael Dell was making and selling computers from his dorm room with $80,000 per month in sales. Cisco Systems was marketing networking equipment for three years and reached $1.5 million in sales before being funded. These are all famous cases of bootstrapping – where people had a concept, proved their business model, and gained traction with customers before taking outside funding. Many would-be entrepreneurs have lost sight of these examples and expect investors simply to hand them funding even when the new venture is just an idea without proof of concept or revenue at all.

Recently I attended the inaugural of a bootstrapped start-up conference, MicroConf. I participated in the conference because I believe bootstrapping is the way to go for many companies. Entrepreneurs should concentrate on growing the business rather than worrying about managing external investors. Once the company reaches around $2 million in annual sales, investors will start calling the entrepreneur looking to make a deal. This is what investors really want.

Getting Started With Bootstrapping
So how do you get started and where should you focus your efforts? First realize that you will need to be ready to modify your original concept; the final concept will evolve as the product interacts more and more with the market and customers. All bootstrappers would say that one key to success is to create the minimal feature set and get it into the hands of the customers as soon as possible. Then collect feedback and when it comes to the next iteration, focus on the feedback from the customers that love your product, incorporating changes and new features those customers want.

Too often entrepreneurs feel the need for everyone to love their product, and they spend too much effort on those unsatisfied customers, putting in fixes and new features for them. Another key to success is to get to build relationships with that handful of customers who use the product the most. You should know why those customers purchase the product, know how they use it, and also know their grips and concerns. There is no substitute for personal conversation with the customers.

A major revision of the product isn’t always necessary; sometimes it’s just a matter of repositioning the product in the minds of the customers. Once you get to know the customers who love their products, you can then reframe the marketing. You can emphasize the product’s benefits that made these customers buy and in turn, this will attract more customers like those who already love the product. This redirects the marketing to concentrate on the product’s strengths.

One of the best reasons to bootstrap is the effect on revenue. Bootstrap start-ups have to find a way to attract sales quickly. In venture-backed companies, the product can be under development for years because it has too many features designed into it. In the end, they may find there’s little or no demand for the product. Bootstrapping forces a start-up to develop a product that customers need, and to find customers who are willing to pay for it immediately. And to do this, a new product must solve painful problem.

No company can survive without capital regardless of whether that capital comes from revenue or outside sources. You may find it difficult to interest investors in your business or you may think your idea is just not a good fit for outside investors. Either way, the next time you get the entrepreneurial urge, consider bootstrapping your new venture.

How Do Angel Investors View Start-Ups?

Posted by Cynthia Kocialski Starting Innovative Businesses No Responses »

May 092011

Entrepreneurs often seek out angels looking for funding. Are they really from heaven? What do angel investors really want? How have the angels fared with their investments? Why has it been getting more difficult to attract angels to start-ups?

The New Hampshire Center for Venture Research released their annual report on angels. Here are some eye opening statistics:

For 2010, 66% of angel exits were acquisitions and 27% were bankruptcies. Only half of the 66% of acquisitions were profitable for angels and the profits ranged from 24% to 36%. Overall, this means approximately one-third were a total loss, one-third were somewhat of a loss, and one-third made money, but the money makers didn’t cover the losses.

Where are the angels placing their bets? Angel investment in seed and early stage companies declined to 31%. They prefer start-ups in the expansion stage. This translates into wanting less risk and an already working business model that is poised to scale. Mostly angels invested in Internet and software start-ups.

Has start-ups lived up the national promise of leading the way of leading the way out of the lackluster recession? The reports show that last year, start-ups created 370,000 jobs with an average of 6 new jobs per company. In comparison, the number of unemployed is currently 13.5 million individuals.

This begs the question of where are entrepreneurs with not much more than an idea getting their early money. Fenwick and West released their angel survey for Silicon Valley and Seattle in April, and according to report, venture capitalists are providing funding for 24% of the these start-ups, seed- stage funds account for 45% of funding, and the rest was angel investors. Of course, many more are self-funded or bootstrapped.

A large angel financing is considered to be upwards of $1 million, most are much smaller amounts. The smaller the financing, the more likely convertible debt was used, whereas, the larger financings were more likely to be preferred equity transactions.

Who are angels? Some of the angels are the likes of Bill Gates and Michael Dell, most are not. Many are local business people or independent professionals. While they have money to invest in fledgling companies, they don’t have so much money that they can throw caution to the wind and take a true gambler’s odds with their investment. Venture capitalists are fund managers and as such, are far more likely to swing for the fences than angels.

What do angels wants?

Angels want as-soon-as-possible exits. They prefer M&A’s. They want the total investment to be kept under $5 million. Many don’t want to get involved with the larger venture capitalists because this ultimately may mean their share gets diluted down to next to nothing. They rather get involved with other angels.

My own personal experience reveals the same as these reports. I use a service that is offered by a local company run by the former president of Sandhill Angels, and revenue at his business for the past few years has been down 60% from the peak. Another angel group told me angels usually lose the most money in the first three years of becoming an angel, even with the support and guidance of an angel group, and overall only the top angel groups are profitable, most yield results slightly below breakeven. And yet another told me angel groups were much more of a “social” club than anything else. I can say that angels always want to tell me how many investments they’ve made in recent years, but no one ever wants to tell me what the results were. Contacts, who work with small companies across the country, paint the same picture of the angel’s behavior in recent years: they want to invest in late stage companies, those ready to scale, those with revenue (and preferably $1 million to $2 million in sales).

Just the other day, I was at a conference and one of the seed stage funds sent a representative to root out possible start-up investments. The presentation ended up in a heated discussion. Why? Because they were addressing a crowd of 30-something professionals, saying they wanted entrepreneurs but didn’t want them to collect any salary for several years. I’ve heard this from several seed stage funds and angels, and it’s what is being referred to as “Ramen Noodle” founders, young entrepreneurs capable of living off of air (or Mom and dad) for years to come. In fact, one of the top seed funds in the valley told me “we invest in young men and women, those people like we’d hoped our kids would have become, but didn’t.”

The bottom line is angels want to make money. Since it’s truly is their money that’s being invested and most don’t come from the ranks of the super rich, they often don’t act like they’re from heaven after all.

And while the term angel investor dates back to those providing financing to Broadway show productions, I wonder while the term “angel” was used.

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