Archive for September, 2007

Rule #21b – “On a warm summers evening, on a train bound for nowhere”
September 26, 2007

Kenny Rogers sang a little ditty once upon a time about knowing when to “hold’em,” knowing when to “fold’em”, knowing when to “walk away” and knowing when to “run.” The song is catchy and tells a fun story about two gamblers sharing a train ride in what must have been a wilder version of the West. However, the lesson in the chorus is a mantra you’d be wise to ingrain in to your brain.

Businesses rarely develop on the exact timeline and direction that you had in mind when you started out. Some folks don’t even look for an endpoint, preferring instead to make a quality product and then put one foot in front of the other to see where things lead. Whether you are a planner or a “let’s get started and see where it goes” type of entrepreneur, there is a harsh reality that you may have to face one day: your product or business has deviated from what you had in mind so much that the idea of remaining a part of it disgusts you. Broken down further, you need to be able to be honest with yourself and know when to walk away.

I’ll give an example: I knew 2 very intelligent and talented programmers who were building a site to reach a vertical search market. They had studied their competition and found some places where they thought the market was ripe for a new competitor. They built their product with fervor and after a long time of tinkering and getting it right, they were ready to launch. Then an ironic – and somewhat tragic – thing happened. The morning of the launch party, one of the founder’s realized that the business model they had implemented was not the best model possible. The features of the site that would be used heavily did not work as well as the functions that would be lightly used. Even more troublesome was that the relationship between the founders had soured and as a result, neither had the enthusiasm to work as hard on the programming angle long in to the night as they had previously.

With almost no money in the bank and investors icing down champagne, the founder contacted a trusted friend for advice. He laid out the story and the friend asked some very difficult questions. Does it work? As it works now, will it succeed? Is the relationship with your partner so strained that nothing – no money, no success – can fix it? Do you want to buy him out? Do you want to be bought out? If you were to start from scratch tomorrow by yourself, how hard would it be to start over and succeed? Do you even want to do this anymore?

The founder explained that launching the product as it was might succeed, but the long term health of the company would be in peril if the founders couldn’t mend their fences. He thought it was a huge gamble to take; what if things didn’t get better? Would that simply be putting off the inevitable death of their startup? Would it be wiser to walk away early on, saving the chance of long term success by simply going a different way?

The founder listened as his friend told him a few snippets of advice, some of which sounded logical, none of which sounded appealing: do the right thing always…if you haven’t done your best, don’t launch…if you don’t think it will succeed, don’t launch…if the structure needed to carry the product is not in place, don’t launch…do not use your one chance on a half-assed attempt because it’s the easiest way out…THE HARDEST THING TO DO IS ALMOST ALWAYS THE BEST THING TO DO.

After much thought, he contacted the other founder and the investors and explained the decision. He said, “I believe this is a great product and it can succeed. I do not believe it can succeed with the structure we have in place to support it. I would like to walk away from the project, giving my equity to my co-founder and the investor pool in proportion to current equity stakes. All I ask for is that my founder sign a “Free to Compete” contract, indicating that if I want to try and work in this industry, I will be allowed to do so.

So he left. And he was right. The original company launched, gathered customers, generated some meager revenue and folded up shop 14 months later when customer requests for service were taking to long to gain a response. The departing founder started his own similar company using a business model he thought was more in line with what people would be interested in using. He raised more capital, he coded in to the night, he found the enthusiasm that was gone on the previous venture’s launch day. Five years later, he wrote a check to each of the investors in the other company who had supported and allowed his departure for 3 times their original investment in that company. He’s still in business today.

A ship with a hole in the bow will eventually sink unless you get it out of the water. No amount of bailing water and putting tar over the hole will hold given a long enough time frame. Be honest with yourself about your venture. Don’t stay at the helm of a sinking ship out of principle when you have the ability to get back to shore and build a better boat.

Motivational Quote
September 21, 2007

“You will come to a point where you think you have reached the end.  That will be the beginning.” 

– Louis L’Amour

 What a great point, and not just in some existential, motivational way.

As you push onward through your venture, it would be wise to remember that every measurable step you take, every success you achieve, and every challenge you face and deal with marks a new “beginning” for your company.  If you have the ability to wake up in each morning and say, “right now, the scoreboard says zero to zero” then you can dive in to the day’s activities knowing that a new beginning is in front of you.  This type of attitude will help you shed the past, which will make you more fleet of foot in the future.

Every day is a new beginning for you, your venture, your ideas.  Capitalize on the clean slate.

Rule # 21 – Quit with the sugarcoating.
September 17, 2007

If you learn one thing in business, it will be this:  nothing ever goes the way you planned.   As I have addressed before, you will encounter problems and opportunities on a regular basis that you did not imagine and have not planned for.  When you are doing this, it is best if you employee a style of communication – with co-founders, employees, investors – that is professional, polite, constructive, and brutally honest.

Investors:  There is a natural fear in company founders when it comes to dealing with investors.  A nervousness about getting the right message out and crafting it in a way that communicates things correctly.  Investors are your friends and partners, but it’s natural to want to shine a bright light on the good news and casually toss in the bad news as everyone has one foot out the door.  I assure you that if you employee this strategy, it will come to bite you in the ass when the chickens come home to roost.  At all costs, you need to be open with your investors.  You may tell them things that they don’t want to hear, but you’ll never get drug in to a courtroom over hurt feelings.  As an added bonus, you’ll probably be pleasantly surprised when one of them chimes in from the back of the room with a solution to the problem that you were not fully disclosing.

Employees: With regard to employees, you shouldn’t give them the idea that business is great if it’s not.  I know all about creating a workplace “culture” and attitude that is positive and optimistic.  But when things are bad, you owe it to your employees to let them know things are bad.  Why?  Because they’re the ones who will be bailing water out of the boat and getting you on the right track through hard work.  If everyone thinks things are progressing in the right direction when they aren’t, it will be much too late for them to do anything to help when the bad news becomes obvious to everyone.

Co-Founders: The most important place to dismiss your happy-face is also the most critical to your early success.  It’s also the place where relationships are most fragile.  Communicating with your co-founders.  I’ll offer two examples…

In one just launched startup I know of, the 4 co-founders set out to build a web based application based on ratings and reviews.  After much discussion and fundraising, they began building the application.  2 weeks in, the founder who was the “database expert” declared that he was in over his head and the project did not have much chance of success if he were left in charge of the database.  By being honest with his 3 partners, he increased all of their chances of success by admitting his short-comings and getting out of the way.  He is still a co-founder and handles another aspect of the development.   Their site is up and running and while there is a lot of work left to do, they are headed in the right direction.

A second startup with which I am familiar is dying a slow death because one of the partners is incapable of doing his part and none of the other parties involved can find the stomach to say, “you aren’t doing your part….you need to step aside.”  Maybe there are worries about hurt feelings or concerns about the person’s expected response.  What they should be doing is worrying about what’s best for the company and challenging themselves to find a solution.  No, it isn’t ideal, but it can be constructive and honest.  But instead of having a difficult and necessary conversation, they just sit there, waiting on good news that will never come.  All because no one has the ability to communicate honestly with one another.

Be honest.  Be polite.  Be constructive and offer solutions.  But don’t patronize people, don’t massage the truth to your liking, and don’t leave the bad news for another time.

Quote of the Century
September 6, 2007

“Imagine what you might accomplish if you knew you would not fail.” – Unknown

I saw that on a card at a car wash last week and I’ve been amazed at how much it struck me then and how much it strikes me now, days later.  In just a handful of words it conveys the following facts to me:

  1. Many people do not set out after their dreams for fear of failure
  2. What would you/I be doing different with our lives if we knew that success was assured?
  3. When asking oneself “do I really believe in ME to do this?”, the answer is pretty hazy.  Perhaps our assurance of success is hard to believe because we would have to rely on ourselves to achieve it.

We all make choices about what we want to do in life and how much we’re willing to sacrifice or put in to get there.  But it remains staggering to me how quickly people settle for less then what they always thought they could accomplish.  No, not everyone is going to start a business or go on a Mission-trip to Africa or cure cancer or whatever.  But look around sometime at all the people around you who aren’t challenging themselves to do what they really want or really need to do.

What could you accomplish if you knew you would not fail?  What is it that’s making you think you will fail?

Rule #20b – Raise the Money you need, not the money you want
September 4, 2007

Now that we have established that the money you “raise” should be treated like you walked down to the local bank and signed your life as collateral, we need to tackle the question of how much money you should be raising in the first place.

There are some very, very successful people who have a much different view then I do on this. Marc Andreessen, who churns out billion dollar startups almost as often as Lindsey Lohan goes to rehab, loudly declares you should raise as much money as possible. His idea is (in a nutshell) based on the fact that you won’t go out of business with money in the bank, you never know if there will be more money available later, and the risk of making a buyout financially impossible pales in comparison to the real chance that having too little money will kill you.  All of these are good points.  And at which time you have the capacity to raise 44 million dollars in one round for your startup (as Andreessen just did with Ning), I will only say, “knock yourself out.”   You get people with 44 million dollars to answer the phone and you clearly don’t need my advice.

So, how much money should you raise to get your business or idea to the next stage? Some people may tell you that you need to find a fair valuation for your company or decide on a percentage to sell off blah blah blah. The fact is that unless you have absolutely hit it out of the park alread, the first chunk of change you raise will be from people you know who believe in you as a person and really don’t care too much about your idea.  They have a couple grand lying around and want to help you achieve your dreams and if they get a little something along the way, all the better. The specifics will vary, but that’s usually how it goes the first time out of the gate.  My recommendation is you raise the money you need, not the money you want.  

I’m essentially advocating a strategy of just barely going beyond “self-funding” or “bootstrapping.”  I’m suggesting that you take the bills you have as they apply to your startup, project them out for a year and raise exactly that much money.  In a perfect scenario, you would follow the old adage to “raise the money you need for a year!” and then take not a penny more.

The reason for this uber-conservative approach is simple:  as I said before, at the early stages of launching a startup, having money is going to create more problems then solutions.  Raising a smaller amount of money will give you the freedom to work on the project and business without having to sweat whether or not you can cover the cost of your internet connection.  Having a small amount of money will also implicitly keep you from doing stupid things like hiring a VP of Sales or making 100 T-Shirts with your cool logo on them.  I.e., not having much money will keep you from wasting it.  As I said before, if you think that would never happen to you, you’re being naive.  Even the tiny stuff – “Let’s buy the office a Starbucks this morning to reward everyone’s hard work!” – will snowball until your working capital has returned mere pennies on the dollar to you.

Why?  The moment your account becomes bloated with more money then that small amount, you will be tempted to spend it.  Even worse, the people who have invested will start saying, “Why is my money in the account…?…why is there not more staff…?…why is this still not launched…?…what is the deal here…?…WE HAVE MONEY!!!”  Even if you heed my warnings about having too much money in the account, the people who put it there will more then likely NOT understand your reluctance to spend it.

People – investors, specifically – think that money solves all problems in a startup.  Of course it doesn’t; it masks them.  Money covers up a lack of strong work-ethic.  Money covers up timelines that pass.  Money covers up lack of talent.  Money covers up poor communication and a dead market.  Money covers up lack of a business strategy.  On and on and on.  I’ve seen it plenty of times and from all directions and can say with absolute certainty that at this point, you will get more done with $100 in the bank then you will with $100,000 because you won’t have the fall back of saying, “everything’s fine…we have money.”

Raise the money you need to allow you the freedom to get to the next step of your journey.  Not a penny more.