What Entrepreneurs Really Need (and It Isn’t Funding)

Avoid the trap of “I believe, therefore I am right”

I recently saw data from Y Combinator comparing what founders consider their biggest obstacle, then contrasting that with a list of the things proven to grow companies fast (what you really need). To be clear, high growth is all that matters when it comes to proving product market fit. Nothing says “people need our stuff” like hoards falling all over themselves to obtain your product/service.

What you think holds you back:
1. Funding (from investors)
2. Bug fix  (make it work better)
3. Design (make it easier to use and pretty)

What actually holds you back:
1. Launch (get product to market)
2. Design (make it easy use and pretty)
3. Pricing (create consumer surplus)

Remember, high growth covers a multitude of sins. 

Short on cash? Sell more.
Product buggy? Get code fixes to market now.

Alternatively, Failory did a study  that patterned start up data  to identify why some fail and some succeed. The 4 reasons for failure generally fell into four categories:

  1. Incompetence – lack of planning
  2. Inexperience – lack of product know-how
  3. Inexperience – lack of managerial skills 
  4. Personal problems – you’re a hot mess.

The worst thing you can do, is say to yourself, “I believe, therefore I am right.”

Note, three of these categories are, by definition, items that founders may lack and fall into the false premise, “I believe, therefore I am right.”

We see many founders who fail to identify that they are in one of these categories. Successful founders know that they are always one or more of these, and fill their gaps by building a diverse team that is united and motivated around common goals and vision. It takes humility to assume you know nothing, and build a team with the skills to succeed. And humility is what you really need.

Humility will help you get MVP to market faster because you know it will never be perfect. Humility will make the product better because you will not assume you know what the customer wants and will listen to them. Humility will help you to identify who you need to execute your vision, and inspire them to follow you, especially when times are tough.

In short, develop your company with humility, so you can grow with confidence.

Beware of the Startup Industrial Complex

Three rules to avoid getting scammed by advisors.

As an early stage VC, one of the saddest things I observe from meetings with founders is the toxic and pervasive influence of what I call the start-up industrial complex (the SIC).

The SIC is a universe of charlatans and blissfully unaware “advisors” who masquerade as help for early stage companies and, in fact, set them back or bleed them dry for the personal gain of the advisor. There is an almost infinite number of people desperate to take money out of the entrepreneur’s pockets, so I thought I’d write a post about how you can identify and protect yourself from the posers and in the process learn how to identify real help that is there for you.

SIC members usually ask for cash upfront to perform tasks for start-up companies. It may be they offer a so-called, proven method to develop fundraising decks (laughable, when you can get the best advice free from YC), or perhaps an introduction to a prospective investor or customer. Regardless, the first warning sign that you’re among the SIC is when they ask for cash upfront to “help” you.

Rule Number One: the best help for start-ups comes from proven leaders who don’t need cash from your seed capital and genuinely want to help ideas they believe in. 

Another red flag is when a SIC member asks for equity in your company upfront, without any performance vesting standards. For example, “give me 5% equity in your company and I’ll give you advice and allow you to use my face on your slide deck to raise money.” This is a bad deal for you, if you take it.

Rule Number Two: when giving equity, it should always vest over time for performance tied to measurable goals such as sales or results that move your KPIs.

Most SIC members are either burned-out, serial founders who never got an exit, or someone who had a senior management position in a large, mature company. Both types of these people have experience, but they don’t have the experience you need. Failure can be a good teacher, but founders who have not gone through the full process of start-up to exit may just repeat the same failure lessons, and share their mistakes with you. Similarly, big companies may be good at what they do, but the people who work in them are not familiar with the effort and methods to create and grow something from scratch on a small team with a limited budget. Many of these people have good intentions, but they just don’t speak start-up, and are more dangerous when they think they do.

Rule Number Three: Seek advice from people who are either successful founders or VCs, better yet, someone who has done both.

Founders, we love you and want to see you succeed. So beware of those who come looking for cash, free equity, or have nothing to contribute to your future success. The SIC is real, spread the word and beware!

Five Questions Every Start-Up Should Ask About Accelerators/Incubators

First off, and full disclosure, I operate an accelerator program (Sputnik ATX) and have strong opinions on this subject as a participant in the “helping startups” market. I put that in quotations, because, as I’ll expound, there is a start-up industrial complex that is designed to fleece novice founders from their seed capital with predatory fees, terms, etc. Also, I’m going to start just writing accelerator, because writing accelerator/incubator over and over just reads poorly.  OK, enough with disclosures. Read on!

If you’re a breathing human, you’re confused by the veritable potpourri of accelerator and incubator options clogging your inbox. Need help evaluating which one is right for you? How to know which one may or may not help you out? I’m here to help. Here’s a list of questions you should ask to see if your start-up benefits from a program:

  1. Does the accelerator write checks or take checks?
    Accelerators that give money, usually as equity investments and sometimes as a grant (whoo-hoo if you can get it), are often those who have real “skin in the game” and want to align their interests with the founders. They’re willing to put their money where their mouth is, and back your company. It is important to also ask how they help you get your next check. Some, like Sputnik ATX (yea us!) also write follow-on checks and will lead or participate in seed rounds or A-rounds beyond the pre-seed investment typical of most programs.
    Programs that do not write checks to the start-up may also be helpful, but you should expect them to add a lot of value in other ways if they are asking for money or even equity (yikes), without making an investment. For example, it may make sense to give up a few points of equity or pay a fee if you have very high confidence that the program will help you double sales, get major traction, or something else that is material to your success, and not just helping you prepare a nice pitch, some simple introductions, etc.
  2. Does the accelerator help me do something I can’t do for myself or speed up a hard thing?
    Good accelerators identify and invest in companies where they can add value and have experience to offer the founders. Ask the accelerator how they’re going to  help you, and be specific. If they can’t tell you how they can help you solve a tough problem or complete a hard thing, move on. Too often, startups believe that just getting into a program will raise their profile, and so they sign up for something that wastes time and money doing things they could have done faster for themselves. It is OK to recognize that a program isn’t going to accelerate you as advertised. One program here in Austin that really does this well is SKU, an accelerator to help CPG start-ups. SKU has a focus niche where they have deep expertise and networks that help companies get onto store shelves, something that is quite hard to do without the industry know-how and experience.
  3. Is the program just trying to get me to buy something?
    What I mean by this is some accelerators are just trying to sell startups other services, and offer little in the way of help. Good accelerators don’t see you as a customer, you’re a partner that they want to help. A generative relationship should exist between the startup and the accelerator, where the accelerator is spending its time helping you to succeed. If you’re just there to buy products and services from the “accelerator” then the program may just be a marketing channel used by a business to sell coworking space and other advisory services to start-ups without offering much value added. Some coworking spaces may have excellent accelerators, and you’ll only know if they’re awesome when you compare the cost of the required stuff you’ll buy versus the benefit from the space and program.
  4. Is the program merely providing free access to services I can get elsewhere?
    Some accelerators take equity in exchange for providing services like desk space, credit on cloud services, or “free” consulting. Let me address some of the more common services one by one:

    • Desk space – if you have a place to sleep, you have an office. Giving up equity for a desk is a sub-optimal business decision. If you really need a desk, drive Uber/Lyft for a day and use your earnings to pay for that workspace without diluting your equity. As a bonus, you might meet a cool VC while driving (I met a cool company or two this way, the founders pitched me while driving).
    • Credit on Cloud Services – accelerators get this free from Amazon, Google and Microsoft, so they’re not paying for the perk they offer you. Plus, if you attend some of the Amazon, Google and Microsoft cloud events, you can get this same perk for free directly, without selling your soul.
    • “Free” consulting or advisory work is garbage. Advice should always be free to founders. Anyone who has successfully founded and exited a start-up will usually help you out for free because they know how hard it is to launch. Anyone who needs a paycheck from you is not legit, and is usually someone who is preying upon start-ups to make a living because they failed to do so as an entrepreneur or flushed out of corporate life and have no clue how to successfully start their own company (or they’d be doing it already). For this reason, Techstars has a policy of not permitting advisors or partners helping companies in their program from charging any fees to the company while they’re in the program. If they have value, prove it first. A good policy.
  5. What do the program alumni have to say about its worth?
    Ask program alumni companies if it was worth it, and then ask yourself if that company has a credible opinion. For example, someone may say a program stinks, but may just be blaming the accelerator for their own business failure and faults. On the other hand, if a successful founder who built a nice business tells you the same program didn’t help them that much, that opinion has more gravitas. Then, find out why it did or didn’t help them, to better understand if the program will help you

Overall, take some time to learn more about the program, how they add value (if at all), and if that value is what you require at this time. If the value is there, then ask yourself if the cost is worth it.

There are some great accelerators out there, so go find the one that works for you.

The Worst Start-Up, Ever!

Angel sheet is the worlds first fully-social, AI infused, machine learning toilet paper, on the blockchain.

Behold, Angel Sheet.

Angel Sheet is the worlds first fully-social, AI infused, machine learning toilet paper, on the blockchain. Yes, you heard me correctly.

You see, Angel Sheet does what no toilet paper has done before, optimizing its cleaning mission with artificial intelligence, learning your individual needs and improving with every use.

Best of all, it is on the blockchain; you can buy crypto tokens to securely keep track of your commode progress and only share it with your absolute best friends.

Best of all, Angel Sheet monetizes the back-end data, selling valuable water usage and disease vector data to hedge funds and medical research companies. This data value alone will enable the company to lower the cost to the consumer of the basic TP product close to zero.

Better yet, Angel Sheet will create an advertising marketplace for its basic product, infusing each sheet with paid images of the hottest trends, influencers, or political ads. Because it is fully connected to the Facebook API, it knows your preferences and adjusts automatically to your needs.

We estimate that everyone in the world will have to have it someday, it will replace all TP as we know it.  That means our potential market cap is somewhere between Amazon and Google.

Oh, and did I mention our seed round, pre-MVP valuation range is expected to be somewhere between $500 million and a cool billion. Conservatively.

Authors Note: I came up with this pitiful idea after reading a ton of excellent submissions to our recent accelerator class, interspersed with, well, some Angel Sheet. Enjoy.

3 Economic Rules Every Crypto Start Up Must Obey

There’s a ton of people infusing cryptocurrency and blockchain into traditional businesses and asset classes claiming to have some revolutionary breakthrough when, in fact, the business value proposition is nothing more than, well, bananas.

We see a lot of crypto start-up ideas that go something like this:

“We’d like to put bananas on the block chain and trade them with utility tokens. It will revolutionize produce sales globally. Our pre-money valuation for the seed round is 2 trillion dollars.”

I’ve taken some editorial license here, but you get the idea. There’s a ton of people infusing cryptocurrency and blockchain into traditional businesses and asset classes claiming to have some revolutionary breakthrough when, in fact, the business value proposition is nothing more than, well, bananas.

I thought I’d take the time to put down some basic “cryptonomic” rules to help would-be, block chain titans evaluate if their idea is gold or goop.  It all begins with Ronald Coase at the University of Chicago, Laureate for the 1991 Nobel Memorial Prize in Economic Sciences (yes, it does have a cool sounding official name).

In 1937 (yeah, it takes that long to win the Nobel prize), Coase wrote a paper called the Nature of the Firm that revealed the fact that transaction costs are almost always material and do shape economic transactions.  For example, if it takes too many clicks of the mouse to buy something online (a non-monetary transaction cost of your time), you’ll just go buy something on another website. Transaction costs, while not always monetary, affect our willingness to buy, sell, and engage in a market.

Why does this matter to crypto? Because what crypto and blockchain do, precisely, is reduce transaction costs for certain economic activities. For example, bitcoin makes it possible to transfer money between parties without fees, or oversight from your bank, government, etc. That transaction cost can be high (prison) if you’re a drug trafficker or engaging in some other illicit activity. That is why so much illegal activity is transacted using virtual currencies. They lower the transaction cost of the exchange sufficiently to justify the risk of volatility inherent in virtual currencies. I’m not advocating using virtual currency for illegal activity, I’m just saying that it happens for well-understood economic reason.

Overall, bitcoin is probably the lowest transaction cost method to transfer “money” securely to anyone, anywhere, for any reason, and at any time.

This leads us to crypto start up rule #1 – the use of crypto or blockchain must lower transaction costs for the economic activity it underwrites.

If you’re not actually making it easier to transact an economic activity using your business plan, then you’re not creating consumer surplus above traditional market activities and no one will adopt your platform after the initial hype wears off.

The second rule of crypto start ups is due to a government body that was created as an indirect result of Ronald Coase and his pioneering work on transaction costs: the Securities and Exchange Commission (SEC). Some asset transactions require government oversight to even the playing field in public market transactions. This is because asymmetric information (when one party has inside information about the value of something) leads to fraudsters dumpling worthless assets on less-knowledgeable persons. If this insider trading was allowed, it would impose a major transaction cost on public markets from a fundamental lack of trust between two parties in any asset exchange.

To remedy this, the SEC regulates certain asset classes that are publicly traded to ensure that all information provided from insiders with non-public information about an asset, and have control over that asset, share that information with all market participants simultaneously and do not manipulate markets to their advantage. If you try to create an asset for public trade, and then benefit from trading it with inside information, you will go to jail.

This is rule #2: Don’t go to prison. Sounds simple, but for some crypto folks, this is a difficult idea to master. If you intend to create an exchange for your crypto tokens where they can be held, bought and sold, then you’re business should be regulated by the SEC and you need to hire a regulatory attorney who specializes in crypto assets and make sure that you’re idea is lawful with appropriate disclosures and oversight. This isn’t cheap to do, but going to prison is definitely more expensive.

Hmm, does that mean prison is a transaction cost of criminal activity?  You bet it is!

Now, on to rule number three.

Blockchain is a secure way to share information, plain and simple. If you want to use it for a business purpose, then by so doing it needs to be a transaction where securely sharing information on the blockchain lowers transaction costs sufficiently to act as an incentive to increase underlying economic activity . For example, putting banana information on the blockchain doesn’t really help a person buying them at their local Target store get better information in a manner that is more convenient than the sign at the store; however, securely transmitting point of agricultural origin data may be helpful to Target if they have to certify to their shoppers that the banana is organic and their sign is accurate.

To simplify, rule number three is that blockchain should only be used when it lowers transaction costs to securely share and maintain information critical to the underlying economic exchange.

Now, if you’re a crypto entrepreneur, you still have to abide by the basic rules of good startups (link shamelessly inserted if you missed it before). So don’t think that if you do merely these three things, you’re going to be the next Winklevoss twins and the living is easy. Getting any startup off the ground is still a knife fight in an alley with Andre the Giant and he has a gun (as we often say at Sputnik ATX).

These are just economic realities that any crypto start-up will ultimately have to face, so better to know up front and assess if your idea has merit before you push your life savings into the next banana-crypto debacle.

In summary:

Rule 1:  The use of crypto or blockchain must lower transaction costs for the economic activity it underwrites.

Rule 2:  Don’t go to prison, hire a regulatory attorney and obey the law.

Rule 3:  Blockchain should only be used when it lowers transaction costs to securely share and maintain information critical to the underlying economic exchange.

No go out and make Ronald Coase proud: start lowering those transaction costs crypto entrepreneurs!

 

Schrödinger’s Start-Up – Why VCs Don’t Sign NDAs or Non-Compete Agreements

Every so often, I get an email from an entrepreneur that starts something like this:

“By reading further, you agree to the terms of our non-disclosure and non-compete agreement”

My immediate reaction is to delete these emails with prejudice.  I am not alone.

VCs get inundated with pitch decks and proposals for new technology.  NDAs or NCAs destroy our ability to freely invest in good ideas, so it is almost impossible to get a VC to sign one.  Asking for one, in and of itself, demonstrates a lack of sophistication on the part of an entrepreneur.

The reality of your start-up, whether you want to admit it or not, is that your idea is not Schrödinger’s cat.  This refers to a paradox first proposed by Austrian physicist Erwin Schrödinger in 1935.

A gross oversimplification of the paradox goes something like this: A cat is in a box with a sensor and poison. You don’t know if the cat is alive or dead. If you open the box to see the state of the cat, the sensor will break the poison and kill the cat. Thus, you don’t know if the cat is alive or dead, and even trying to verify this will result in the outcome of death.

As a start-up company, you may feel like opening the door to someone seeing your idea will kill it, or at the least subject it to competition as others race to replicate your genius, a-la Schrödinger’s feline friend.  The reality is far from that.

As a venture-backed start-up, you may benefit from stealth mode to prevent copying for a season, but ultimately comes a time when your technology must be promoted and made known to the world in order for you to find commercial success.  Growth is the only metric that matters to a VC, and it is impossible to do this if no one can look at the cat, so to speak.

If the time for the world to know your company is not yet arrived, well then, neither is it the time right for me to consider investing in your company.  VCs want to invest when the time-value of their money will produce the best result in the shortest period of time.  That time usually happens when you’re ready to go to market (seed stage) or getting traction and want to scale (A round investing).

So if you think your idea is so awesome that anyone in the world even knowing about it would kill it, then you’re not really ready to talk to VCs yet.  We like to get involved when you’re ready to let the cat out of the bag, and not be Schrödinger’s start-up.

How to Get Your First Sale

The customer’s own emotions and desires should drive the conversation naturally into your solution, not the other way around.

Trying to get your first paid customer can be tough, especially when you have to do more than just sign up for Google AdWords and -gasp- engage with other humans to complete a transaction of goods, services or both. So if you’re start-up model is just getting eyeballs and selling clicks, this post isn’t for you. This article is about how to get a paying customer for anyone who is doing more than just selling advertising on a site.

When you started your company, I will assume that you had an idea for some awesome thing that would generate a ton of consumer surplus. If you don’t know what this is, please read this first. Now, back to your great consumer surplus generating concept, I assume you have. This minimum viable product is untested, so you’re not sure yet if the “baby is ugly”. Truth is, it probably is ugly, and if you do the start-up sales process correctly, you’ll learn helpful product information that will not only help you sell the baby, but get some good plastic surgery to make that baby pretty.

First things first, find the people who you think will want the product/service. You should be able to network naturally into the person with the problem. If you can’t then you probably don’t know the industry well enough to understand their problems, let alone solve them, and it was a bit presumptuous for you to quit your job, mortgage the house, and risk it all on something you didn’t understand.

Networking into the sale usually means that you reach out to friends/acquaintances, or the friends/acquaintances via direct introduction (email or face to face). Just don’t spam the universe on LinkedIn, everyone hates that and it won’t help you as much as a targeted approach on people who can get references on how smart you are, how good your company is, etc. Those references and network information will help overcome the barrier to buy your future customers face.

The barrier to buy is the cost that a customer incurs to do business with you. That isn’t just money that they pay you, but the value of their time, risk to their current business operations, etc. To make a sale, you have to convince someone that the total cost of doing business with you (time, risk, money) is far less than the benefit they will get from using your product. Since most of those factors are not money (easy to often assess by pricing) your future customer will estimate time and risk costs based upon how well you present yourself, how highly your network speaks of you in reference (your reputation) and the apparent ease of doing business with you from their own assessment.
You lower the perceived risk of these factors by responding to emails quickly, dressing appropriately for any face to face meetings, showing good manners (yes, in every classical sense of this), and not interrupting potential clients/customers.

Ok, so lets go to step two, after you’ve networked into the prospective customer, how should you introduce your company? Here are some basic rules:

1. Don’t push a product on the customer, ask them to talk about their problems first. It is sometimes easier to dig a pit and allow a boulder to fall into it, than move the boulder, since gravity is a lot stronger than even the most Popeye-esqe forearms. This means that the customer’s own emotions and desires should drive the conversation naturally into your solution, not the other way around.
2. At some point, you’ll see the opportunity to share how your company can solve the problem. When the customer need discussion opens that door, show how you solve the problem in 10 seconds or less. Brevity and simplicity gives you power. You don’t need to demonstrate every minute feature of your stuff, just put out there your solution in the simplest way, and be OK with a moment of silence after you say it. If the customer responds with curiosity, find out what specifically interests them in the solution, thus getting permission to delve into the part of what you do that they are interested in.
3. Make sure that your short explanation explains the consumer surplus they should expect from your innovation. It should be obvious how the product/service is going to be something they want.
4. Be honest that you just have minimum viable product at this time, and so you would appreciate getting feedback from them on how you can improve the product. It is important that they know you’re building the plane while flying it, so you can manage expectations. Good first customers will give you a lot of feedback and recognize it is in their interest to do so. If a company sees this as a burden, they’re not a good fit for your first sale.
5. Ask at what price they could say yes today (or the soonest their internal sales system permits). For customer number one, it is not about the revenue, it is about credibility and good feedback.
6. If they say no, then ask them why they aren’t interested, and follow up with additional questions so that you can understand how your product-market fit may not be right for this customer.
7. Before you leave, ask who they know that might be interested. Even when you’re getting turned down, they may know who will say yes. Even if they say yes, they may have a friend in the business who you can call next. Referrals are like gold.

And as a final note for some services where you generate a very massive consumer surplus, you may be able to get the customer to pay upfront for a product/service down the road. That is the holy grail, and should be pursued if you can get it, but don’t be greedy. This most often happens in industries where the customer is used to prepaying part or all of the price to get a service, but this isn’t always the case.

I once saw an innovative part manufacturer get a major industrial to pay them for the inventory cost of their first shipment so that they could go into production and deliver something that generated sufficient consumer surplus to cover the cost of capital above the cost of the part. Also, first customers may want to be investors, and the money they invest helps to not only lock them in as a customer but can also provide a potential exit for the sale of the company at a later date. Treat these first customers well!