Angel Investment Journal - Angel Investing and Entrepreneur Blog

Recently I have come across a few different instances of people talking about when not to start a business (E-Myth Revisited and Scott Shane talking about his book while
on The Frank Peters Show). It is a topic that does not get much coverage, probably because most entrepreneurial-types like to read things to motivate and inspire them, not things that dissuade them from going after their dreams.

It is an important concept because starting a new venture is going to require a significant amount of time and possibly a significant amount of capital. So it is vital to make sure the resources you are dedicating to it are going to be on something worthwhile.

My freshman year in college, I wanted to start a sno-cone stand. I grew up in St. Louis which has an abundance of sno-cone stands all over the place doing consistent business. In my college town, just two hours from St. Louis, there was not a single one. I was pretty confident I could start a stand and make money from it. Twelve years later, I am pretty sure it would have made money, but it would have been a foolish use of resources. Instead, my brother convinced me to go after another business we had just started in the ticket industry. That company eventually grew to a $22 million company before it was acquired. If I had started a sno-cone stand, maybe I could have expanded and had a few locations. Maybe I could have franchised it or found an exciting niche in the industry that could have been big, but the chances of it being as big as the ticket industry were very slim. And there is no way I could have gone after both businesses to the extent that was required for success.

This isn’t meant to get you to think too much about your idea before going after it. Thinking too much is a major reason people never start a business. They do too much thinking and not enough action. The point is that you should be sure to think big. If your idea has big potential then take action (DIFN) and try to validate your idea as cheaply and quickly as possible.

I was at InvestMidwest this week and saw some really exciting companies. I was impressed by the presentations and it seems many of the presenters were either coached on what their presentation should include or they just intelligent entrepreneurs that knew what needed to be done.

Most presentations I see include one aspect that is so common it has started to frustrate me. It happens when the presenter gets to the part of the presentation about projections. They start talking about revenue projections and they present the figures, but say that they believe this projections to be “conservative”.

I don’t know why it frustrates me, but apparently I am not the only one that feels this way. Fortunately, I only heard one entrepreneur (out of 12) claim their projections were conservative. And, upon hearing this, I saw another investor look at his buddy and smile.

Why shouldn’t you use the word “conservative” when talking about your projections?

First, when coming up with projections, especially if you are a start-up, it is extremely hard to predict what you could actually do. But you should do whatever you can to support your projections. So don’t try to say you just need to get 1% of a gigantic market in order to experience huge success. Talk about what aspect of that market you expect to penetrate. But since it is so hard to predict, you probably don’t know what is conservative and what isn’t.

Second, why would an entrepreneur that is trying to “sell” the concept of his business and raise money quote conservative numbers? It is unlikely you would, so don’t try to make the projections look bigger than what you actually believe.

Finally, even if your numbers are conservative, don’t use the word “conservative”. Don’t qualify your projections at all or maybe use a different word like “realistic” if you actually believe those projections are within reach.

While watching Citizen Kane last night, one particular quote in the movie made me think:

It’s no trick to make a lot of money… if all you want to do is make a lot of money.

Things are not as simple as that short phrase, but it does have a lot of truth behind it. If you have one goal and one concern in your life - to make a lot of money - it is very likely you will be able to do it.

The concept requires that you are willing to sacrifice all other aspects of your life (being the type of person that doesn’t care about any other aspect of your life will work just as well as having to make sacrifices). But most people want to make money to have freedom, to be able to do fun things, to not have to worry about money, etc. Money alone means nothing. You strive to make money as a result of the benefits of having money. But it is also true that you could have money and not have those things. This is why you need to stay focused on what you are ultimately seeking. Having a lot of money without a loving family or friends is probably not your ideal goal. Having a lot of money without having any fun along the way sounds like a pretty crappy lifestyle.

There is nothing wrong with being motivated to make a lot of money. Just be sure to know what you ultimately seek. Be willing to make smart choices about what you are willing to sacrifice, because success will likely require a lot of them. I was fortunate in college to have made smart choices in what I sacrificed. I never played video games in while some guys would spend hours a day playing them. I also made sacrifices in the amount of time and energy I put into school, which turned out to be a wise decision. Instead, my brother and I ended up building a solid company while going to school. I didn’t sacrifice going out and having fun and now I wouldn’t sacrifice spending time with my family.

Be sure you know why you strive for whatever it is you seek and make sure the sacrifices you are giving up are worth it.

Many entrepreneurs spend way too much time planning before they actually take action. Many also spend too much time trying to raise funds too early in the process. It is generally advisable to take some action as soon as you can. This allows you to get feedback regarding whether your idea has potential. You will be able to determine if you are on the right track or if you need to take another path including making some revisions to your idea.

Testing your idea can easily be done through Pay Per Click advertising. You can create an ad campaign in less than 10 minutes. An entire blog could be dedicated to what you can do to optimize your PPC ads so I won’t get into that here (but here are a few good resources). The main things you need to do are make sure you target the right keywords, have a decent ad, and put up a landing page that will help you track interest.

You don’t need to put up an entire site, you just need a teaser on the page and then measure how many people respond to the teaser. When I say “respond”, I simply mean you need a way to judge how interested people actually are in what you are offering. Actually getting traffic is good, but if what you are offering is not what they want, then you can’t accurately judge the need for your business.

For example, we were thinking of selling and ebook on online reputation management. Before we spent the time to actually write the book, create a site, and everything else involved, we ran some PPC ads and got traffic for people looking for related keywords. On the landing page, we had a few tests going at different price points. We listed what would be included in the book and then listed a price. For some people we said “Click here to buy this ebook for $79″, other tests showed lower prices. When people clicked on the link, it took them to a page saying the book was not yet available and they could fill out a form if they wanted to be notified when it was released. We did not collect any information from people unless they said they wanted to be contacted when the book was released because we did not think it would be right, but more importantly, we were not interested in collecting info on them. We simply wanted to how many people would click the link so we could determine if an ebook on reputation management had much potential. In the end, we found out that it did not have as much potential as we thought so we never did anything with it.

Another time we considered pursuing a new type of lead (for our lead generation company). We created a PPC campaign, put info on the landing page and did something similar. In this instance we found out there was enough interest in this type of lead and we would likely be able to convert the visitors at a high enough rate where it would be worthwhile to pursue.

The idea of testing your business model via PPC ads is mostly related to online businesses, but most businesses now need to have some online aspect to them so it is likely applicable to you.

One of my favorite questions to ask in an interview is a relatively short and simple one, but does a lot to help you learn about the person. The question is “What Blogs, Journals, Magazines, or websites do you read?” If they don’t have a list, they are probably not the best candidate because they are not likely excited or passionate about their profession.

Our companies like to give intelligence tests for most positions. We are not looking for MENSA caliber people, we just want to make sure they are at least relatively intelligent. Motivation, people skills, and specialized knowledge are more important than having an extremely intelligent individual, but there are few positions where someone can excel if they don’t know which number is the smallest - 2, .6, or .18.

Interviewing for a new position is also a great opportunity to learn new ideas. When interviewing for a Public Relations position, I learned all kinds of things about PR which I had not previously known. So take advantage of the situation and try to learn from the interviewee in addition to learning about them.

Paul Graham has a great post about called the Future of Start-ups. He touches on a variety of topics including the fact that starting a company is much easier today than in the past.

My first prediction about the future of web startups is pretty straightforward: there will be a lot of them. When starting a startup was expensive, you had to get the permission of investors to do it.

He follows that up with this great little quote:

Now the only threshold you have to get over is whether you have the courage to.

Another great idea included in this is a concept I think most companies shoudl try to do, but few do it:

We often tell startups to release a minimal version one as soon as possible, then let the needs of their users tell them what to do next. In essense, let the market design the product.

Most start-ups don’t want to release until they have the perfect version of the product/software. The problem is that you don’t know what the perfect product/software is until you start getting feedback from the users.

And a final bit of advice which I also like:

Instead of going to venture capitalists with a business plan and trying to convince them to fund it, you can get a product launched on a few tens of thousands of dollars of seed money from us or your uncle, and approach them with a working company instead of a plan for one.

Most start-ups don’t think they can succeed without raising money. But it is a heck of a lot easier to get money if you have something to show. In addition, if you have something to show for it, you don’t have to give up as much in equity.

37Signals has a post today talking about the fact that they don’t do 5, 10, or 20 year plans. I tend to agree with this because most business I have been involved with that have achieved success actually achieved success in areas that we didn’t even know about when we started. The same is true for a many companies. Only when you get into an industry and find the demand for a specific niche do most companies achieve their greatest success.

Jason talks about the best business advice he has ever received:

“Focus on the things that won’t change.” Today and ten years from now people will still want simple things that work. Today and ten years from now people will still want fast software. Today and ten years from now people will still want fair prices. I don’t believe we’ll have a “I want complex, slow, and expensive products” revolution in 2017.

Jared has a good post called 10 Startup Tips. He said he worked with Sequoia Capital and had a bad experience. In another post I spoke of how much success some Sequoia Capital startups have had and posed the question whether it happened because Sequoia Capital has access to more good startups or if they actually add so much value that it increases their chances.

I would imagine it is a little of each. But there definitely can be a downside to working with a large VC. If you do not prove your potential quickly, it is likely that they will spend fewer time and resources on you. Plus, as Jared points out, there are some people that have experienced some great success within the firm, so they will likely have some ego issues. Having that much experience advising you can be great, but they may also not be able to see what you are doing, especially if it it something totally different and may hinder your from achieving what it is you set out to do as opposed to helping you reach that goal. All of this depends on a variety of factors and that is why there is not one simple formula to follow to have a successful startup. This is actually good. If it were too easy to do, the benefits would not be as great.

My favorite tip in his post was #3:

Keep the business guy away from the technical people.

Marc has a post discussing hiring practices that is pretty insightful. Give it a read if you have time (it is long for a blog post). He discusses three main things to consider when hiring someone:

1) Drive
2) Curiosity
3) Ethics

Drive is obvious.

Curiosity relates to identifying if the position is something that the person would enjoy doing. For example, if you are hiring for a programmer position, does the candidate stay updated on related news and topics? Does he read industry blogs, magazines, forums? Does she have opinions and ideas on trends in the industry?

When testing for ethics, he suggests:

Test for how someone reacts when they don’t know something. Pick a topic you know intimately and ask the candidate increasingly esoteric questions until they don’t know the answer. They’ll either say they don’t know, or they’ll try to bullshit you.

Guess what. If they bullshit you during the hiring process, they’ll bullshit you once they’re onboard.

I like to see what other people do. I don’t think we have a great hiring process, even though we are constantly in hiring mode. We give short intelligence tests at all our companies for all new hires. We are not looking for the brightest people, instead we are just trying to weed out the ones that are clearly lacking in the intelligence department. We only have 17 questions. From experience, the difference in performance between someone that gets 13 right and 17 right is not a big deal in performance. But if someone does not get 11 or more right, it is a telling sign.

When we decided to start giving the test to candidates, we gave it to existing employees.  It was surprisingly accurate in helping predict people with potential and the people that would be better off in another position. Every person that was in the top 30% of our company scored above a certain threshold. Whereas the bottom 30% of the people almost all scored below a certain mark.

It is not an amazing test nor is it extremely accurate at predicting just how well a person will do. But it is one tool that helps us in identifying people we should avoid hiring. That alone is a great help because one bad employee is a drain on any company.

VentureHacks has a good post discussing ideas to consider when you are determining whether you should raise debt or equity for your company.