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.

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.

I generally recommend that people try to get their business going for as little money as possible. Bringing investors in too early is not the best idea. If start seeking money then you will likely spend too much time working on funding instead of building your company. And getting the funding will be harder since you probably won’t have achieved much progress. Once you see some results from your efforts, it is much easier to convince someone to invest in your idea.

Sometimes it is necessary to get funding for a variety of reasons. One of them is to get a great domain for your company. There are a variety of reasons to spend money on a good domain, one of them is establishing credibility. We started a vacation rental site and would contact people to see if there were interested in listing on our site. Most would reply saying they were already on enough sites, but when they saw our site - lakerentals.com, they were much more likely to list. When we were acquired by the Weather Channel Interactive, this was one of the main reasons they were interested in our company. They really liked the domain names we had. So an investment in a domain is usually not a bad investment anyway (as long as you don’t pay too much) because it will likely have value regardless of what happens to your company.

Building credibility is also extremely important for your conversion rates. For example, without looking at the sites, would you rather buy from SoccerPro.com or soccer-training-info.com If you start out with a bad domain name, that can potentially hurt you as long as you are in business. Having an advantage with your conversion rates is a huge advantage over the long term and is largely undervalued.

A great domain also has other advantages including some help with your online marketing. Aaron Wall has a great write up on the value of domain names for SEO purposes and you should check it out.

On the other hand, you can start your venture and validate your idea without needing the best domain name. You can get a domain that could be considered more of a brandable domain, such as wisecamel.com. And if you validate your idea and decide you would like to try to get funding (as well as a different domain), you can always for a 310 redirect to send all traffic to the new domain.

Getting some funding to help purchase a great domain is one of the reasons where getting some funding early on is not a bad idea, as long as you can find investors that realize the value of a good domain name. But it still may be a better idea to hold out on funding and the domain until you have a validated business concept.

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.

Marc continues to make amazing posts on his blog. Check out this post talking about how a business plan really does not have much value as related to determining the success of a company. The main reason being is that you don’t know what it will take to be successful. The chances are you will need to revise the plan as you learn more about the industry.

He includes an excerpt from Randall Stross’s book about Thomas Edison, The Wizard of Menlo Park. I just ordered it from Aamzon as it sounds like a great book.

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.

I found an old post from Mark Cuban via The Great Success blog. The post discusses the idea that Entrepreneurs only have to be right once. Cuban says:

In basketball you have to shoot 50pct. If you make an extra 10 shots per hundred, you are an All-Star. In baseball you have to get a hit 30 pct of the time. If you get an extra 10 hits per hundred at bats, you are on the cover of every magazine, lead off every SportsCenter and make the Hall of Fame.

In Business, the odds are a little different. You don’t have to break the Mendoza line (hitting .200). In fact, it doesn’t matter how many times you strike out. In business, to be a success, you only have to be right once.

One single solitary time and you are set for life. That’s the beauty of the business world.

It is an interesting and accurate post. I think that nearly all Entrepreneurs that have achieved success in a business, have many other business which were not a success. To reach All-Star status in the entrepreneur world, you just need to hit one homer. To get that homer, it helps to have a lot of plate appearances. It also helps if you don’t try to bunt. Dream big.

In Austin Powers, Dr. Evil plans to “hold the world ransom for… 1 MILLION dollars!” He is laughed at because the amount is so small. He later increases his demand, but you could take a lesson from this. Don’t try to request too much money when you are starting.

I see many entrepreneur’s seeking seed investments that want to get enough funding that will take them to profitability. There may be reasons why you need to get all of the money up-front, but I would highly advise entrepreneur’s to consider seeking a smaller amount of money from the beginning. Why?

1) Your estimation on the amount of time and money it will take before you are profitable is likely much lower than it will actually take. You will likely need to get additional funding in the future even if you think you will have enough. So trying to only require one round of funding may be pointless anyway.

2) It will be much harder to raise the amount of capital you seek if it is too high. First, most angels (or angel networks) prefer to invest in deals under $1 million. Plus, the less you seek, the more likely you are to find the sweet spot of more investors, which can only create a better situation for you in terms of speed in which you can get funding, deal terms, etc.

3) Related to #2, getting the funding quicker will allow you to begin work on the business and spend your time on what actually matters. Wasting your valuable time trying to raise a million dollars when you could actually get 6 months out of $150,000 may not be the best idea.

4) One of two things will happen once you get started. You will start seeing some success and you will have evidence that your idea is valid and has big potential. The other option is that you won’t see this success. If you can’t prove the idea has potential fairly quickly, then you are likely going to have problems with your entire business, not just when it comes to getting investments. If you can show your idea has potential, getting additional funding is not likely going to be a problem. People are much more willing to invest in a proven concept than a simple idea. In addition, you will probably be able to retain more equity since you will be able to increase the valuation of your company. If you had received all of the money at the beginning, your valuation would have been lower and the equity would have been more expensive for you.