Angel Investment Journal - Angel Investing and Entrepreneur Blog

There is a interesting piece on Paul Graham’s site posing the question, Why To NOT NOT Start a Start Up.

I heard good things about Start-Up School this year. I spoke with Ben Roodman, who runs a mobile social network start-up - ImThere.com with David Gorman. Ben attended Start Up School and said it was a great place to network. He even had a chance to speak with Paul Graham.

If you are a start-up, it may be a good idea to check the school out next year.

The Myth of the Great Idea talks about the fact that a lot of people talk about starting up a company, but claim they need to find their great idea before they begin. He claims that the problem with this is that a lot of times it is just an excuse not to do something. No company can simply rely on a great idea, they need to be able to execute. A brilliant idea is better than a crappy one, but without execution, even a brilliant idea cannot succeed.

In addition, successful companies may start with a great idea (or at least one which they feel is great), but end up changing their focus as they grow and learn. I have been reading “Founders at Work” that has some very interesting stories about successful start-ups. The stories in the book support the idea that many companies change their entire concept as they grow. Most find a niche within the industry or with just one aspect of their company and change their entire game plan.

The most important part of a “Start-Up” is actually Starting. Start to do something and learn from it. Failing fast and often is fine (as long as you can do it cheaply).

Greg Moreno has a cool post about the value of an idea:

Awful idea = -1
Weak idea = 1
So-so idea = 5
Good idea = 10
Great idea = 15
Brilliant idea = 20

No execution = $1
Weak execution = $1000
So-so execution = $10,000
Good execution = $100,000
Great execution = $1,000,000
Brilliant execution = $10,000,000

I would say that it should be altered a bit since weak and so-so execution should probably be negative numbers. Spending time and money on an idea but not having good execution will likely end up with a negative result.

Stanford will be hosting Start-Up School on March 24:

We’ll have a range of experts speaking on all the things you need to know to start a company: what makes a good startup idea and where to get them; what to look for in a co-founder; how to get angel and VC funding; how to incorporate a company and what agreements founders should have among themselves; when and how to apply for patents; what can go wrong in a startup; what acquirers look for; and how the acquisition process works.

I have not been, but it looks interesting. Matt Knox’s blog has some notes from Start-Up School 2006 that can give you an idea of what to expect.

Rick, at The Post Money Value, writes about a start-up that recently went bust as a result of not being able to get funding. The company actually had a VC ready to invest and needed to get some paperwork signed. One piece of paperwork was the shareholders agreement requiring all of the shareholders to sign.  The problem? The founders were generous in giving out shares of the company in the early stages:

A little code help? Here, have some shares.  Dropping a pizza by? Here, have some shares.  Some cash? Bless you, here, have some shares.   You get the point. All told, 42 shareholders which owned 22% of the company.  42 people spread out over three countries.  42 signatures required.  And, as fate would have it 21 missing shareholders.  Moved, not returning phone calls, no emails, etc.

Giving out shares is not necessarily bad, but you should be sure you do it only in exchange for things that are truly valuable to you. In addition, Rick discusses setting up a voting trust:

Draw up a voting trust for everybody who has less than a certain percentage of share ownership. You can use less than 10% or whatever number but spell it out and ensure the language is clear and reviewed by a qualified lawyer.

Early in your start-up keep in mind that you may want to get additional funding, even if it is not in your immediate plans. New investors do not want to have to deal with anything too complicated. An investment in any company is inherently risky and the more complicated things are, like having 42 investors that need to sign off on any deal, the riskier the investment becomes.

Entrepreneurs looking to get funding for their start-up company often value their company much differently than investors. Entrepreneurs use the concept for the business (the product or service) as the driving factor behind the valuation they seek and feel they deserve. In fact, they usually think the idea is so brilliant, that they attempt to keep it top-secret and prefer not to disclose many ideas. They even like to require that investors sign an NDA (see my previous post related to investors and NDA’s).

Unlike Entrepreneurs, investors tend to place much more value on the management team. Bill Payne’s book, The Definitive Guide to Raising Money from Angels, shows the general breakdown for what he considers when valuing a start-up:

Management Team - 30%
Size of Opportunity - 25%
Product or Service - 10%
Sales Channel - 10%
Stage of Business - 10%
Other Factors - 15%

Even though this breakdown makes the percent of the valuation attributed to the product or service appear to be very minimal (10%), Bill mentions that there are other factors that are directly attributed to the product or service, such as size of the opportunity. But it is obvious that the management team of the start-up is very important. Some of the most successful companies are not a result of the initial product idea. For example, you probably know that Flickr started as an online multiplayer game. The team behind the company adapted and made it into something huge.
So just because a company has a brilliant idea or a fantastic technology, it does not support a huge valuation.

By the way, if you have not checked out Bill’s book, I would highly recommend investing the money to purchase it.

Guy references a Wall Street Journal article saying that studies have showed that businesses with a business plan do not have a higher rate of success compared with those without a business plan. This helps support the idea that a great idea will not work by itself.  In fact, a lot of companies actually change their focus as they grow. As you probably know, Flickr started as a gaming site. A lot of companies get into an industry only to later find a niche. Having a business plan and only focusing on executing the plan may prevent you from finding a niche that may give you an advantage.

Great companies are usually a result of great leaders, managers, and business thinkers, which is why many investors are more interested in the Executive team than they are in the business plan. A business plan isn’t worthless, in fact you need one if you are seeking investments. But I would take a great team and a good idea over a great idea and a good team.

In sports, you can tell good coaches by what happens after half time. All coaches go into a game with a game plan. Some of them work from the beginning and don’t need to stray from it. Others need to go in at half and adjust their plan. They learn and adapt to the game at hand. Those that can make the adjustments are usually the ones that have a better shot at success.