Tag: ExchangeHut

More Practice, Less Theory

“What do we need to know this for?” I asked as my K5 teacher tried to tell me how to write more clearly.

My penmanship was pretty bad and the teacher realized that I was writing my letters backward.  Instead of writing some of my letters from bottom to top, I wrote from bottom to top.  I remember being annoyed and asking “what do we need to know this for?”  I could read my writing and so could the teacher, but I wasn’t following the rules.  In 3rd grade, I pretty much refused to learn cursive because I could print really fast and hated the new rules, again asking “what do we need to know this for?”  I continued this (probably incredibly annoying) refrain all the way through middle school: manually calculating slope instead of using a graphic calculator, diagramming sentences, specific types of bibliographies.  Even gym class wasn’t safe from my middle school ire.

Somewhere along the line, probably around freshman year of high school, I kept the questions to myself, but decided to tune out anything that I thought wasn’t going to help me later in life.  I loved reading about interesting things that had happened in real life and writing about current events, but hated theoretical or outdated lessons.  My favorite class in high school was consumer economics, an entire class devoted to balancing your checkbook, investing in stocks and personal economics.  It was real and I still use many of those skills I learned sophomore year.

I hated geometry because of the rigidity of proofs, hated calculus because I couldn’t understand why we had to do it by hand when we had graphing calculators to do it for us.  I hated memorizing the parts of a cell in freshman biology and reading about the Greek Gods.  It was boring and I couldn’t see the benefit later in life.  I haven’t used any of those “skills” since. This choice was the main reason why I got waitlisted at UW and almost didn’t get in, but I don’t regret it one bit.

When I got to college, I was expecting a change.  I thought we would learn how to succeed in the real world, but I quickly realized it was going to be more of the same inside the classroom.  I realized that if I was going to learn, I would have to do it myself.  After I bought ExchangeHut, I thought I’d try the business school.

After about half of a semester, I realized it wasn’t right for me.  Accounting 100 was rule driven and required you to do problems by hand.  After managing ExchangeHut’s accounting in Quickbooks for a few months, I couldn’t understand why we would figure out any of that stuff by hand.  Why not just use Quickbooks and save all of the trouble?  After the first four weeks, we started to learn about how Wal-Mart manages its inventory and how other large corporations prepare financial statements.  While I understand accountants need to know this stuff, I realized it was worthless to me.  I could use quickbooks for my accounting and if I ever got really successful, I’d hire an accountant.  Why bother?  I found the over reliance on theory to be extremely prevalent in business school classes.

I had a simple accounting question for ExchangeHut and asked four different friends who were Accounting majors with good GPAs.  None of them knew the answer, but they could sure solve the question on the exam about WalMart’s inventory system.  It happened again this year with an intern for Entrustet.  We have a finance major who earned a 4.0 from UW and is graduating in the spring.  He is clearly smart and learns quickly.  We have him doing some balance sheet work and other finance related tasks and he’s good at it.  He was working on our balance sheet and ran into a somewhat complex issue, so he went to his finance professor and asked for help.  The professor said “just use quickbooks, it’ll know where to put everything in the right place.”

At first I just laughed, but then I realized this was a microcosm of why students are having trouble adjusting the the real world.  I don’t think its our intern’s fault.  He just was never taught how to use quickbooks and as soon as he got to the real world, his professor says “use quickbooks.”  That’s what happens to graduates all over the country.  Rebecca Thorman’s post addresses how colleges are failing students, but I really think the over reliance on theory in the place of practice is what is hurting students.  Ellen Nordahl looks at the problem from the other side in her post about how students are unengaged.  Universities need to teach students more skills they will use in the workplace or they will not be prepared.  I bet if students weren’t asking themselves “what do we need to know this for” in their heads, they would be more engaged in their school work.

I am not saying that we should throw out all theory.  It is clear that you need to understand the basic theory in order to implement them in practice, but universities have swung way to far to toward the theory end of the continuum.

Schools are not the only place where the balance is out of whack. I ref a bunch of soccer each year and see the same basic problem.  I ref everything from U-11 to high school to semi-pro adults and I really enjoy it.  Each year, all refs have to take a recertification course that is supposed to refresh refs on the laws of the game and let us know about any rule changes.  It also gives instructors a chance to stress certain aspects of the game and teach better game management.  At the end of the class, everyone has to take a 100 question test and get at least a 75% in order to retain their badge. All USSF refs have to take this class each year, so attendees range from 12 year old first year refs to 70 year old guys who have been reffing for 35 years.  Sounds like a good system, right?

Wrong.  The test focuses on incredibly abstract game situations that would never happen, even to a World Cup level referee.  Here’s some actual questions from the test:

Q: An offensive player is dribbling toward goal, standing outside the penalty area.  A defender who is standing in the penalty area takes off his shoe and throws it at the ball, knocking it away.

Q: A player takes his shin guard off and slaps the ball with the shin guard in his hand.

There are a ton more, but you get the idea.  You have to know the rules to get these questions right, but they cause everyone’s eyes to glaze over.  It would be a test that would be great to do as trivia, but doesn’t really help a 12 year old new referee manage a game.

Because the test is so skewed toward situations that will never happen to you, the instructors have to teach to the test, just like teachers in middle and high schools do for state tests.  To make matter worse, the instructors use jargon heavy language instead of using concrete examples.  For example, at my most recent clinic, a kid of about 13 was confused about offside.  The instructor had said “as the assistant referee, make sure you stay with the second to last defender.”  The kid raised his hand and said “I thought it was the last defender.”  It was clear that the kid forgot that the goalkeeper counts as a defender, but instead of explaining it with an example, the instructor just repeated his sentence again, but more slowly and with more emphasis.  The kid didn’t understand until another ref at my table explained it to him with a diagram and an example.  There were so many other examples like this during the 8 hour course, my head started to hurt.

A huge percentage of kids quit refereeing each year because they get screamed at by coaches and parents.  The recertification classes should teach foul recognition (ie, when to blow the whistle and when not to), how to kick a coach out, how to deal with parents and the basic rules of the game, not what to do if someone throws a shoe at the ball or whether the correct restart after a chicken walks onto the field and knocks the ball over the end-line is a drop ball or a goal kick.  They should be showing videos of fouls from youth and adult games to keep people engaged.  A quick search of YouTube for “soccer violence” or “youth soccer red cards” brings up tons of teaching moments.  Additionally, FIFA makes rule changes each year, usually as a result of something that happened in an important game.  We could have watched videos of each situation to explain why FIFA decided to make the change, but instead we just read it from the book. Just like you learn how to succeed in the real world by doing things and learning practical things like Quickbooks, soccer referees learn from watching other successful referees work and learning from real life situations.

It is harder to come up with engaging, real life lesson plans than it is to teach theory.  Its also riskier.  I think educators are less likely to try to teach real life situations because it takes time to come up with more in depth lesson plans and it’s not the safe choice.  In The Wire (my favorite tv show ever), a teacher realizes that he can teach probability to his inner city students via dice.  The kids love it and learn because they can see how they will use this skill in real life.  I think everyone agrees that the US has to do a better job of preparing students for the future.  The first step is to stop teaching so much theory and start teaching things that students will use in real life.

To Office or Not to Office?

I’ve always been a proponent of working from anywhere.  I ran my first company completely remotely while in college.  When I was 19, I worked out of my room, usually sitting on my bed, surrounded by paper, music playing from my ipod, laptop on my lap.  My friends jokingly started to call my bed my office.  That got a little awkward when I had to start meeting potential investors and clients.  Going to coffee shops all the time instead of going back to my “office” was a bit of a challenge.

My partners and I continued to work out of our respective bedrooms for the next three years.  We hired two programmers, one who was local in Madison and one from Poland.   It was great.  We were able to save money by not spending on an office, work from home, and stay warm in those long Wisconsin winters.  We were productive and grew our business from about 15,000 users to over 125,000.   We were able to raise six figures from investors, all without getting an office.

In our third year, we were asked to meet up for an interview about starting a business in college.  We all went over to one of my partners’ houses for the interview.  My two partners and I were joined by our US based programmer.  We quickly realized that it was the first time that we were all in the same room, even though we had been working together for almost three years.  There had been just about every other combination, but never all four of us in one place at a time.  It was pretty amazing to see that we could run a successful company without ever meeting in person.

After we were acquired, we all talked about whether we should have gotten an office earlier or not.  I was always happy to work from home and save the money.  One of my partners was a big proponent of getting an office and believed that we would have been more productive if we had been in an office earlier.  After the acquisition, Corey Capasso, my partner who had wanted an office, moved to New York City to pursue his new company, Add The Flavor, a company that infuses flavor inside plastic.  He quickly got an office in Manhattan and got to work.  He kept calling me and emailing saying how much more productive he was now that he was in an office.

I stayed in Madison and founded my current company.  My co-founder, Jesse Davis, and I resisted getting an office.  We worked from our house, the business school and the Union Terrace.  I began to call the terrace “my office” and we worked outside with the beautiful view of Lake Mendota all summer.  One of my friends called me one day to tell me that “someone was sitting in my office.”  We were productive and worked well without an office, but we decided that we were not being as efficient as we could.  With Corey’s constant emails about how much better it was to work out of an office in the back of my mind and the business progressing nicely, we started to look for some space.

We ended up getting a great deal on some space in downtown Madison that was too good to pass up.  We had looked at multiple business incubators, but finally settled on sharing some office space with another young Madison company because we wanted to have connections with other startups, they had the best location and they had the best price.

We moved in and our productivity increased noticeably.  We filled the walls with tile board or what I call poor man’s whiteboards and our brainstorm sessions were much better.  We spent less time sending documents back and forth and increased our productivity in just about all aspects of our business.  Getting an office has been one of our best decisions so far.

So when should you get an office and how do you still make sure that you’re not just getting an office for the sake of an office?

I think it’s time to get an office when you are about to raise money.  This does not have anything to do with actually taking money, but it serves as a good proxy for when you you are about ready.  Every startup is different, but if you can do all of our business planning and initial programming before getting an office, you will come out ahead.  If you are raising money, it usually means that you have written a good business plan, done a good amount of initial research and pitched your idea to variety of people.

It’s also important to note that just because you have an office, you don’t have to turn into an 9-5.  My partner and I still work from home when we are too tired to come in, have other things we want to do during the day or simply want to work by ourselves for the day.  Getting an office does not trap you if you don’t let it.  It’s not like getting an office makes you automatically have a boss, stuck in a cubicle.  Try to find an office within walking distance of your house.  It will allow you to go back and forth and give yourself flexibility that you need in a startup.  Don’t spend a ton of money on your space.  All you need is a place to hang some white boards, get wireless Internet and work without the distractions that can happen at home or in a coffee shop.

What have your experiences been with working from home or at an office?  When do you think is the right time to get an office?  What sorts of characteristics do you look for in office space?

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Raising Money from Family and Friends

It’s really easy to find information about raising money from angel investors or VCs, but many people neglect another important way to fund your startup: raising money from family and friends.

There are pros and cons to raising money from family and friends, but for your first round (especially in your first company), I think that the pros outweigh the cons (if your family can afford it), especially if you follow some common sense rules so that you can still go to your family reunions.  It seems to me that many in the startup world look down on companies that are funded by family and friends.  I think that’s a mistake.  I’m writing this post because I wanted to share my experience raising money from family and friends so that others can see it is a viable option.

When it came time to raise money with my first company, I had the choice of whether to try to raise money via angel investors or from family and friends.  After doing some research, I decided that family and friends was the route I wanted to take.  We were able to raise six figures fairly quickly from a good group of investors, which helped us stay focused on running our business instead of raising money.  Whereas many angels and angel groups would have wanted to get to know us for 3-6+ months, we were able to close our round in about 6 weeks.

How were we able to raise money quickly?  How do you actually go about approaching family and friends for money?  What if your family doesn’t have much money?  Why should you do it and why are they better than angels/vcs?

We were able to raise money quickly because we wrote a detailed business plan, did our research and found people who were willing to believe in us.  At first, we wrote a 2 page executive summary of our business that included how much money we were trying to raise, our valuation, how much 1% of the company would cost, why we needed the money and what we planned to do with it.  This exercise helped us really figure out how to tell our family and friends what we were doing.  It is especially important to avoid the curse of knowledge when writing your business plan, but its even more important when the investors are your family and friends.  Next, we developed our full business plan, making sure to be as clear as possible.  We made it clear that we were asking for investment in exchange for ownership in the company, rather than loans.

Next, we talked to our lawyer about how to raise money.  He helped us write up an offering summary, amended our operating agreement to allow us to take on investors and filled out all of the necessary forms for the government.  He also helped us add to our business plan to make it more understandable to non-tech people.  Our professionals that were working with us (lawyers, accountant, professors) were able to point us in the right direction of people with money.  This is even more important if your family does not have the resources to invest in your startup.

All of our investors were accredited investors, which means that they have net worth of at least $1m or a yearly salary of over $300k.  Accredited investors helped us in two ways.  First, since they were high net worth individuals, they could afford to take the risk of losing their money.  While we were confident we were going to be successful, we still knew we could fail and lose our investors’ money.  Second, having all accredited investors meant less paperwork for us and our legal team.  Having accredited investors helped us avoid the mistake that some people make: raising money from people who cannot afford to lose it.  This is a huge mistake, even if you think you are going to be successful.  It is the quickest and surest way to give yourself way more stress than you need and get yourself taken off their holiday card list.

We were up front with our potential investors.  While we were confident we were going to be successful, we told the investors that the worst case scenario involved them losing 100% of their investment.  We told them that they might not be seeing a return on their investment for 3+ years and tried to think up scenarios that would cause these bad outcomes to happen.  It was clear that our investors were more comfortable with us once we showed them that we had done our homework and were not simply selling them snake oil.  Don’t make promises you can’t keep just to get someone to open their checkbook.  They will not be happy with you when you are not fulfilling your promises a few months down the road.

Make sure you don’t set your valuation too high.  While you are trying to get a good deal for your business, you want to make sure that your investors are getting a good deal as well.  After all, they are your family and friends.  Another key is to not take too much money from one single investor.  In my first company, our biggest chunk from one single investor was $70,000.  While we ultimately made him money and he could have afforded to lose his investment, it would have been more comfortable for everyone involved to have gotten a little less from one single source.  It’s also not the end of the world if one of your potential investors turns you down.  Don’t press for money from someone who is uncertain because they will be the first to complain when things are not going as well as you had hoped.

Many angel investors will tell you that their investment comes with connections that you will not get from your family and friends.  While there is some truth to this statement, I think that it is overrated.  Your family and friends will get you money more quickly and be more willing to take you at your word.  A family and friends round will also set you up nicely for a second round from an angel or VC if it is necessary down the road.  If you can show that your family and friends believe in you, it gives you credibility.  If I see a startup without some amount of family and friends money, I wonder “wow, this guy couldn’t even get his Mom to believe in him, so why should I?”   It brings up questions in my mind, but is not a deal breaker.

I have had good experiences raising money from my family and friends and I think more people could benefit from thinking about going this route, rather than just thinking about angels/vcs.  Check out my list of Dos and Don’ts and Pros and Cons of raising money from family and friends below:

Do

  • Write a simple executive summary and longer business plan
  • Be upfront and honest about potential losses
  • Be honest about the time horizon for payoff
  • Make sure your investors can afford to lose 100% of their investment without any hard feelings
  • Seek out accredited investors from your professionals

Don’t

  • Oversell yourself, your company or the opportunity
  • Underestimate risk
  • Take too much money from a single source
  • Set your valuation too high
  • Get mad if they turn you down

Pros

  • Raise money more quickly
  • Better valuation and less stress than angels/vcs
  • Potentially make your family/friends money
  • Easier to get money than from angel groups for first time founder

Cons

  • Can be awkward if you fail
  • Doing business with family/friends can be nerve wracking
  • No network

What do you think?  Have you had experience raising money from family and friends?  What did I miss?

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Don’t Be Afraid of Competition

I just got back from a trip to New York.  While I was there, I met with a promising entrepreneur who has a great startup that has been pretty successful so far.  He is in the middle of expanding his business nationwide.  We came upon the topic of competition and how to deal with it.  I realized that many people have some misconceptions about competition.

My advice was “don’t be afraid of competiton.”  I learned this lesson when I was running ExchangeHut and talked about it at last year’s Entrepreneurial Deli event in Madison.  While we were running ExchangeHut’s trading platform for college students, our biggest fear was that Facebook would launch a marketplace that would crush our competitive advantage.  When we heard that Facebook was launching its marketplace, we changed big parts of our strategy to react to the new competition that had yet to launch.

Big mistake.  When marketplace first launched, it was fairly useless and was not a competitor to our business.  We had changed some of our bigger plans because we were afraid of competition and did not expand as quickly as we had planned because of it.  Our competition did not hurt us.  My point is that you never know if your competition will actually be successful.  If you have a great idea, don’t immediately change your plans if you hear about competition.  Execute on your ideas and let the chips fall where they may.  If your idea is good and you execute well, you will be successful.

Another point on competition:  Don’t be afraid to get in contact with your competition.  This isn’t t say that you should tell your competitors (or the world) every last detail of your plans to conquer the world, but you should be on good terms with the other people and companies in your space.  We found that it paid off to get to know the other startups that were in our market.  We talked to just about everyone in our market.

We even ended up being able to work out some great deals with competition because we were on good terms with them and they knew we existed.  There really is no downside to being on good terms with the others in your market.  You never know when a great opportunity will present itself to you or one of your competitors that will be beneficial to both of you.  Plus, if you plan to start another company, these contacts will be valuable later.  If we had been afraid of competition and not talked to them, we would have missed out.  Moral of the story: don’t be afraid of competition, get to know them, but don’t tell them everything!