Tag: startups

Is Your City Startup Friendly?

Category : Entrepreneurship
Posted on November 23, 2009 by Nathan Lustig

I was talking with a few people at the last High Tech Happy Hour and the last Capital Entrepreneurs meeting about what makes a city startup friendly. We came up with a short list, but I’ve been thinking about it ever since. What makes a city startup friendly and how can cities that are not startup friendly make changes to become more startup friendly?

Startup friendly cities need to have a high density of smart people. Potential founders of startups need other smart people who could be potential partners, contractors or employees. Most cities that have a high density of smart people happen to be cities with large universities that attract a huge supply of smart people each year. It helps that these cities have universities because it’s even better to have young smart people, rather than simply smart people. Young people can afford to take bigger risks and are more willing to work longer hours for little or no pay than older people who may already have families, mortgages or other obligations.

Another helpful characteristic is low cost of living. If founders can live cheaply and find cheap office space, it makes it much easier for a startup to get off the ground. Additionally, having a low cost of living allows startups to stretch their investment dollars much further. Employees, rent and just about everything else is cheaper. I talked to one Madison-based founder who has successfully sold one company and is on his second startup who believes that Madison’s low cost of living is one of the most important reasons why his company succeeded and his competitors did not.

Access to affordable office space in a business incubator is another key characteristic of startup friendly cities. Business incubators are an important asset for startups, especially if they are affordable. Unfortunately, many incubators I’ve seen end up charging close to market rates. Incubators are an important step for startups because they are usually the first move from working out of the founder’s bedroom. They also provide camaraderie, connections and bring startups out of isolation because the rest of the people in your office are also running startups. It’s much better for a startup to move into an affordable business incubator with other startups, rather than move into an affordable office space next to a lawyer, construction contracting company and a non-profit.

It is extremely important for startups to interact in a community of other startups. Having other entrepreneurs around, especially entrepreneurs who have been successful in the past, is important because founders can ask for advice when they have problems. A mentor program like MERLIN Mentors is very important because it matches up experienced people who have been successful before with inexperienced startup founders. These mentor programs not only build a community of startups, but they provide specific feedback to startups and help them overcome challenges that they might not if they were left on their own.

Another important aspect of an entrepreneur community is free networking events like the High Tech Happy Hour and Capital Entrepreneurs. Events like the High Tech Happy Hour bring smart people together who are not necessarily focused on entrepreneurship and startups, but are fertile ground for finding employees. Local, free entrepreneurship groups like Capital Entrepreneurs offer founders of startups a place to meet others who are doing what they are doing. It also creates a community and gives founders of startups some semblance of co-workers. Starting a startup can be lonely if you do not get out and interact with others who are facing the same challenges and dilemmas that you are.

These free networking events provide a way for experienced entrepreneurs to mingle with people who are just getting started. Experienced entrepreneurs set an example and show everyone in the city that starting a company is viable. They can also provide advice, but simply having experienced, successful entrepreneurs in your city makes your city startup friendly. Cities like Boston, San Francisco and Seattle have these networks. Others like Madison and Boulder are just getting started, but are on the right track.

These experienced entrepreneurs can introduce inexperienced founders to professional service providers like lawyers and accountants who are willing to help entrepreneurs. It also helps if your city cultivates a network of experienced, flexible professional service providers. These service providers should be willing to take equity, give discounts or defer payments into the future for startups that they think are going to be successful. It is extremely helpful if startups can still get top notch professional services, without breaking the bank during the company’s research stage.

These professional service providers can help startups gain access to capital that they need to fund their business. Ideally, a startup friendly city will have VCs, angels and other rich people who are interested in investing in startups, but not all cities must have all three. A strong network of professional service providers who work with entrepreneurs can make introductions to rich people who are willing to invest. Some startup friendly cities can be heavy on angel and rich individuals, but light on VCs. Another way cities can help entrepreneurs is by advocating for small business loans and other alternative ways of funding.

Startup friendly cities generally have support programs in place for entrepreneurs. They tend to have low taxes. It is much easier to start a startup in a city that does not have 10% sales tax, like the city of Chicago. The state of Wisconsin provides a 25% tax credit to angel investors who invest in certified Wisconsin startups. Wisconsin also offers low interest loans that are forgiven if the startup fails. Both of these programs help entrepreneurs succeed. Other states have implemented programs that fund early stage startups.

Finally, many people who start statups generally like living in cities. They like walking to work and living in tolerant environments. They like to be able to meet in coffee shops, go to interesting restaurants and enjoy life with their peers. It’s best to have good weather. Low crime and good schools are also helpful. Overall, creating a city with high quality of life keeps the three most important ingredients, experienced entrepreneurs, rich people and smart, young people, in one place.

Cities can begin to implement policies that help foster entrepreneurship. Cities can start by creating a business incubator for startups that offers offices (with windows) at 50% discounts. They can start to create mentor programs like MERLIN and create entrepreneur networking groups like Capital Entrepreneurs. Service providers can start offering discounts or equity for service deals. Once one service provider has success offering this deal, it quickly becomes the industry standard. I’m not advocating that government do all of this. People who want to see their cities become more friendly to startups have to do some of the work themselves.

Government does have a place. It can offer incentives for startups to move to their cities. It can lower taxes or offer government programs that provide easier access to capital. It could create a new business incubator and it could help create a community of entrepreneurs by publicizing entrepreneur success stories or the local startup community. Government could help make cities more startup friendly simply by being more friendly to startups themselves.

Characteristics of Startup Friendly Cities

Figure out if your city is startup friendly. Rate your city on a scale of 0-2 for each characteristic and score total the score at the end. 0 means that your city does not do it at all, 2 means your city does is very well.

Access to capital
High concentration of smart people
Low cost of living
High concentration of rich people
Network of experienced entrepreneurs
Mentor programs
Low cost startup incubator
Low taxes
Governemnt support
Flexible professional service providors
Free networking events
High quality of life
Tolerant, vibrant, walkable cities
Large universities
Culture of entrepreneurship
Educated workforce
Good weather
High concentration of science and technology workers
Direct national flights
Entrepreneurship advocacy groups

I would say Madison, WI gets a score of 23/40. Milwaukee gets a 13/40. San Francisco gets 36/40.

How startup friendly is your city? Do you agree with my list? Do you have any characteristics to add?

To Office or Not to Office?

Category : Entrepreneurship
Posted on November 10, 2009 by Nathan Lustig

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?

Raising Money from Family and Friends

Category : Entrepreneurship
Posted on November 2, 2009 by Nathan Lustig

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:

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?

Paul Graham’s Newest Essay is a Must Read

Category : Entrepreneurship
Posted on October 26, 2009 by Nathan Lustig

I’ve never written a post solely telling readers to read someone else’s work, but Paul Graham‘s newest essay called “What Startups are Really Like” is so good I’ll break my rule. Graham is the founder of Y Combinator, a company that funds startups and gives them guidance, money and a community for to help them start their startup. Graham emailed all of the founders of the companies Y Combinator has funded asking them what was the most surprising thing about their experience:

I’m in the unusual position of being able to test the essays I write about startups. I hope the ones on other topics are right, but I have no way to test them. The ones on startups get tested by about 70 people every 6 months.

So I sent all the founders an email asking what surprised them about starting a startup. This amounts to asking what I got wrong, because if I’d explained things well enough, nothing should have surprised them.

He took the most interesting responses and wrote an essay reacting to it. If you run a startup, are interesting in starting one or are just interested in what entrepreneurs go through to start a company, this article is a must read. Pretty much everything he says rings true to my experiences and would be advice I would give, so I will just let it stand on its own.