Tag: startups

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!

Every Startup Needs a Mentor Team

Every startup that wants to succeed needs a mentor team.  These mentors don’t have to be a formal board of advisors, but they should be a diverse group of accomplished business people, lawyers and professors.  They don’t have to be experts in the area you are starting your company, but it would be useful to try to find one person who is.  You should be able to call or email them anytime you are stumped on a problem you are trying to deal with.  You should also be able to meet with them every 1-2 months to give progress reports and talk through your business.  Ideally your core team should consist of 3-5 people, but even 1 mentor is a huge help.

It’s important to have a mentor team for a bunch of reasons.  First, your mentors will be able to bring an outside perspective that isn’t as close to the business as you are as the founder.  Its amazing how many problems someone smart who is a little removed from your business can solve.  Second, having a mentor team builds credibility both with others in the business community like potential partners and customers and with potential investors.  When I look at startups, if the founder doesn’t have a mentor team, I start to wonder if their idea is any good or if the founder is totally committed.  Sort of like a partner, if the founder can’t find someone to like them and their idea enough to be a mentor, there might be something wrong with the idea or the team.  Third, mentor teams provide valuable insight into areas that founders many not have experience.  Whether its a tax question or how to approach investors or how to present to a partner company, people who are smart and have been successful before usually are able to help you out.

My mentor teams for my businesses have consisted of a lawyer, successful entrepreneurs, professors.  For my current company, my partner and I joined the MERLIN Mentors program here in Madison to add to our existing network of advisors and mentors.  If you are starting a company, see if there is a program like MERLIN in your area.  It is a great way to gain access to mentors who can help you succeed, especially if you don’t have an existing network.  If there isn’t a program, email interesting professors you find online or in your area.  Write a business plan and enter into a business plan competition.  Join LinkedIN and see if you have any connections who might be able to help you.  Ask your friends and family if they know anyone who might be interested in listening to your ideas.  Not only is it easier than you think to find a good mentor, it’s also one of the most important things a startup can do.  It doesn’t even cost any money!

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Entrepreneurs Come in All Shapes and Sizes

I’ve been writing a lot about entrepreneurship lately, focusing on how it is easier than many people think and how people should view getting involved in a startup as a viable alternative to getting into the job market, especially during college and in this economy.  One of the most common responses to these posts have been “I’d love to start my own business, but I don’t know the first thing about technology” or “running a big technology startup is too hard and I don’t want to move to the coasts.”  I want to clear up this common misconception.

There are all kinds of entrepreneurs.  They come in all shapes and sizes and start all sorts of industries.  I think everyone agrees that high flying Silicon Valley tech startups and cutting edge biotech companies are clearly founded by entrepreneurs, but there are so many more examples of entrepreneurship that many people overlook.  Founders of small businesses like gas stations or restaurants are entrepreneurs.  So are people who start non-profits, people who start bands, artists who sell their paintings and people who create custom designed t-shirts.  Self-employed consultants, programmers and graphic designers are entrepreneurs.  So are people who sell parking on football Saturdays and Sundays around the country.  The examples are endless.

Jean-Baptiste Say, a French economist and the person who coined the word entrepreneur, defined an entrepreneur as someone who “undertakes an enterprise, acting as intermediary between capital and labour.”  I like his definition, but will add that an entrepreneur has to accept full responsibility for the endeavor’s success or failure.  All of these endeavors fit this definition.

Whenever I talk about entrepreneurship, I’m referring to all of these different ways to be an entrepreneur.  I think its critical for people who are thinking about starting something on their own to realize that they can be an entrepreneur and live the entrepreneurial lifestyle without raising hundreds of thousands of dollars, hiring huge amounts of employees and inventing something that will change the world.  These other types of entrepreneurship are just as important, if not more important, than many of the big high tech, high visibility startups that you hear about in most newspapers.  I think this distinction is really important and try to break it down whenever I talk with potential entrepreneurs.

Revenue vs. Growth

There are two paths that entrepreneurs go down when they are starting a company.  They can try to grow as quickly as possible without regard to revenue so that they can sell out or they can focus on cash flow and revenue, while still trying to grow the business.

I’ll call the first one the Facebook Method.  For companies that subscribe to this thinking, their goal is to add users, traffic, page views or some other metric as quickly as possible.  After reaching a certain critical mass, the goal is to try to be acquired by a larger company that will figure out how to make money from their success.  If no other company will acquire the startup for fair value, the startup will look for a good revenue model.  In order to reach this goal, theses startups usually have to take on large amounts of angel or VC funding.  This method was most popular during the tech bubble years of the 90s, but still is popular with many startup founders, as its the easiest way to start a company.

The second method is to start with a well defined revenue model and try to become “ramen profitable” as quickly as possible.  Companies that start with well defined revenue models expect to become profitable much more quickly than the companies that subscribe to the first model.  Many times, they will be profitable within 6-9 months, rather than a few years.  These types of companies do not necessarily have to bootstrap or eschew VC funding, but they generally have stronger footing when they do go to raise money.  They can get better terms because they do not need the money to stay in business.

Both Paul Graham and Mark Cuban have written about these two competing strategies in the recent months and it seems that both fall into option two rather than option one.  Graham’s recent article titled “Ramen Profitable” is about the necessity to have a revenue model that actually generates revenue from the start, rather than hope to grow big enough and then find a revenue model.  Graham explains Ramen Profitable this way:

Ramen profitable means a startup makes just enough to pay the founders’ living expenses. This is a different form of profitability than startups have traditionally aimed for. Traditional profitability means a big bet is finally paying off, whereas the main importance of ramen profitability is that it buys you time. [1]

In the past, a startup would usually become profitable only after raising and spending quite a lot of money. A company making computer hardware might not become profitable for 5 years, during which they spent $50 million. But when they did they might have revenues of $50 million a year. This kind of profitability means the startup has succeeded.

Ramen profitability is the other extreme: a startup that becomes profitable after 2 months, even though its revenues are only $3000 a month, because the only employees are a couple 25 year old founders who can live on practically nothing. Revenues of $3000 a month do not mean the company has succeeded. But it does share something with the one that’s profitable in the traditional way: they don’t need to raise money to survive.

Graham believes that companies that can become ramen profitable quickly have a better chance of success in the end.  So does Mark Cuban.  Cuban puts a huge emphasis on cash flow and profitability and getting there quickly.  Cuban says:

Business is a very simple concept.  You have to pay your bills.  If you have anything left over, you get to smile and spend it as the principals of your business see fit. If you don’t have enough to pay your bills, you either have to raise money to cover the deficit, file bankruptcy and try it again, or go out of business.Simple.

…[I]f you talk to any company I have ever invested in, the only thing I care about are profitable sales. What are you selling?  How hard are you working at selling? What are your revenues ? Why are you paying yourselves a salary rather than a commission ? What unique initiatives are you working on to generate sales TODAY.

When I invest in companies, I expect 100pct of them to be successful and grow and QUICKLY be profitable.  I may  not hit many homeruns, but I sure hit a lot of singles and doubles and rarely strike out.

Both Graham and Cuban put an emphasis on having a clear revenue model from the start that is designed for quick profitability.  This attitude puts them at odds with many VCs who are happy to invest large sums of cash in companies that are not going to be profitable for many years or do not have a revenue model other than “ads.”  This is not to say that a VC will not fund a company because it has a well defined plan to become profitable and has a revenue model from the start. VCs are mostly interested in upside, ie how big will it grow at exit, rather than can it be profitable from start to finish.

Ramen profitability is a great goal for startups to have at their inception.  It forces them to think long and hard about their revenue model and how they will actually get customers to pay for their service.  It’s a delicate balance between profitability now or growth now.  I see it as a continuum.  On one end is the Facebook Method of extreme growth without much time spent on the revenue model.  On the other end is trying to be profitable from day 1 and believing that growth will come with a good product.  Founders should balance quick growth with a revenue model that generates profit as quickly as possible.  I know this sounds like having your cake and eating it too, but it is possible.

If you are thinking about starting a company or have started a company, take a step back and think about how you will actually get someone to pay for your service and how you plan to get that money into your bank account.  I know it seems simple, but many startups raise round after round without thinking about how they will become profitable, until the funding dries up and you are done.