Invested Interests

The Cost Equation for a Startup is Better Than Ever

The Cost Equation for a Startup is Better Than EverI come from a high-tech software background, and only a few years ago, it would cost at least a million dollars ($1M) for a team of professionals to produce any commercial software product. Now, with open source software components, and low-cost development tools, the same job can be done by one good hacker for a few thousand dollars.

Even for low-tech startups, the scope of information available on the Internet, and its global reach, has had a similar financial impact on the many other challenges facing every startup founder. Here are a few examples: Read more

Invested Interests

Mark Suster’s “Never Negotiate Piecemeal”

Nothing tells a truth better than a good story. Especially when it’s true. Read Mark Suster’s Never Negotiate Piecemeal. Here’s Why on his Both Sides of the Table blog for a good read and a good lesson.

He tells the story of his baptism by fire in startup-dom, a series of negotiations including office rent, sublet, getting people on board, getting the media to care, dealing with recruiters, dealing with the tech prima donnas, and (a favorite of many) “dealing with pesky VCs.” He summarizes:

As unpleasant as people find the thought of it – life is a negotiation. And no life is more of a constant negotiation than that of an entrepreneur. And most of us start with zero training. One of the big mistakes I used to make (and still sometimes do, frankly) was to negotiate piecemeal. I think it actually comes naturally to the uninitiated and it’s suboptimal.

Then he introduces Stuart Lander, who taught him a lesson. But before we get to the lesson, I just plain like this intro into his negotiation strategy:

Like a machismo first-time CEO I thought I should handle the negotiation myself. Their CEO was equally bravado and dumb. He openend with his first issue. I listened to why he didn’t agree to that particular term and what he preferred in stead. Like the problem solver I had been trained as in my software development days, I parsed his issue. I saw where he was coming from and from our side why our ask was what it was. I talked too much. I looked for middle ground. He talked too much. He haggled with me. We both felt good. And smart. We agreed a compromise. Then on to the next issue.

Stuart, however, had a better idea. Don’t negotiate point by point. Negotiate by line. He said (key thought here):

If you negotiate piecemeal you end up compromising on everything. That’s not very smart.

So he came up with this instead:

The problem with negotiating piecemeal as Stuart taught me is that you trade on every item. You don’t prioritize the issues which you really care about. If you don’t want to give a millimeter on one item you have a hard time doing that point-by-point. Done as a “package deal” you can say, “I gave in on these 5 issues that you asked for. On this issue I can’t give.” That’s much harder to pull off piecemeal.

I like that. It seems like good advice to me.

Tim Berry , Founder, Palo Alto Software
June 5th, 2012 0

Invested Interests

Entrepreneurs: Don’t Quit Your Real Job Too Early

Many entrepreneurs I know feel guilty about not quitting their day job when initiating their startup, worrying about not giving their all to an employer, juggling the multiple roles, or even a legal conflict of interest. I’ll try to offer some guidelines to address these issues, but I generally recommend you keep the day job until your new company is producing real revenue.

The exceptions to this advice would be if you are being paid for your startup position by external funding, or if you have enough money in the bank for both you and the startup to survive for at least a year. Otherwise, I suggest that founders be up-front with their employers, with an honest commitment that the “side” work on the potential startup will not jeopardize committed results. Read more

Power Pitches

10 Things I Look for When Reading a Business Plan

It’s the end of May as I write this so I’ve just finished my annual April-May business plan marathon reading more than 100 business plans for my angel investment group and four different business plan contests. This seems like a good point to summarize here what I look for in a business plan. 

  1. Don’t push adjectives. Let me assign my own. This year for every plan that really looks like it might be disruptive or game changing I saw 20 or so that claimed to be. 
  2. Tell stories. A story tells market need way better than general market numbers. Write about problems you solve and who has them, how you solve them, and why you do it better than anybody else.  
  3. I want a forecast that starts with specifics like channels or traffic and conversions or segments and builds up. I hate the forecast that assets some huge market and takes a small percentage of it. It seems like every time I read “this is a $X-billion-dollar market” the surrounding discussion lacks depth and credibility. 
  4. I want unit economics. Often this is part of a good forecast. Tell me what it costs to produce one unit, what the channel pays for it (if channels are relevant) or what the buyer pays for it, what it costs to ship, and so on. 
  5. I want realistic expenses. Most plans are pretty good about estimating direct costs but bad about underlying expenses. You can’t have a $20 million sales estimate with 10 employees in the company and a few hundred thousand dollars of marketing expense. It just doesn’t happen. 
  6. Never write that you have no competition. Having no competition means one of two things: either your business sucks, or you haven’t done your homework and you don’t know your business. Even the most amazing disruptive game-changing plans have competition. If not now, then tomorrow. Who’s going to enter this market?  
  7. I want good positioning. Don’t try to please everybody. Start with a relatively narrow product-market fit and, if you can, move it gradually up to more markets and more segments. Explain in your plan which segment is first and why. Explain who you’re leaving out of your market and why. 
  8. I want to see basic numbers. I expect projected monthly income, balance, and cash flow for the next year and annual projections for the second and third year. And I want to see them, as in useful business charts, but I want to be able to see the numbers in detail too. 
  9. I want to see milestones: dates and deadlines. And progress made. What have you actually done in the recent past? Write about achievements. 
  10. By far the best validation of a plan is actual sales made already. People have written checks. Second best are letters from future customers promising future business. 
  11. (Bonus point) Don’t muck it up with too much science. It’s not a research plan, it’s a business plan. Summarize the science so I have some idea and then tell me about the business. 
  12. (Bonus point) Don’t let the document get in the way. I don’t want to think about formatting or editing, I want to read your stories and imagine your future. Keep it moving and keep my mind on the business, not the misspellings or repetitions. 
Tim Berry , Founder, Palo Alto Software
May 29th, 2012 2

Invested Interests

8 Attributes of a Real Entrepreneur That Run Deep

Business success begins in the mind of the startup founder and his team. A winning startup is a team of entrepreneurs who build and run the business as an extension of who they are, rather than some extrapolation of the Google or Facebook model.

It’s not so easy to fake the important attributes when the going gets rough. So before you risk it all by jumping into a startup, do a reality check on your own mind to see if you can find a majority of the following attributes, summarized from the book “You Can Win” by Shiv Khera: Read more

Industry Experts

Second-Class Investor Citizens: Facebook’s IPO and Dual-Class Equity Structures

Dual-class voting structures are receiving a lot of attention these days along with intense publicity related to the Facebook IPO, following in the wake of other recent tech IPOs with a similar structure such as Zynga and LinkedIn.  This is nothing new; long favored by family-controlled media empires such as Rupert Murdoch’s News Corporation, among Internet firms alone, Google took a dual-class approach when going public in 2004.  Some commentators have suggested this is the wave of the future, signifying a shift in the balance of power from investors to founders of the relatively small, elite group of growth companies that make it to public markets.  Yet I’m skeptical that a widespread shift will occur anytime soon, and for reasons discussed below, as much as I admire and advocate for talented entrepreneurs, I believe it would be a losing proposition for nearly all involved. Read more

Antone Johnson , Founding Principal, Bottom Line Law Group
May 24th, 2012 1

Invested Interests

Reflection on Local Angel Investment From Inside Out

This is a good time to reflect on my experience with locally based angel investment. I just finished with the fourth of our annual angel investment event for my local group based in Eugene and Corvallis, Oregon. I’ve been an investing member since the group — the Willamette Angel Conference, nicknamed (ugh) the WAC — started. 

We now have an investment in Cascade ProDrug, using technology developed at our own University of Oregon (based in Eugene, where I live) to help people fight cancer by reducing the toxic effects of chemotherapy. It’s an early stage investment, meaning that it has a long way to go, several years, before it gets through all the testing and makes a difference for people. We like the local connection. 

We try to make our investments as convertible debt. We have a standard term sheet as a starting point. We’ve never seen that term sheet survive negotiations all the way through signing, but it’s usually a good start. It’s technically a loan, but nobody wants it to actually be a loan and get paid back. Instead, we all want the company to grow and prosper so that our debt gets converted to stock ownership in a year or two. We do it that way so neither we not the startup have to decide what percentage our money is worth until later, as it grows, and bigger investment follows. 

This year we started with more than 30 submissions from startups. After several weeks of due diligence, we narrowed that down to five, of which three were using technologies developed at one or the other of our two big local universities, the University of Oregon and Oregon State University. 

We’ve used the gust.com platform to manage our documents, submissions, due diligence, and so forth since our first year, 2009, even before it was renamed and reconfigured. That’s worked out very well for us, which is part of the reason I blog on this site regularly. 

After four years of it, I now have small investments in four small local companies. It’s inappropriate for me to make public statements about these companies, but I can summarize by saying that one of the four looks good, one looks bad, one is doing okay, and this most recent one is too soon to tell.

In the meantime, over these four years, I’ve now spent four Springs as a member of a group of people looking in detail at local startups. The activity and the group are part of the benefit. For the most part I like my fellow WAC members and enjoy participating in a team looking at startups. I enjoy the weekly meetings when we spend evenings listening to pitches or sharing the results of our exploration of specific startups. I like the excitement of new companies and large potential and, yes, big dreams.

So is that a good way to invest money, you might ask? Am I happy with what I’ve got for the money I spent? The answer is yes, I am. These are all very high risk investments, meaning that they are all way more likely to lose than to win; but if they do win, they have a long shot at winning big. It’s a hit business, in which one hit pays for all the other losers. I wouldn’t want my life savings put into that kind of investing, but it isn’t.

More importantly, is this a good way to spend time and money? I say yes definitely. Oh, and aside from all this selfishness, I like to think that this activity is also good citizenship, contributing to the attractiveness of this community for startups and people thinking about startups. The availability of our kind of investment is a positive factor. 

Tim Berry , Founder, Palo Alto Software
May 22nd, 2012 0