10 Common Startup Flaws Leading To An Early Demise

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Based on my experience as a mentor and an entrepreneur, if you fail on your first startup, you are about average. That’s not bad, but who wants to be average? Every young entrepreneur knows implicitly that startup success is a long hard road. Statistics show that the failure rate for new startups within the first 5 years is higher than 50 percent. How can you improve your odds?

Of course, a real entrepreneur always takes a failure as a milestone on the road to success. They count on learning from their mistakes, and use the experience to move to the next idea. But why not learn as well from the mistakes of others, without suffering their cost, time, and pain? In that context, I offer you my list of ten top startup failure causes, seen over and over again: Read more

Martin Zwilling , Founder and CEO, Startup Professionals
November 3rd, 2013

If a startup has an unreasonably high valuation in its F&F round, would Angels and VCs be concerned?

Yes, absolutely. In my experience, that may well be the #1 killer of deals that should otherwise happen.

Consider the math: if the F&F round is $60K for 1%, that means the ‘post investment’ valuation of the company is $6 million. If the company now approaches a professional investor such as a VC, angel group or serious angel, let’s say that this new investor is prepared to put in $400,000. But based on their experience and knowledge of the market, they are only willing to do so at a ‘pre-money’ valuation of $1.2m (that is, they expect to get 25% of the company for their investment.)

This sets up a very uncomfortable situation for the entrepreneur, with only three possible outcomes, none of which are good:

1) Take the money from the new investors, and don’t do anything to the F&F investors. Result: your uncle has just lost 80% of the value of his investment because he had the faith to make a bet on you when you were starting out…and now he feels you cheated him by overstating the value of your venture. How comfortable do you think the next family dinner is going to be?

2) Take the money from the new investors, but retroactively adjust the valuation of the company used for the F&F investors, so that the value of their holdings remains intact (this is technically called “full ratchet anti-dilution protection”.) Result: if the two ends are being held constant, the only place from which to take the ‘make-up value’ is from the pocket of the founder, which means that you personally take 4% of the equity from your share and give it to your uncle (which, added to the 1% he already had, brings him to 5%, which is what his $60K investment *should* have gotten him in the first place.)

3) If the first is too painful and the second too expensive, then you do neither…which means that the new investor walks away, and the company has locked itself into a position from which it will be unable to raise additional financing.

For precisely these reasons it is *highly* advisable to do F&F rounds as Convertible Notes with a 10—20% discount. This leaves valuation to the professional investors, gives the F&F an immediate uptick in the value of their investment, and is efficient and cost-effective from a legal documentation standpoint.


*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

When A Startup Chooses IPO Most Founders Are Out

Mark Zuckerberg photo via Reuters/Robert Galbraith

Many entrepreneurs still dream of “going public,” making billions of dollars, and playing with the big boys. They don’t realize that this option would likely be their worst nightmare, since it costs millions for the road show, usually dilutes your equity to a tiny fraction, and takes away all your entrepreneurial control. Consider the recent example of Facebook and Mark Zuckerberg.

Even though the Initial Public Offering (IPO) alternative for a successful startup seems to be coming back, it is relatively rare. After a record low of 39 U.S. IPOs in 2008, the market was up to a still trivial 128 in 2012 (compared to 675 in 1996). Even in most of these cases, the original startup founders were pushed out, or heavily supplemented, with “experienced” executives. Read more

Martin Zwilling , Founder and CEO, Startup Professionals
October 27th, 2013

What exactly is an API team?

I believe this question is conflating two completely separate concepts:

An API is an Application Programming Interface, a set of computer instructions that allow different programs or systems to communicate with each other. That’s how Quora can post your answers to Twitter, or allow you to log in to Quora with your LinkedIn account.

An API Team is simply the group of people (typically software programmers and product managers) within a company who design. develop, market and support users of the company’s API. Read more

8 Tips On How Much Money To Ask For From Investors

Image via SVTuition.org

Startups ask me “How much money should I ask for?” The simple answer is the absolute minimum amount you need to make your plan work. Some entrepreneurs try to start with a huge number, hoping they can negotiate and close on a smaller one, while others understate their requirements, in hopes of getting their foot in the door with an investor.

Neither of these strategies is a good one, as both are likely to damage your credibility with potential investors, even before they look hard at your plan. Here are the parameters you should use in sizing your request, and be able to explain in justifying your request to investors: Read more

Martin Zwilling , Founder and CEO, Startup Professionals
October 20th, 2013

I want to start investing in the tech industry (seed stage and/or stock market investing). What resources are good for evaluating a company in this niche and learning more about the industry?

The two possible approaches mentioned in the question are very, very different from each other.

Investing in public technology stocks in the stock market (such as Google, Apple, and many smaller companies) is something that anyone can do, can be started with a very small amount of money, can be experimented with before committing (by establishing a ‘shadow portfolio’), can be easily unwound, and for which there is an enormous amount of instruction, advice and industry news available.

Read more

How does a startup replace an executive?

This is one of the trickiest situations, and for a tech-based startup where the Founder/CEO is not him- or herself a tech person, it may well be THE trickiest situation.

In large part it comes down to the integrity and personality of the CTO, and the quality of the relationship with the CEO. If both are straight-shooting professionals, then a full, private, direct discussion/negotiation is probably in order. Read more