Successful Startup 101 Magazine - Issue 5 Read online

  # 10. Poor Marketing

  A small business needs to market its brand considering the tough competition it will face against more established businesses. You need to invest enough resources into promoting your products through the right channels. This is so your target market knows exactly that you can fulfill its needs. Online marketing is a must these days, but you should not ignore the physical reach of traditional marketing methods such as brochures, flyers and business cards.

  Ultimately, it is a matter of planning out your overall strategy, assessing your own strengths and weakness, and keeping a good eye on all of your resources—be it financial or human. Consider each of these possible pitfalls, and you can find your small business not just surviving, but thriving in this competitive world.

  About the Author

  Jared Mumford is the owner of SEO Visions, a digital marketing agency, and a partner at All Inclusive Marketing.  He lives tucked away on Canada's west coast with his wife and two sons.

  Angel or Devil: Who’s Really Investing In Your Start-Up?

  By Nir Eyal

  A friend called me heartbroken, crying. She had spent months looking for investors to fund her fledgling startup and now she had a big problem. Someone was ready to give her the money.

  Trouble was, the cash came with a catch. The only investor willing to pony-up the money was someone she didn’t like. She also got the feeling he did not like her much either, and yet, he wanted to invest. “If he was involved, I have the feeling I would quit my company down the road,” she told me over the phone.

  Time was running out; she needed the funds and with no other investor ready to commit, she feared she’d have to take the money from someone she couldn’t stand. The very thought made her sick in the stomach.

  I felt for her and her dilemma piqued my curiosity. What differentiates a great early-stage investor from someone no entrepreneur wants to take money from unless they absolutely have to?

  Negative Value

  Last month, famed investor and Sun Microsystems co-founder, Vinod Khosla, shocked a tech conference audience claiming, “95 percent of VCs add zero value. I would bet that 70-80 percent add negative value to a startup in their advising.” Can Khosla be right? Can investors be a liability rather than an asset?

  “I don’t know a startup that hasn’t been through tough times,” Khosla said, and it is during these rough patches that he believes many investors fail their companies. But there are more ways an investor can screw a company than giving crummy advice.

  A classic Harvard Business Review article demonstrates how investors can negatively impact the psyche of startup founders, often with toxic, long-lasting repercussions. The paper’s authors, Manzoni and Barsoux, describe a disorder they call the “set-up-to-fail syndrome.” Though they focus on how this affects the manager-to-employee relationship, I believe the affliction can also manifest in the context of an investor-to-founder partnership, particularly when a first-time entrepreneur is involved.

  What is this sabotaging syndrome? It begins innocently enough. The chain reaction usually begins with the “tough times” Khosla says are part of every company’s lifecycle. Sometimes the investor has pre-existing doubts about the CEO’s abilities, but the infection usually starts when the company misses a minor target or isn’t progressing as quickly as anticipated.

  When things do not go as planned, many investors increase supervision of the company and its CEO. The investor’s doubts in the founder begin to show through subtle cues like body language and tone, as well as in not-so-subtle ways like sending emails asking for more frequent progress reports. The investor may also initiate lengthy discussions, wanting to know how the company intends to get itself back on track.

  The investor’s questions are legitimate — it’s his or his firm’s money after all. But the byproduct of the increased scrutiny is the deterioration of the founder’s confidence and creativity. The entrepreneur suspects the investor is losing faith and responds by overcompensating in an attempt to fight the investor’s perception.

  The CEO may start working at an unsustainable pace and demand the company’s employees do the same, squandering mindshare and team morale on unnecessary tasks to placate the investor. Fearful of further disappointing her patron, the CEO may unintentionally paint a rosier view of the company or stop asking for critical feedback.

  As the founder shares less, the investor interprets the CEO’s closing-up as an inability to surface problems — a sign of poor judgment and a lack of competence. The investor becomes increasingly frustrated and is now convinced that the CEO requires further oversight.

  As the study’s authors point out, “Perhaps the most daunting aspect of the set-up-to-fail syndrome is that it is self-fulfilling and self-reinforcing — it is the quintessential vicious cycle.”

  Taking cues from the more experienced investor, the first-time CEO begins doubting her own abilities. She begins performing her job mechanically, avoids risk-taking and spends more time and energy catering to the investor’s requests. The CEO’s self-doubt fuels poor performance, validating the investor’s suspicions and throwing the company into a self-perpetuating death-spiral, which leaves the once-promising CEO dazed, confused, and often times, out of work.

  Stopping the Syndrome

  The tragedy of the syndrome is that it is fueled by good intentions. The founder wants nothing more than for the company to succeed and the investor has no intention of destroying value in a company he’s invested in. But according to Manzoni and Barsoux, how people with power react in times of trouble can have a considerable and often deleterious impact on others.

  But the set-up-to fail syndrome is preventable and reversible. Both entrepreneurs and investors can take steps to vaccinate themselves from the disease.

  When my friend faced the unfortunate choice between an investor she did not want to work with and the potential death of her fledgling company, she had a difficult decision to make. In her case, she decided to keep looking for other investors, believing that starting a company with the wrong person was worse than not starting a company at all.

  But merely finding a good investor is not good enough. Even well-meaning angels can become devils when conditions are challenging.

  An antidote to the syndrome is to acknowledge how people in positions of authority influence the performance of others. Whether it involves investors, bosses, or managers, any supervisory relationship can fall prey to a breakdown of confidence. Investors must beware of the trap of labeling founders as deficient and instead stick to judging objective outcomes and circumstances.

  In addition, expectations about the degree of supervision should be set early in the relationship. Companies that institutionalize regular dialogues between hierarchies can head-off the syndrome before it gets out of control. A similar practice can help CEOs and investors get along.

  Perception Matters

  For their part, company founders can prevent the onset of the syndrome by understanding its potential impact and guard themselves from the performance drains that come from the downward spiral.

  The set-up-to fail syndrome can only continue if the CEO perceives that the investor is losing faith in her abilities. Ultimately, founders and investors are on the same team and both want the company to thrive. Therefore, regardless of what the devil investor may say or do, the startup CEO must perform a bit of mental acrobatics to keep her sanity.

  If the perception of disappointing an investor is getting in the way of guiding the company, the entrepreneur must choose another point of view. Founders must ward-off the demons of self-doubt by never interpreting investors’ actions as, “You are failing,” but rather, “I want us to succeed.”

  Real Angels

  In my own experience having worked with several fantastic investors, it was always the great ones who not only had insight, but also the humility to confirm that the CEO knew best. Even during the company’s tough times, interacting with real angels leaves the entrepreneur energized,
confident, and more creative than before.

  The best angels remain faithful in the face of uncertainty and help CEOs rise to the challenge. They imbibe founders with an omnipotent sense that they can do anything. In short, real angel investors make founders feel like Gods.

  Editor’s Note: NirEyal is the author of Hooked: How to Build Habit-Forming Products. For more insights into how products change behavior, join his free newsletter and receive the first chapter of his book.

  5 Ways to Become a Better Leader Today

  By Peter Economy

  As a leader, you have the opportunity to directly and positively influence the success of not just your organization, but also the people who work for you. One of the hallmarks of successful leaders is that they are genuinely concerned about their people's personal growth and success. Think carefully about changes you can make in these five areas, and you'll see fast results in how your employees respond to your leadership: 

  1. Accept the Challenge

  Outstanding leaders embrace the challenge of leadership. They understand it is a way of life, not a box to check off on the way to the top, and they sincerely want to work with people and help their organizations succeed. This may sound simple enough, but it is not always so easy. To work with people, you must constantly put into practice superior interpersonal and social skills--your job is to motivate, support and remove obstacles so employees can do their jobs. 

  2. Skip Fixes That Don't Stick

  Effective leaders do not rely on gimmicks or quick fixes to overcome challenges to their organizations--they consider themselves life-long learners, and they constantly put into practice methods intended to facilitate productivity. They are always looking for ways to help employees improve their productivity and ability to get results. Instead of relying on tips and tricks, be a life-long learner. The key is to keep learning and evolving. Expose yourself to new ideas and discover what works for you as a leader by putting these ideas into practice.

  3. Partner With Your Employees

  Successful leaders continually cultivate partnerships with their employees, working alongside their people to simultaneously meet  objectives and help the employees grow. Build a successful partnership with your employees with good two-way communication and a sound understanding of goals. When possible, offer employees more responsibility in the partnership. Communicate with your employees, provide them with the support they need for success and work with them to make great things happen.

  4. Establish Two-Way Trust

  Build and maintain open and honest communication with your employees. Encourage employees to communicate constructively among themselves and with management. This promotes two-way trust and an environment in which people feel empowered to speak out when challenged or frustrated. Without the fear of reprimand, employees can celebrate as a group when things are going well and feel confident to seek out solutions when challenged. 

  5. Be Open to New Ideas

  Once trust is firmly established, it's likely that your employees will communicate ideas for improvement. It's a natural outcome of a productive environment: When people feel valued and trusted, they create and innovate. Take the time to listen to them, as someone may discover a solution to a long-standing issue or challenge a long-standing assumption. Today's business environment often requires entrepreneurs and executives to do more with less. Tighter budgets, fewer employees and demands for quick returns on investments are challenges to most organizations. Use technology and tools creatively and efficiently, but don't overlook the potential of one of your greatest assets: your employees. Be open to their ideas and implement them when it makes sense.

  You can be a better leader--starting today. What are you waiting for?

  About the Author

  Peter Economy is the bestselling author of Managing For Dummies, The Management Bible, Leading Through Uncertainty, and more than 60 other books. He has also served as Associate Editor for Leader to Leader for more than 10 years.
@bizzwriter

  © Peter Economy 2013

  Alternative Business Financing when the Bank has to Say NO

  By Robert Jacobs

  Many business owners are frustrated with the lack of funding from their bank. Most banks are declining approximately 80% of the funding requests that they receive from their small to medium size business clients. This includes established businesses and particularly start-up ventures.

  Businesses with less than two years of operational history will not qualify regardless of the credit profile of the owners. Reason: Banks must be conservative as they are lending their depositor's money and must make their funding decision based on the historical track record (success) of the business. Banks expect that the loan will be serviced from the proceeds of the business. Typically, the financial strength of a business with less than two years of solid profits will not meet the bank's minimum funding parameters... even if the business owners personal credit profile is strong. Established businesses with weak cash flow and financial statements are also being declinedd by their bank. Besides Time in Business (TIB) and owner credit history, other elements such as debt load, aging receivables and weak collateral, etc., enter into the risk analysis and funding decision of the bank.

  However, there are legitimate alternative funding solutions for small to medium size business owners. These alternative funding solutions are little known and little used. While not all inclusive, these are the typical reasons they are underutilized: First, their banker does not educate the business owner about the alternatives for funding for fear of losing their business client. Second, bank compliance policies often preclude referring their clients to 3rd party funding sources for fear of liability issues. Third: Small business owners wear many hats and simply do not have the time or knowledge to search out legitimate alternative funding solutions and perform the necessary due-diligence so that they are making an informed decision about their prospective funding partner.

  Little Known Alternative Funding Solutions for the Small to Medium Size Business Owner

  These are a few of funding solutions that are available that are much faster and do not require the business owner to give up equity in the business or pledge additional collateral and will consider challenge credit situations...

  1. Unsecured Business Financing. Available for start-up as well as established businesses. No collateral required, no financials, no tax returns. Business owner need only have strong personal FICO credit scores of 680+, with no derogatories, at least one-credit card with a 3 year history of no late payments that has at least a $5,000 upper limit and a 50% utilization rate. Revolving line of business credit. Typical funding is in the range of $25k to $50K. Approval decisions in 24-48 hours. Funding in 10-14 days. No upfront fees. Business Credit Partners can double the amount of funding when the business owner has challenged credit. Spouses, relatives, business associates can be the credit partner and they do not have to be active in the day to day operations of the business.

  2. Business Revenue Loans. Good for established businesses with owners who have challenged credit situations. FICO Scores as low as 500 acceptable. Funding decision based on the cash flow and business bank balances... not the credit profile of the business owner. Short-term loan... 6. 9, 12,& 18 months. Funds available from $10K to $100K+. Approval decisions in 24-48 hours. No upfront fees. Funding in 7-10 days.

  3. Retirement Account Funding. Good for start-ups as well as established businesses if the business owner has an intact retirement account, such as a 401K, 403B, IRA that has at least $35K in the account. This is an IRS approved funding model where the roll-over of the retirement account does not have early withdrawal penalties or tax burdens. Funds can be used to start a business, expand an existing business, buy equipment, remodel, working capital, etc. Credit profiles are not a factor for approval. Funding available from $35K to $200K+ depending on funds that are in the retirement account. Multiple retirement accounts can be roll-over. All or part of the
retirement account can be rolled over as needed. Approvals in 48 hours. Not a loan, so there is no interest charges. Fees paid from proceeds of the funding. Funding in 10-14 days.

  Visit The CashXchangegroup's web site for details about other legitimate alternative funding solutions that are underutilized, but available to the small business community.

  So, if you too are frustrated with your bank having to say no to your funding request, contact The CashXchange Group to discuss your situation. Expect a no-obligation, no-cost, courteous and confidential discussion about how we can assist you with your business funding needs.

  Robert Jacobs

  THE CASHXCHANGE GROUP

  800-313-6433

  [email protected]

  www.cashxchangegroup.com

  To Help Small Business, Change the Definition of Independent Contractor

  By Carol Roth

  There has been a fundamental shift in the foundation of business in the U.S. Services have replaced manufacturing as the primary growth driver. On one hand, this has created a skills gap for those in the workforce. However, it has also created an opportunity for individuals to become self-employed through freelancing. Freelancing gives individuals an opportunity to take more control of their own destiny and is often a first step in establishing a small business that grows and employs others.

  Small business growth is the most obvious catalyst for growth in the U.S. economy. There are more than 28 million of them, including solo business owners. In cities like Chicago, small businesses employ half of the workforce.  This means that we need to be highly focused on creating a favorable business environment where small businesses can grow and thrive. However, the U.S. tax code hasn’t kept up with the changes in the business environment and the needs of small business owners.

  One simple definitional change in the tax code – revising the definition of an independent contractor, aka a 1099 worker – would provide substantial support to help foster a pro-small business environment.

  If you are confused by the difference between a 1099 worker/independent contractor and an employee, you are not alone. Per the IRS, “Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.”

  This may seem like a small distinction, but to small business owners who are already consumed with burdensome administrative tasks, not to mention a cost structure that may not be yet scalable, it is a significant one.

  Many businesses, especially small businesses, use independent contractors and freelancers as a way to fill in gaps in their business. However, the IRS says that if you perform work that would be done in the normal course of business by an employee (including, amongst other things, not setting your own hours or methodology for completing the work), you are considered an employee, not an independent contractor, for tax purposes.  This stands even if you own your own firm, have additional clients and/or just plain want to be one.

  It is very clear that this outdated definition creates a barrier to hiring, especially for small business owners. It means that a freelancer may be considered an employee by IRS standards, meaning additional paperwork and compliance for a small business owner. It affects small business owners on both sides – impeding the hiring company from growth and the freelancer from getting more work. If a small business only needs a person for projects, shortened hours or even for part of the year, having an expanded 1099 definition would allow an independent contractor to be able to be employed by multiple businesses without creating redundancy in administrative work and other paperwork.

  What is the stress and burden for going from no employees to one employee like for a small business? It is significant. It affects a business through the cost and time of payroll and reporting. Plus, there is other compliance that is necessary when you have employees (such as legalities regarding hiring, firing and more). It may also affect the structure of one-person business’s retirement plan.

  Independent contractors who are paid more than $600 a year by a business and have a non-corporate entity (LLC, Sole Proprietorships) issue hiring firms a form called a W-9. The hiring firm then files a form 1099-MISC with the IRS each year to report those payments. If the government and the IRS are concerned about income reporting, this 1099 reporting should take care of that concern.

  If both parties are in agreement that an independent contractor arrangement makes sense, why would the government stop that? Income and other taxes are still getting paid. While businesses pay and collect Social Security and Medicare taxes (aka FICA taxes) for each employee, an independent contractor is subject to self-employment taxes, which cover both Social Security and Medicare contributions in an amount roughly equivalent to the FICA tax.  So, why should the government and the IRS care which entity is responsible for those taxes? Shouldn’t that be up to the parties in the work arrangement? Allowing more individuals to work as independent contractors as they are hired by other businesses should actually increase tax revenues by making it easier to put people to work and for companies to grow.

  With an estimated 22 million of the approximately 28 million small businesses in this country being one-person entities, recognizing the need to change legislation to support freelancers is an important step towards giving small business owners a real voice in Washington.

  About the Author

  Carol Roth is a contributor for CNBC, bestselling author of The Entrepreneur Equation, recovering investment banker and a small business advocate. She also has an action figure made in her likeness. Check out her website at www.CarolRoth.com and follow her on Twitter: @CarolJSRoth.

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