Successful Startup 101 Magazine - Issue 8 Page 3
You won't feel the pain until it's too late. Your startup will be catching fire and then all a sudden everything will come to a screeching halt. This is what happens when you take shortcuts with important expenses.
With that said, there are two costs you should never try to cut or sidestep: legal and accounting. Too many startups neglect these expenses when they start their companies. Over time, it ends up becoming their worst nightmare. Here's how can make sure you have your legal and accounting in order.
Get a lawyer
As soon as you start your company, you need to start looking for a lawyer. I've seen many entrepreneurs try to shortcut this by printing documents they find on the Internet. Most times, it ends up being a disaster. As you continue down this path, you'll start trying to make major contract edits yourself. By the time you get a lawyer, you'll have to go back, pay a fortune, and fix all your damage.
Instead, find a lawyer who has experience in startups. When we started Alumnify, we didn't have enough funds to afford a lawyer. So, we gave up a few shares of our company for deferred legal fees until we raised our seed round. This is a great way for you to make sure your legal work is in order without using all your initial cash.
If you do go this route, make sure you are checking in on how your lawyer is billing you. Some will try adding extra hours because they are getting paid in deferred fees. Make sure you set expectations of what you're looking for up front and get an estimated price before getting into the actual deal. The last thing you want is to close your next round of funding and give it all to your legal counsel.
Never take money without paperwork
When you start your company, many times you'll begin by taking money from friends and family. Your best friend will hear your pitch, trust in you, and then hand you over a check. Understand that many investors you bring in from the friends and family round will not know about the paperwork. In other cases, your early investors will say they trust you and they don't need to sign anything. While that's a nice gesture, you're the one who's going to pay the price in the long run. Once you raise money from a seasoned investor, they're going to expect paperwork for every previous dollar you took in. If you don't have that and can't get it in place, kiss the investment goodbye.
Use QuickBooks or get an accountant
Here's a way to think about raising money that will help you whenever you start looking for investment. When you take money from an investor, think of it as loan. You have to pay that money back, with interest. It doesn't matter whether you take money for equity or as a convertible note; someone is trusting you with their funds.
Now let's say you borrowed money from your friend and two months later he asks to see where his money was spent. Would it be fair for you to say, "I don't know" to him? Of course not. That would raise major concerns. That is part of the reason you need to be a stickler when it comes to the books. Eventually, you'll go through intense audits. The longer you go to get your accounting right, the worse those audits will be for you.
Another reason not to shortcut accounting is that if you don't know where your money is being spent, you don't know your burn rate. And if you don't know your burn rate, you don't know how long your runway is. Finally, if you don't know how long your runway is, you'll have no idea when you're going to be out of business. Not knowing this information makes it impossible to lead a company effectively.
If you haven't done so already, start getting used to QuickBooks. Your other option is to hire an accountant. Many entrepreneurs think doing the latter will cost too much money. In reality, you can find someone to do basic accounting for you for a few hundred dollars a month. If that's out of your budget, try doing an equity deal. Keep in mind that accountants are less likely to take an equity deal than lawyers or employees. Either way, put something in place early, or you'll have major consequences down the line.
About the Author
AJ Agrawal is an entrepreneur, writer, and speaker. He is the CEO and co-founder of Alumnify Inc.
5 Ways for Bootstrapped Startups to Get Through the First Year
By Zach Cutler
In the eyes of an investor, a bootstrapped startup that has proven stable and successful within the first year is powerful. It not only raises confidence in the product and the leadership behind it, but also indicates that any invested money will likely not be thrown away.
Ultimately, when it comes to working with investors, it’s important to prove that a startup and the people behind it not only know how to spend money, but know how to bring in additional money.
To successfully bootstrap a company in its first year, it’s important to consider a few things:
1. Cut the nonessentials and focus on immediate needs. There is nothing more important to startup success than the talent that makes it all possible. Avoid any unnecessary expenses, such as office overhead or “frills,” to free up money to invest in better talent.
Virtual offices will allow team members to work together from anywhere in the world and are extremely cost-effective. Ultimately, cutting costs wherever possible will more likely enable worthwhile investment in a larger team, which will be the catalyst to growth for the company.
2. Focus on two types of talent: engineering and marketing. An innovative and savvy engineer knows the ins and outs of mobile apps and understands what users truly want and need. An intelligent and driven marketing professional understands the market and how to reach the desired target audience.
With these two power talents working side by side, any product has a good chance to be successful.
3. Don’t cut corners. Investors need to know the business and its leadership are stable and legit, so do everything by the book. Once they get involved, investors will want to see paperwork, as well as profits and losses and balance sheet reports right off the bat. This should be a priority from day one.
Find an accountant and purchase good accounting software to ensure that records are clear and corners are not cut. This will also allow for extra time to tend to other important matters within the startup.
4. Cover the legalities before it’s too late. It’s critical to ensure the product or app is covered and that there are no loopholes that would allow someone to steal its name or intellectual property once it takes off.
During the planning phases, when speaking to potential investors, partners, or developers, it’s also wise to use a confidentiality agreement to ensure everything stays within the four walls. Additionally, copyright any sketches, mockups or documentation of the product during development stages.
5. Utilize freelance consultants. Skilled freelance consultants offer additional niche talent only when it’s needed. Build and keep a solid list of trusted and intelligent freelancers who can be utilized when the time is right. With the extra cash flow freelancers provide, startups have more ability to hire the best full-time staff needed for success.
It’s no secret that the first year for a bootstrapped startup will have many highs and lows. Despite the uncertainty and exhilaration that comes with those highs and lows, it’s important to stay focused on what’s needed to get to the next step.
Eventually, those steps will likely lead to talking with investors to get the startup to the next level. Cutting no corners from the very first day, bringing on the best talent and preparing for failure and success will prove to an investor that the product and those behind it have what it takes to succeed.
About the Author
Zach Cutler is an entrepreneur and founder and CEO of Cutler, a tech PR agency in New York and Tel Aviv. An avid tech enthusiast and angel investor, Cutler specializes in crafting social and traditional PR campaigns to help tech startups thrive. He can be reached at zach@cutlergrp.com.
* This article originally appeared on Entrepreneur.
Why Startups Sell For Millions with No Business Model
By Dev Aujla
For the last three years I have been immersed in the startup world. Many of my friends work for startup com
panies, I've written a book that covered many startups that trend towards the social good spectrum, and I have been recruiting and working for many of the companies myself, here in New York.
During this time, I felt like I was missing something--some major point that everyone else understood but me. I wondered what purpose all of these startup served, and wrestled with understanding how so many of these businesses could be sold for millions, or even billions of dollars, when most made little to no profit and lacked concrete business models.
I kept quiet about my questions, afraid to admit that I just didn't get. When I shared my feeling with close friends I boiled it down to an impression that it must simply be all pretend. It must be one of those ideas that will eventually self-correct and everyone will then realize they have been believing in a fake shared reality. It was a philosophical response that I obviously didn't share with many.
Then, I had the chance to work with a 50+ billion dollar company on a short term consultancy and I heard the board members and C-suite employees talk about acquiring and investing extensively in these small, profitless startups, as well as the venture capital funds that fund them. I finally got it: It's all about research and development.
It isn't pretend at all. It is a simple value proposition that doesn't rely on the companies having a business model but rather relies on the knowledge they learned. It is outsourced research and development. All these calls to "disrupt" industries at the end of the day is different language for what used to be called R+D.
Let’s look at it more closely. It would cost a large car company, for example, $100 million dollars to research and develop the best new LED light bulb themselves. For the record, this isn't an obscene amount of money within the scope of a multi-billion dollar company.
Then you have a VC firm that has a look at the industry and notices that it costs this manufacturing company $100 million to do this R+D work, and they figure out how they can do it cheaper. How? They put $25 million into a whole portfolio of LED light companies. Let's say one of those companies develop the best new LED bulb, in which case the business can be sold to the car company for $75 million, and the car company still saved $25 million they would have spent if they did the R+D in house. Of course the numbers are made up but you get the idea.
Large companies buy VC-backed start-ups without real ways to make money for three reasons:
To Learn Something
The cheapest and only way for big corporations to learn everything they can about their industry and to inform their future investments is to invest in startups that are at the forefront of research and innovation in their field. The same way we as individuals would go to University to gain access to and absorb information, big companies gain an immense amount of knowledge from groundbreaking startups. Often they will buy companies only for the learning in order to inform future investments. It can also be as a way of laying the groundwork so they can investigate if they want to start building a product pipeline in this new area.
To Fill Their Product Pipeline
Companies need a steady stream of new potential products to sell or integrate into their core products. Although most of these acquisitions won't end up being used, a few will make it through the funnel and become real, sellable products. For internet companies this product pipeline looks like new ways to acquire users, and new ways to monetize markets. For car companies it would look like LED light bulbs.
To Acquire the Team
This is a form of corporate headhunting and simple way for big companies to "recruit" new talent and get them working in house.
Of course every start up hopes to be that magical unicorn that becomes big enough themselves to start buying other companies or investing in research and development but for most... it’s definitely not pretend. It is just outsourced R+D.
If you want to build a company and sell it maybe it is time to do what the VC's do and analyze where you can provide value as an outsourced R+D department and get hustling.
About the Author
Dev Aujla runs Catalog, an agency which provides strategic advisory and recruiting services to companies that make money and do good. He is also the founder of DreamNow, a charitable organization which has helped over 50 thousand young people organize and start community projects.
What Does It Mean To Lead With Trust?
By Randy Conley
I’m convinced that leadership is much more about who you are than what you do. As such, there is nothing that speaks more to the quality of your character and leadership than the amount of trust people place in you.
But what does it mean to lead with trust? The presentation below, far from being a complete treatise on the subject, lays the foundation of leading with trust. I would love for you to leave a comment to add your thoughts on what leading with trust means to you.
About the Author
Randy Conley is the Vice President of Client Services and Trust Practice Leader at The Ken Blanchard Companies (www.kenblanchard.com). You can read his blog, Leading with Trust, at https://leadingwithtrust.com and follow him on Twitter @RandyConley.
9 Lessons from a 10-Time Startup Failure
By Eric T. Wagner
“Nine out of ten businesses fail; so I came up with a foolproof plan — create ten businesses.”— Robert Kiyosaki
Well spoken by Kiyosaki.
But what’s it like to live through 10 failed startups and still come out with a 3 million dollar company?
Meet Kurt Theobald, Co-Founder and CEO of Classy Llama.
Yes — Theobald started 10 businesses over the span of 5 years. Each one a failed mess. But herein lies the beauty from ashes — he nailed it on his 11th try.
Now ranked at #454 on Inc’s Top 500 Fastest Growing Companies in the U.S. for 2013, Theobald’s latest creation (with the help of co-founder Erik Hansen and a team of 23) is on target to reach $3 million in revenue this year.
As luck would have it, Theobald and I were able to sit down for a 60 minute rapid-fire chat where I did everything I could to extract the secrets of his success.
Pull up a chair and take notes, because Theobald reveals 9 valuable lessons you can take to the bank today, which I now gift to you:
Lesson #1: Opportunistic vs. Strategic Entrepreneur: One Of These Is Fatal
Look up ‘shiny object syndrome’ in an older dictionary, up pops a picture of Theobald. He had the disease and it wasn’t pretty.
“That was really just a big mistake on my part. If it looked interesting, I’d pursue it. It was just like whatever came my way. Just chased multiple opportunities and never was strategic about any of it. That in itself led to many failures.”
Lesson? Act strategic. Don’t just chase every opportunity walking by in a pretty skirt. Understand your core competencies, your ‘North Star’ purpose and learn what ‘opportunity discernment’ means.
Lesson #2: Fail Fast… But Not Too Fast
Sweeping the startup world is the mantra ‘fail fast’. And yes — this is sound advice for every startup. But is there a case when it can go too far?
Ten failures in 5 years — I’ll let Theobald tell you: “It may not be entirely redeemable to let go so fast. I’m an impatient person and it’s a leading weakness. I’m very quick to let go — sometimes too fast to let go. Sometimes the most successful entrepreneurs will stick with it, try from different angles and then it eventually takes off. They stick it out and get the formula right.”
Lesson? Yes — take on the ‘fail fast’ approach. But balance it with tenacity and dogged determination. You don’t want to be the miner who stops digging 6 inches away from the vein of gold.
Lesson #3: Find Your Formula
Every successful business on the face of the planet has this in common: they’ve figured out their ‘secret sauce’ and are now scaling it. But you can’t scale until you find your formula first.
Theobald on one of his 10 failures: “By the time it came to close, there wasn’t enough rev
enue to sustain the (business) model. It just wasn’t viable and the formula wasn’t right at a fundamental level. It wasn’t too long after that I went and filed personal bankruptcy.”
Lesson? Nail first, scale second. Nathan Furr and Paul Ahlstrom drive this home hard in their book ‘Nail It, Then Scale It’. Do this in the wrong order and you’ll drive off a 500-ft cliff.
Lesson #4: Know Who You Are
You’re either an entrepreneur or you’re not. Period. No half-way point. No being a ‘little bit’ pregnant. The entrepreneurs who recognize who they are at their core are most likely to figure it out and succeed in the long run.
Theobald explained it this way: “I wrote two things in my journal: One, when I fall, I am getting up. Every single time. And two; I get up because it’s who I am as an entrepreneur. Therefore to not get up is to betray who I am. And so that’s what kept me going through all the failure. You can’t stop. You don’t really have a choice because if you choose that then you might as well sacrifice your whole life.”
Lesson? Write it down. If you truly believe you’re an entrepreneur, commit right now to that as your identity. Claim it and live by it. I did when I was 14. You may think I’m a writer, but I’m an entrepreneur. Period. And I never quit.
Lesson #5: You Must Have A Deeper Why
Simon Sinek nails this in his infamous TED Talk speech. If you’ve never listened to this thing, do so after finishing this article.