Bulletproofing Your Ideas: Part 1 – The Quick Screen

As entrepreneurs, we all have great ideas and we love turning them into reality. Unfortunately, most people spend more time justifying why their idea is great rather than questioning whether it is great. Here’s an example:

    1. Have brilliant idea, e.g. Curling Rink Management Software

by Reverend Aviator (cc)

  1. Daydream about becoming the Microsoft of curling
  2. Write business plan about how you will dominate the curling software market
  3. Convince poor souls to jump on board your curling startup
  4. Do an investor road show to raise funds for

What’s wrong with this picture (besides thinking that curling is just plain wrong)? The problem is that there was never a rigorous process for vetting the idea. This is a missed opportunity because vetting can reveal hidden strengths and weaknesses in ideas.

I use the following quick screen process for evaluating ideas:

  1. Are you an expert in the field? If you aren’t you’re probably overestimating your idea or underestimating the difficulty of executing it.
  2. Does your idea make something 10 times better than the alternative? If your answer is “how am I supposed to measure that?” you’re in trouble already.
  3. Do you understand how the industry makes money? Understanding how people give away things free is not the same thing.
  4. Can you win? Being #17 in an industry sucks.

If you answered NO to all 4 questions it’s a good indication your idea needs major surgery. If you answered NO to some of the questions, it’s time to focus on improving its weaknesses.

photo by Divine Harvester

photo by Divine Harvester (cc)

E.g. if you aren’t an expert in the field take the time to recruit one. Better yet, try to recruit the industry’s best expert. If your value proposition is a combination of ease of use + slightly cheaper + runs on a Mac + is multi-lingual, you’re probably proving your idea is only incrementally better. No one ever switched painkillers because of better taste and they won’t adopt your solution unless the thing they care about really works. Prove that and the UI can be ugly.

Don’t understand how your industry makes money? You probably won’t make any. Before inventing a new revenue model study the revenue models of your competitors and complementors. One tip: if no one is making money in an industry (e.g. curling software) it’s a good sign you won’t either. Finally, seeing a path from your idea to dominating some industry niche is very important. If there are insurmountable barriers to entry or high capital requirements to win, your idea may never get a chance to win. Think about this in advance.

The point of idea screening is not to generate ideas. That’s your job. Screening protects you from your natural tendency to believe that your ideas are great. If they are great, screening will help you prove it.

If you have other ways to screen your ideas feel free to post them.


Winners of StartupEmpire Contest Announced

Thank you to everyone who submitted entries to the StartupEmpire giveaway. The quality of the writing and thinking was excellent and it was inspirational hearing so many people wanting to further their entrepreneurial careers. Our hats off to all of you.

We only had 10 tickets to giveaway unfortunately so Austin and I had to make some tough choices. The good news for anyone who wasn’t selected is that there have never been more entrepreneurial events happening across Canada. I hope to meet all of the companies at one of these events at some point in the future.

So here is the list of winners (in alphabetical order):

Congratulations everyone. We’ll see you all at the conference in a few days.


Contest – 10 Free Tickets to StartupEmpire Available

Flow Ventures, Austin Hill and AngelSoft are co-sponsoring a contest to help 10 entrepreneurs attend next week’s StartupEmpire for free. This is going to be a great event to focus on building new companies in lean times but we realized that, for some, the cost of admission and travel might be a problem. Winners of the contest will receive:

  • Free admission to the conference
  • A $100 subsidy for travel (which we’re asking GTA-area people to donate to those traveling from farther away)
  • Two great business books: Reality Check by Guy Kawasaki, and Randy Komisar’s The Monk and the Riddle
  • Some discounted and some free passes to post your funding pitch on AngelSoft’s OpenDeals program which will be seen by Angels and VCs across North America

Here are the questions we’d like you to answer as part of the contest:

  1. If you are a startup tell us about your company, size, market, product and what stage you are at in your growth. (If you are not part of a formed startup but) If you are an entrepreneur, programmer or aspiring entrepreneur tell us about your background, your plans as an entrepreneur. Tell us what you’ve done to advance your entrepreneurial aspirations.
  2. Why do you want to attend Startup Empire – what do you want to accomplish there?
  3. What are the 3 questions that you would want answered by any of the speakers @ StartupEmpire?

Send your answers to startupempire [@] by Saturday November 8th and we’ll announce the winners ASAP.

Rumano de cada día CdMp3 (Pons - De Cada Dia)

Free MS Software for Startups

Microsoft has just launched a new startup initiative called BizSpark which provides free Microsoft software to startups. What software?

  • MS Visual Studio Pro
  • SQL Server
  • Windows Vista, XP, Server etc.
  • Office & Project
  • Sharepoint
  • And premium MSDN subscriptions for all

These are not only development licenses but production/hosting licenses as well so this is a good deal. To qualify you have to be a private company in software with less than $1 million in revenue. The program is free but there is a $100 charge when you leave the program. Also, after 3 years you’ll have to revert to a normal paying customer (but then again, you’ll be making more than $1 million already, right?).

You also have to be sponsored by a partner but you can do so through Flow (just shoot us an email).

You don’t have to be building your application on .NET so I’m pretty sure there’s something for almost everyone, even people building Web 2.0 apps on LAMP. I know one of the people behind Microsoft’s emerging business group, Yi-Jian Ngo. He has a great blog about core infrastructure issues and he’s a real believer in startups.

This is a new program so we’ll have to check back when people sign up and can provide feedback. But I’d say getting free software is a great way to build lean startups.


Ottawa Founders & Funders Wrap-Up

The inaugural Founders & Funders Ottawa was a great example of entrepreneurial power networking. I personally don’t like “fashion show” events where founders pitch a panel of funders. I have a feeling that not many startups get funded that way and it just gets in the way of person-to-person networking, which is what F&F Ottawa excelled at.

Allan Isfan (founder of FaveQuest) did a great job organizing the event and encouraging/forcing people to talk to each other. Speaking of which, here is a brief rundown of some of the folks there:

It was nice to see a variety of funding sources including a Boston VC (Sigma Partners), government funding, Angels and debt funding sources. I also think it’s encouraging that founders and funders travelled to Ottawa from Toronto, Montreal and Boston. I don’t think any Canadian city can sustain its own technology ecosystem so people need to start enlarging their networks.

Hijo De Cesar,El (histórica)

Getting the most out of your accountants (we fired ours)

We recently received a bunch of invoices from our accountants that had the following line item: “Accounting: $2000”. There was no backup and the bill came 3-4 months after the work was done. When we asked for an explanation we received an indignant email from the accountant asking why we were questioning their billing practices. Our answer was: you’re fired.

I’m not suggesting you fire your accountants. On the other hand, don’t be afraid to demand great service from your suppliers. Here are some things I always look for:

  1. Prompt Billing – You probably think it’s crazy to demand more invoices but getting a bill every month means you can keep an eye on your expenses. After three months it’s too late to regret what you’ve spent. If they can’t get their act together to bill you monthly that’s a red flag.
  2. Detailed Bills – Anyone who generates hourly fees must provide a breakout of what those hours were spent on. As in a timesheet. Lawyers already have software that does this so don’t believe anyone who says it takes too much time. No details, no payment.
  3. Freebies – Our ex-accountants billed us every time they answered a question (with no timesheet backup of course). This discourages clients from relying on them as a trusted adviser. Look for people who don’t mind answering a few questions once in awhile, off the clock.
  4. Value Add – I’ve referred clients to our ex-accountants but they certainly never reciprocated. I had low expectations until I met our new firm who, before signing anything, referred a client to us. This is great relationship building. If you’re not sure about your firm’s value-add potential, get customer references.

I had a great experience with our lawyers yesterday where we were discussing some templates for legal agreements we need. They made it clear they weren’t charging for the meeting, would not charge for the next brainstorming session, and would give us fixed fees for all the work they would do. They even offered to donate some time to kick things off. All of this was unprompted.

It’s time to get a bit more demanding with your suppliers, just as you’re being asked to tighten your belt. Be fair and reward great service but don’t tolerate anything less than excellence.

Anyone have any good/bad stories to share about service providers they rely on? You can hide the names to protect the innocent.


Bootstrapping Part 2: Government Funding

You wake up everyday and look in the mirror and say, “I am a capitalist.” You have The Wealth of Nations

on your bedside table. But in tough times, smart people look for handouts from the government. $700 billion worth of bailouts has even made it socially acceptable!

In Canada, almost $2 billion (just .28% of the US bailout) is granted annually to companies doing R&D via the SR&ED program. Most provinces also piggy-back on this program and provide additional funding of their own. For (Canadian) startups, these subsidies mean cash in your pocket because they come in the form of refundable tax credits. This means you still get money back even if you aren’t profitable, which you probably aren’t. In Quebec, for example, the combination of federal and provincial tax credits means you could get 80% of your developer salaries refunded to you. That $80k developer really cost you $16k!

What’s the catch? First, you won’t get your refund until after you spend the money. You file for your SR&ED tax credits at the end of your fiscal year and after 4-6 months of “processing” you receive a check in the mail. So what’s the use of a refund on expenditures if you can’t afford the expenditures in the first place? Good point and one that the lending market still hasn’t quite solved yet. But you can turn a potential tax credit refund into cash in the following ways:

  1. If you have a good balance sheet and a some personal assets, you might find a bank to loan you a portion of your expected SR&ED refund in advance. Honestly, if you’re a pure startup this will be very difficult because the bank cares more about your real assets than a future tax credit. Some government programs will provide loan guarantees which can help you get that bank loan. But banks are notoriously conservative about even taking on a tiny amount of risk (anyone out there with some stories they’d like to share?).
  2. If you have finished your year-end there are now some secondary lenders who will loan you a % of your SR&ED refund for the 4-6 months it should take to get your check. These guys are expensive (1-2% per month) but they might be your best/only option. I know of two who advertise their services: Goldeye Capital and R&D Capital. I haven’t worked with either personally.
  3. Many investors highly value the cash flow that SR&ED tax credits bring and might be convinced to invest more dollars, using your future tax credits as collateral. I’ve done this several times myself and it usually works out well for everyone because, unlike banks, investors know people who can claim the tax credits even if your startup, gulp, isn’t around to collect.

Canadian startups need to be very familiar with government programs given the economy and the relative lack of startup capital we have in this country. Next time we’ll talk about other programs that exist including Quebec’s new e-business tax credit and some of EDC’s funding programs.

Hambrientos (El lado Oscuro)

Bootstrapping Part 1 – Outsourcing

Not everyone agrees that bootstrapping a startup is the best way to go (I do). But the economy has recently made you a bootstrapper, whether you like it or not. Mark has already posted a great article

about bootstrapping which I encourage everyone to (re)read.

One good way to achieve bootstrap success is to ask yourself what needs to be inside your startup. Most entrepreneurs don’t ask themselves what really needs to be inside vs. outside because they fall prey to the following myths:

1. Contractors are always more expensive – Most people compare the high hourly rates contractors charge with a computed hourly rate taken from a person’s salary. Usually there’s no competition: salaries are cheaper by the hour. But you have to factor in hiring costs, overhead, benefits, and management time as well. Be realistic about these costs, especially the opportunity cost of your time, and you’ll probably find that contractors are efficient. Try not to think about the fact that some of your hires won’t work out…

2. I can’t outsource THAT function, it’s too important
– That’s usually the wrong question. The real question is whether outsourcing a key function might actually give you superior results. E.g. you might not be able to attract the best CFO to work with your little company but you could probably get that person to help you with a specific project, e.g. fundraising.

3. We need to retain knowledge – Find good people, write good contracts and give contractors a reason to work with you long-term. Don’t forget that most startups don’t have any formal knowledge management tools anyways. Plus key people regularly walk out the door. The point is you don’t automatically get knowledge retention just because you have payroll.

4. But we’re a software company, we need to have developers!
– Whether you run a software company or a funeral home (a great recession-proof business by the way), the goal of your company is still to make money. If you can build a better product with less money by contracting out you’ll have more money leftover to re-invest in making your customers happy. I work with a San Francisco-based company whose products are used in some of the largest hotel chains in the world. They’re profitable but still have no HQ. Their R&D is in Montreal, their VP Operations is in Chicago, and their CEO is in San Francisco.

5. We can’t give up control
– You’re probably assuming, incorrectly, that a) you have more control over employees than contractors and b) more control = more performance. First of all, most control you have over employees is coercive, i.e. “do it or you’re fired.” The problem is, the more you use this control the less people will like you and want to work for you. Contractors, on the other hand, are used to being paid for performance, especially for fixed-bid contracts. They often have more incentive for doing a good job. Sure you can bonus employees for good performance but you can’t cut their salary if they underperform. Sometimes giving up some control gives you a better end result. If you’re not a developer yourself it’s almost always better to outsource to someone more experienced. Hire a great external team and they’ll save you from yourself.

So in summary, ask yourself the hard question of what really needs to be inside your firm. Don’t forget that employees imply a lot of overhead costs and risks, including the risk of sitting idle if things don’t work out as planned. If you’re a first-time entrepreneur outsourcing the headaches of building and managing a staff for the first time will pay off in spades as you focus on your products and your customers. There are risks in outsourcing too, so be diligent and get good references. But when things get tough don’t forget that “supplier credit”, i.e. slowing down your payments to suppliers, is a source of short-term cash flow. I wouldn’t try doing that with employees…


National Angel Organization Summit – Roundup

I attended the NAO Summit recently in Halifax and was encouraged by the number of Angel investors who not only took the time to attend the event but were bullish about investing in startups. I met some Angel groups I knew about and some I have never heard of. Here are just a few of the participants:

As well as individuals Angels like Austin and Marnie Walker.

One topic that was discussed a lot was co-investment, i.e. syndicating deals across multiple Angel groups. This is becoming more practical as Angels become more organized. It’s also needed as funding dries up from early-stage VCs and startups require longer runways. I’ll be attending next month’s Co-Investment Summit in Toronto, also put on by the NAO. It should be a great event.