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10 tough questions to ask yourself before raising money

CC by greefus groinks

CC by greefus groinks

I seem to spend a lot of time convincing people not to raise money. The #1 culprit is not The Downturn or a lack of good ideas. The real problem is that people are trying to raise money too early when things are still half-baked.

Here is my top 10 list of tough questions all entrepreneurs should ask themselves before trying to raise money:

  1. Is your idea ready? – Most ideas need time, not money. E.g. time to really vet ideas, get outside feedback, and do a deep dive into everything. Money won’t help you do this faster and will be a distraction.
  2. Are YOU ready? – Anyone can, and should, start a business, but you should be honest about your personal timing. Can you afford to take a pay cut and work long hours at this stage in your life? Have you built up some relevant career experience to help you? Do you have good general management skills? What can you do to develop your own skills?
  3. Do you have a good network? – It is so much easier to build a company when you have a good network to support it. Networking is free and fun and you’ll hone those skills you’ll need when you are building your own company. Don’t like networking? Don’t start a company!
  4. Do you have big gaps in your team? – Don’t try to raise money when you have a technical product with no engineer on board. Build your core team first. Hint: don’t do it alone, ever!
  5. Do you understand the fundraising game? – There is no excuse to be under-educated about the fundraising game. Everything is available on the Web and many funders blog about their deals. Don’t wait until you start pitching to learn what a term sheet is or what valuation to expect.
  6. Do you know your target customer intimately? – Don’t just talk about customers as if they are an abstract concept. Be able to personally name 10 customers (who you have talked to) and be able to describe them in intimate detail.
  7. Do you have a detailed and paranoid view of the competition? – Why start a business before thoroughly understanding the competitive landscape? And yet most competitive analyses fall far short. Many ignore obvious direct competitors and few deal with substitutes effectively. Be more paranoid!
  8. Are you ready to work for someone else? – When you have shareholders you’ll no longer be working for yourself but for them. It’s a major mindset change from being a sole owner to being a manager who can be fired…
  9. Do you have a better alternative? – Successful bootstrappers know that you can do without most of the things you believe you can’t do without. Make sure you weigh the time and probability of raising money with your next best alternative, which might actually be pretty good.
  10. Are you ready to give up a modest payout to yourself to go for a bigger, riskier payout for your investors? A lot of people don’t understand that a “lifestyle business” that generates $1 million in profit per year is not interesting to many investors. But it’s very interesting to most entrepreneurs. Understand why investors and entrepreneurs have different motivations before you take on any investors.

Answering these questions will help you diagnose whether you’re ready to raise funding or if you should be looking for investors in the first place.


Angel Co-Investment Summit Roundup

Last week’s Angel Co-Investment Summit, put together by the NACO, was one of the best investment forums in recent memory. Over 150 active Angel investors (yes, you read that number correctly) heard pitches from 25 companies who had already raised Angel funding.

Here is the list:

Here is a more detailed breakdown of companies and fundraising:

  • 48% were science or medical technology companies, 32% were Web and 12% were telecom based
  • 72% were from Ontario, 16% from BC and the other 3 from Saskatchewan, New Brunswick and Newfoundland. Nothing from Quebec perhaps reflecting what little presence NACO has in Quebec.
  • The median amount companies had already raised was $1.15 million
  • The median burn rate was just below $40k/month
  • The median amount sought was $1 million
  • The median pre-money valuation was $5 million

Overall I was impressed by the quality of the companies, particularly the science and med tech companies who seemed to have great CEOs, unique IP, customer traction and relatively little capital burned. The Web companies in general did not hold up.

If this is what “early stage” investing looks like these days, those entrepreneurs raising seed capital are going to have to work twice as hard to get investors’ attention. In any case, I hope events like this  encourage more deal syndication which would mean more capital available for companies.


Bulletproof Your Ideas: Part 2 – Be a Skeptic

I previously talked about how to vet ideas by putting them through a quick screening process. Another good technique is to take your idea and argue the opposite. Philosophers have done this for centuries so I didn’t just make this up. In a nutshell: assume your idea sucks and try to convince yourself it doesn’t.

The technique is simple: take each of your claims (e.g. “people will buy our product”) and argue the opposite (e.g. “people will absolutely NOT buy our product”). You’ll be forced to spend time thinking about your idea’s flaws, which no entrepreneur enjoys doing. If you aren’t skeptical by nature, find someone who is. They’re usually easy to spot because they annoy you.

Here are some examples:

“We are first to market”

The Believer: Even if I see a competitor I’ll convince myself that they aren’t in my space. I somehow found a huge untapped market that everyone else in the world overlooked.

The Skeptic: I know there are competitors (including people who aren’t competitors now but will be later) and I want to be aware of them. My customer’s desire not to switch to my product is a form of competition. I doubt that being first to market is the right strategy anyways.

“Our market is huge and growing”

The Believer: I can quote a Forrester report about the market being $X billion. I still talk about how worldwide Internet use is growing, fast.

The Skeptic: It doesn’t matter how huge the market is, I can’t afford to reach everyone in it. Big markets attract big scary competitors and crowded markets drive down prices and margins. This early in the game I probably have no clue how to size my market anyways.

“We have a real competitive advantage”

The Believer: Everything about my startup, from the cool name to the indentation of my CSS is a competitive advantage. My competitors have great stuff but it’s not integrated

The Skeptic: Our customers don’t care about our differentiators. Most things we consider competitive advantages are easy for others to duplicate (unless they don’t work).

Playing the skeptic is unnatural for all entrepreneurs, that’s why it’s such a useful exercise. Sometimes that idea you’re only pretending to think sucks will actually suck at the end of the exercise.


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:

  • Ian Graham from the CodeFactory, an Ottawa co-working space that I am a member of
  • Mike Ball from LoyaltyMatch, a cool service to trade rewards points
  • Ian Barker from Symtext, an e-content platform for distance educators
  • Adrian Salamunovic from dna11 which uses DNA to create ultra-cool artwork
  • Jason Kealey from LavaBlast, a software platform for mid-sized franchises
  • Andrew Seely from Therapeutic Monitoring Systems
  • Trevor Stewart from Hummingbird Music, a platform for booking live shows
  • Aydin Mirzaee from
  • Nick Quain from CellWand
  • Luc Levesque from TravelPod who created the life-destroyingly addictive TravellerIQ on Facebook

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.


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 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…

Tienen puntas las estrellas?/ Do Stars Have Points?: Preguntas y respuestas sobre las estrellas y los planetas/ Questions and Answers About Stars and Planets

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.