It’s a startup truism: Investors fund people, not ideas. But ideas are much easier to assess than people. So how do venture capitalists decide if an entrepreneur is worth millions in funding?

The easy answer is: They look at the founder's resume.

“The mantra in our business has always been ‘serial entrepreneurs,’” says Bob Ackerman, managing director at Palo Alto-based venture firm Allegis Capital. “These are people who have demonstrated they know how to navigate the minefield that lies in front of every startup. If they get through it successfully once, the bet is they can get through it the next time. In our current fund, two-thirds are serial entrepreneurs. And that shows up in the performance of the fund.”

Going Beyond the Obvious

That’s reasonable. But it’s obvious.

What about finding the next boy genius? The next Larry Ellison or Bill Gates or Marc Andreessen or Mark Zuckerberg? They’re all entrepreneurs who built significant companies (to put it mildly) on their first try. How do VCs and angels identify people like that, who will step up to the plate and hit a grand slam in their first at-bat?

That’s where judgment and experience come in. And that’s why many top VCs are former operating executives themselves. The idea is that experience can help them peer into the soul of first-time entrepreneurs and see if they have what it takes to get through the minefield. Are they coachable? Do they listen? Yes, they need the passion and enthusiasm, but they also need to keep one foot on the ground?

“The history of startup founders making it all the way to exit tells you the deck is pretty much stacked against them,” Ackerman says. “But there are examples of those who do it.”

He recalls a first-time entrepreneur he funded named Scott Weiss, who started a company called IronPort - and sold it to Cisco for $830 million. “When I looked at Scott, there was the confidence and bravado you would expect from an entrepreneur,” Ackerman recalls. “But behind that bravado was a lot of hard work, a lot of solid research and a lot of solid validation. I looked under the hood and found a tremendous amount of substance.”

The first time they sat down, Weiss asked Ackerman who in his network had managed a company that had experienced the sort of growth Weiss was expecting for IronPort. He said up front that IronPort was his first try and that he wanted to connect with veterans who could tell him right away if he started veering off track.

Maturity… and a Map

“To me, that demonstrated a tremendous amount of maturity,” Ackerman says. “Yes, he had that aggressive drive and enthusiasm and confidence, but also the realization that he could step on a mine anytime along the way and lose his whole thing. And he wanted to make sure he didn’t make those mistakes. I loved that.”

There are two ways to navigate a minefield. You can do it by braille. Or you can get a map.

“We look for entrepreneurs who go get the map,” says Ackerman, “who are prepared to do the hard work to develop that map rather than just rush through the minefield, hoping they’ll get through. Venture is all about people. An ‘A’ idea with a ‘C’ team has low probability of success. A ‘B’ idea with an ‘A’ team is a much better bet.”

Lead images courtesy of Netscape, Guillaume Paumier, World Economic Forum and Oracle Corporate Communications.

Most unemployed Americans have only a few options. Most spend their days applying for jobs, not just because they need the opportunity to work and earn a living, but also because job searching is a prerequisite for collecting unemployment compensation.

Get a Job - or Start a Business?

But thanks to Senator Ron Wyden (D - Ore.) and several other U.S. senators, Americans in some states have another option. Self-Employment Assistance (SEA), a provision in the Middle Class Tax Relief and Job Creation Act of 2012, legislation passed by Congress and signed by President Barack Obama in February, allows the states to “empower unemployed workers to start their own businesses.”

Although the U.S. Department of Labor just announced that $35 million in funds were available to “develop, enhance and promote SEA programs in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands,” five states - Delaware, Maine, New Jersey, New York, and Oregon - already have active SEA programs.

To entrepreneurial types this seems like a no-brainer. Scott Gerber - ReadWriteWeb contributor, founder and president of the Young Entrepreneur Council, and a leader in the movement to #Fix Young America (Senator Wyden, in fact, wrote a chapter in Gerber’s #Fix Young America book addressing this topic) - says SEA is “just common sense… and a simple realization of the new reality of the startup economy.”

Big Government - or Small Business?

There are, of course, those who say SEA won’t work, that it’s just another “big government” program. Gerber counters that argument this way: “Government can’t cure all woes. But there are certain things the government can do, like remove barriers." More to the point, he continues, "It’s obvious that long-term unemployment solutions like sending resumes isn’t working.”

Actually there’s more fodder to support SEA, which isn’t exactly a new idea. Wyden first wrote legislation to “empower states to provide unemployment compensation to individuals for the purpose of funding self-employment” back in 1985.

And just a few years later - in the early 1990s - two demonstration projects (allowing people to start businesses with their unemployment benefits) were created in Massachusetts and Washington state. The results? Researchers concluded SEA projects “increased the likelihood of self-employment and the amount of time participants were employed.”

Additional research looked at SEA programs established in the late 1990s in Maine, New Jersey and New York. That study showed SEA participants “were 19 times more likely than non-participants to be self-employed at any point after their period of unemployment, and were four times more likely to have obtained any type of employment.”

There’s more. Oregon has been operating an SEA program since 1995, and a survey shows nearly half of its program’s participants have created an average of 3.12 new jobs. SEA programs, says Senator Wyden, turn unemployment insurance into “job multipliers.”

Who Qualifies?

You can’t just say you’re starting a business to qualify for the SEA program. Those eligible to collect unemployment must have a “viable business plan” and “be working full-time” to launch “a sustainable business.” If you qualify, you will be able to collect your unemployment benefits for a maximum of 26 weeks, even though you are not searching for full-time employment.

To further help startup entrepreneurs, the Department of Labor is calling on the resources of the Small Business Administration, SCORE and the Small Business Development Centers to provide technical assistance and training in the participating states.

To some startups an unemployment check may seem too small and trivial to make a difference. But during startup, every dollar counts. And as Gerber says, “A lot of little somethings will help move the economy forward.”

The White House and the Department of Labor want to encourage other states to adopt SEA as soon as possible. States must apply for the grants by June 30, 2013.

In the grand pantheon of disgraced technology company CEOs, the resume blunder of ousted Yahoo Chief Executive Scott Thompson seems almost trivial. Claiming an unearned degree pales in comparison to the true titans of tech transgressions - whose careers were toppled by everything from massive fraud and grand larceny to inappropriate dalliances with underlings. Each imploded in their own particular way, but all their stories come mixed with heaping helpings of arrogance and a dollop of coverup.

Here’s your chance to meet the real world of Horrible Bosses, and get a glimpse of how they were rewarded - or occasionally punished - for behaving badly:

Scott Thompson, Former Yahoo CEO

Scott Thompson was at Yahoo’s helm only five months before getting the boot for claiming to have a computer science degree from a college that didn’t offer one at the time. While a charitable observer might say he never lied, Thompson also never explained how that erroneous info got on his work bio. Nevertheless, the untruth gave investor activist Dan Loeb just what he needed in his proxy battle to stack the Yahoo board with his supporters. Thompson was given the heave-ho this month and Loeb, who runs the hedge fund Third Point, got the board seats. Thompson didn’t leave empty handed. While he missed out on a severance package, he did walk away with $7 million in bonuses from the struggling Internet portal.

Brian Dunn, Former Best Buy CEO

Brian Dunn stepped down in April as chief executive of electronics retailer Best Buy for what the company later called an “extremely close personal relationship” with a female employee more than 20 years younger. The 51-year-old Dunn did not use company resources in his “friendship,” which included lunch and drinks during the workweek and on weekends. The pair also seemed to stay in touch a lot. During two separate trips abroad for a total of nine days, Dunn contacted his “friend” by mobile phone at least 224 times. In the end, the board found that Dunn’s behavior violated company policy, yet he was still entitled to some big bucks. His separation package totaled $6.6 million.

Mark Hurd, Former Hewlett-Packard CEO

Mark Hurd resigned in August 2010 as chief executive of tech giant Hewlett-Packard following a dalliance with a contract employee who later accused Hurd of sexual harassment. While investigating the allegations, the HP board found that Hurd had doctored expense reports in order to hide his personal relationship with marketing consultant Jodie Fisher, a former soft-core porn actress. Fisher denied the relationship with the married Hurd was sexual. She settled privately with Hurd and both sides agreed not to discuss the affair. Hurd left HP with $12.2 million in severance and enough stock to earn millions more - and was immediately hired by his friend Larry Ellison as co-president, director and board member of Oracle.

David Edmondson, Former RadioShack CEO

David Edmondson resigned in February 2006 as CEO of electronics retailer RadioShack after lying about his education. Edmondson topped Yahoo’s Thompson by claiming to have two college degrees when he had none. The CEO apologized for the “embarrassment” he brought to the company. RadioShack’s hometown newspaper, The Fort Worth Star-Telegram, broke the story, reporting Edmondson never graduated from the unaccredited bible college he attended. The newspaper also found that the CEO was facing a trial on his third arrest on drunk-driving charges. Edmondson left the company with a severance payment of less than $1 million in cash.

Sanjay Kumar, Former Computer Associates CEO

Sanjay Kumar, ex-CEO of IT management software and solutions company Computer Associates, pleaded guilty in 2006 to his role in a $2.2 billion accounting fraud. He also admitted to interfering with a federal investigation by authorizing a payment of $3.7 million to silence a potential witness. Kumar, who was once a part owner of the New York Islanders hockey team, was sentenced to 12 years in prison, which he started serving in 2007. Computer Associates, which later changed its name to CA Technologies, paid more than $225 million to a shareholder restitution fund. Kumar contributed about $20 million from his own assets.

John Rigas, Founder, Former CEO of Adelphia Communications

After leading Adelphia Communications for more than five decades, Chief Executive John Rigas was sentenced in 2005 to 15 years in prison in a multibillion-dollar fraud case that collapsed the company he founded. Rigas and his son Timothy Rigas, who was Adelphia’s chief financial officer, were convicted of 18 felony counts of fraud and conspiracy. The younger Rigas got 20 years in prison. The Rigases were convicted of stealing $100 million from Adelphia, which had been the fifth-largest cable company in the nation. They also were found guilty of conspiring to hide $2.3 billion in company debt.

Bernard Ebbers, Former CEO of WorldCom

Bernard Ebbers was sentenced in 2005 to 25 years in prison for leading the nation’s largest-ever corporate fraud. The former chief executive of telecom carrier WorldCom was convicted of nine felonies in an $11 billion accounting scandal at the company. When WorldCom filed for bankruptcy in 2002, it was the largest in U.S. history and led to shareholders and employees losing billions of dollars. Ebbers forfeited the bulk of his assets to burned WorldCom investors. Those assets included a Mississippi mansion and other holdings worth as much as $45 million. The day before his sentencing, Ebbers called the predicament he was in “bizarre.”

Robert McCormick, Former CEO of Savvis Communications

Robert McCormick resigned in 2005 as chief executive of IT infrastructure management outfit Savvis Communications (now owned by CenturyLink) after it was revealed that he spent $241,000 entertaining business associates at a Manhattan strip club. The company’s board might have looked the other way, if McCormick hadn’t used his corporate charge card to pay for lap dances and then claim to be a victim of fraud when American Express demanded its money. Dubbed the “The Lap Dunce” by The New York Daily News, McCormick never submitted an expense report for the party at Scores. The company claimed it did not pay for McCormick’s night out on the town.

Joe Nacchio, Former CEO of Qwest

One-time Qwest CEO Joe Nacchio was convicted in 2007 of 19 counts of insider trading and was sentenced to nearly six years in prison. Nacchio was convicted of selling $52 million in stock in 2001 after it became known internally that the telecom carrier (also now owned by CenturyLink) was in danger of missing sales forecasts. Nacchio, who resigned in 2002, was ordered to forfeit almost $46 million and pay a $19 million fine. In 2011, Nacchio sued his lawyers from prison, claiming they were negligent. He also accused them of overbilling, pointing to charges that included lawyers' underwear purchases.

Gregory Reyes, Former CEO of Brocade

Gregory Reyes was convicted in 2007 in a stock options backdating scandal at networking solutions vendor Brocade and received a 21-month prison term. The conviction was later overturned and the ex-CEO was retried. Prosecutors won again and he was sentenced in 2010 to 18 months in prison. At his second sentencing hearing, Reyes broke down crying, and his attorney had to read his statement for him. At his second criminal trial, Reyes blamed the company’s outside counsel, which he claimed signed off on the backdating of stock options. The judge at the sentencing hearing didn’t buy the argument, saying that, at some point, people have to take responsibility for what they say and do.

Thompson photo courtesy of Yodel Anecdotal. Raju image via World Economic Forum/Flickr.

"We can gamble in Vegas. We can donate on Kiva or Kickstarter. But it's illegal to purchase $100 of stock in a job-creating business? That makes no sense."

That is the tagline to a new project called WeFunder from three TechStars Boston alum who are trying to garner support for the "Democratizing Access to Capital Act" (S.1791) that would allow entrepreneurs to crowdfund startups. Launched yesterday with the hopes of getting $100,000 from 100 pledges, the guys behind WeFunder have already seen near $3 million in promised funds from more than a 1000 supporters if the Senate passes the bill.

Different From A Kickstarter Project

The notion of crowd funding a startup is fundamentally different than that of endorsing a project on Kickstarter. At Kickstarter, people fund projects and have no ownership over the project once it is completed. It becomes a lot more complicated when the notion of investing in actual companies is taken into account.

Right now, the only entities that can invest in startups are those that are accredited investors such as venture capital firms or venture banks. What the Democratizing Access to Capital Act of 2011 would do would be to amend the Securities Act of 1933 that outlines when and how investments in companies can be made through the Securities and Exchange Commission. This is where a mess of SEC rules and regulations come into play. Many of the regulations that the SEC implements are designed to protect the investor. The Securities Act of 1933 was put in place in 1933, four years after the 1929 market crash that led to the Great Depression and caused many affluent American's to lose their fortunes. It was a necessary act that helped protect people but also spur U.S. businesses. To a certain extent, the Democratizing Access to Capital Act fits in the same realm.

Sponsored by Sen. Scott Brown of Massachusetts, the bill comes three years after the market bust in 2008 that started what we now refer to as "The Great Recession." Many political and business leaders in the U.S. are looking toward the technology sector to lead America back to the heights of economic prosperity. The Wall Street Journal today published an article saying that the next economy will be based on three pillars: big data, smart manufacturing and the wireless revolution. It is clear that the U.S. has the technological prowess to create a dynamic new economy. Yet, with capital markets spread thin, the next big American company working on a technological advance could die for lack of funding before it even gets its feet off the ground.

Tremendous Impact

The impacts of the Democratizing Access to Capital Act could be tremendous. It would open up the flow of cash to startups from real people. The act would allow a single non-accredited investor to put money into a startup they has the power to create jobs.

"Think of it as Kickstarter for equity, where everyday non-accredited individuals can invest up to $1k in a startup they believe in," said Daniel Sullivan, one of the founders of WeFunder and the founder of crowdsourcing startup Crowdly. "I think this is a really important issue that involves how the general tech consumer can help drive the economy."

The other two founders of WeFunder are Nicholas Tommarello of Escapist and developer Nick Plante.

Some may think that startups like WeFunder are looking to disrupt the venture capital industry. That is far from the truth. Venture capitalists and bankers are not going anywhere. Startups still need guidance, mentors, legal support and infrastructure that VCs can offer them. They also have more money and better insider knowledge than the individual non-accredited investor. For example, just look to the $2.7 billion that VC firm Andreesen Horowitz has raised in the last three years. What the Democratizing Access to Capital Act does is lower the bar for the transference of money for startups looking to build a great idea. The ability of money to flow freely across the ecosystem should be of great benefit to all involved.

The founders of Boston-based startup Promoboxx must be breathing that sigh of relief. Promoboxx has landed a deal with Chevy to power its Super Bowl commercials from local dealers. Yes, that Super Bowl. The one where Madonna is playing the halftime show this year. How did a little startup out of TechStars Boston make it to the biggest stage in the world?

Chevy will utilize the PromoBoxx platform to engage its 6,000 dealers with co-branded campaigns designed for each specific dealers. The commercials are being released before the Super Bowl and local dealers are given tools to promote their own specific version of the campaign online through email, Twitter, Facebook and their own websites.

Think about the logistics behind that for a second. That is 6,000 dealers with their own co-branded commercials. Each dealer has thousands of customers. That is a lot of very specific, locally targeted marketing going on. That means that Promoboxx's platform needs to be very robust and scalable to deliver content at rates that size.

"We built it to be a cloud scalable platform that is able to handle practically simultaneous infinite users and large national brands" said Jamie Fiedler, lead engineer at Promoboxx.

To accommodate Chevy, Promoboxx had to create new user interface and unique experience for each of the 6,000 dealers. That is not easy. Promoboxx teamed with Big Fuel, a social media company out of New York, to handle the issue.

"The design and development team was updating the Promoboxx dealer engagement portion of the platform at the same time as they were revamping the entire product," Promoboxx CEO Ben Carcio told ReadWriteWeb. Therefore, all of this new technology being developed will morph into the overall product offering. This made the Promoboxx technology team realize how flexible the product needed to be when working with such large brands, which forced them to build a Modular RESTful API."

Promoboxx focused on creating a flexible backend to handle the needs of each specific dealer. This will be the biggest test for Promoboxx. With 6,000 dealers of varying degrees of technological prowess, the platform needs to be simple enough to be everything to everybody.

"The way the process works can vary per brand, so the importance of a flexible API/backend was super crucial. There wasn't a defined path that every company or dealer would follow, so flexibility was an essential part," said Fiedler.

Super indeed. Super Bowl that is. Promoboxx has likely hit an inflection point in its evolution. The company got its first big break. Now the real work starts.

What is interesting about some of these points is how different the kind of company that Vesa is creating from what his team came from in Redmond. It is almost as if everyone learned how little they liked the BigCo mentality and have purposely tried to make things small.

• Don't be optimistic. Plan that you will struggle initially, and this way you won't end up diluting all (or even much) of your startup capital. "It is always better not to take any outside money and pay everything on your own dime," he told me. Agreed. This means that you have to start off small.

• Set your sights lower."You don't want to conquer the world, just make a small adjustment over time." Vesa talks about having an excellent niche product that is highly profitable rather than shooting for the stars and failing and losing your entire company. That is what he is trying to do with the racing scoring app.

• Know what not to do. Learning from your mistakes is just as important as success. Vesa's failure taught him more about what not to do with his present venture. "Watching a startup destroy itself was a very potent teacher." Speaking of which, note: "There are lots of ways to fail, but only one way to succeed." Sounds like something Yoda might say to young Luke.

• Don't make too many promises that you can't keep. Understand scope creep and keep it under control. Eliminate buttons, reduce functionality, and keep things simple. Resist the temptation to make your product more complex at every turn.

• Don't be greedy, share your equity with your key founding members. Even if it is a small percentage, you want to retail your key developers and engineering talent. Nothing says loving more than some points of equity.

• Venture lightly with lawyering up your company. 'Nuff said.
  

Feel free to share your own Yoda-isms in our comments.

I've found myself thinking a lot about the research being conducted by the Startup Genome Project these days. The data is an absolute goldmine and provides quantitative benchmarks for issues I've thought about for years. One of the findings from their first report was:

"Most successful founders are driven by impact rather than experience or money."

This certainly maps to my experience as a founder and also working with other entrepreneurs. However, in most cases it's a little more complex than that, as I find a number of goals typically intertwine to get people to jump in and start a business.

There are players in the ecosystem driven by other goals, such as job creation. For example, the Kauffman Foundation, an institution I partnered with when I was a research fellow Carnegie Mellon and continue to hold in very high regard, has proposed the Startup Act as a way to encourage entrepreneurs and strengthen the economy.

As part of this, they produced an excellent 3 minute video (embedded below) talking about what entrepreneurs do and specifically highlighting their role in birthing innovations, creating jobs and producing net new wealth.

I certainly wouldn't disagree with any of these outcomes from successful founders or a program that makes the economy more entrepreneur-friendly.

However, getting back to the original question of this post, given the community here at ReadWriteStart, of entrepreneurs and also supporters of entrepreneurs (such as investors), what motivates you? Please leave your answers in the comments below and also explain your role in the ecosystem.

DNA photo by net_efekt

While certainly not every business needs to raise venture financing, it is the path for many high-growth technology startups. Therefore, going down the fundraising path is something many technology entrepreneurs will need to do and is a critical step in the development of their business. This can be an intimidating experience so I've put together a list of five tips for raising a venture round. This is by no means an exhaustive list so I'd love to hear other suggestions from you in the comments of this post.

Tip 1: Make Sure You Are Ready to Scale

First, before you even start the process of raising a lot of money, make sure you have figured out your model and are truly ready to scale. Earlier this week on ReadWriteStart, Steve Blank used research at The Startup Genome Project and explained:

One of the biggest surprises is that success isn't about size of team or funding. It turns out Premature Scaling is the leading cause of hemorrhaging cash in a startup, and death.

If you're early in the investment process, a small angel round or partnering with an accelerator may be the best approach. In fact, research conducted by the Startup Genome Project found that the best practice in the first phase, a.ka. discovery, is to only raise between $10,000 and $50,000.

Tip 2: Have A Real Lead

Next, if you are going to raise a round, find one or two partners to do it with. As Mark Suster pointed out yesterday on his blog, he's seeing more and more cases where "entrepreneurs are working hard to make sure they have as many VC names and famous angels on their cap table for signaling value." He explains five problems with this and I couldn't agree more. Remember, once you screw up your cap table it's really hard to go back. So in your first few funding rounds, try to raise money from as few people as possible and make sure they really will help.

Tip 3: Conduct Diligence on Your Potential Investors

When you get close to finding a lead, don't be afraid to ask to speak to some CEOs who have worked with the firm. They are going to poke and prod your business to figure out if you're someone they want to work with. You should figure out the same thing. Pay special attention to investors who are willing to introduce you to CEOs of their portfolio companies that went through hard times. This is when your potential investor will really show how committed they are to the companies they invest in.

Tip 4: Really Understand Key Terms

Once you get the term sheet make sure you know how to read it. I strongly recommend reading Brad Feld and Jason Mendelson's Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. This will give you tons of information on all the terms you'll encounter when raising a venture round and how they could impact your deal. This includes things like how liquidation preferences impact future rounds and ultimate liquidity, to why VCs ask to expand an option pool before investing as part of their term sheet. Too many entrepreneurs focus exclusive on the valuation number and this book can really help you understand all the implications around the term sheet you receive.

Tip 5: Remember Time Kills Deals

Once you have a term sheet you are happy with, don't over negotiate. You have a business to run and more importantly don't forget one of the first principals of any sales process: "time kills deals". The worst thing that can happen is for you to drag your feet over some meaningless terms (which you'll understand are meaningless thanks to reading Brad and Jason's book above) and end up having your potential investor get cold feet or even have something that's outside your control change. Just get the deal done once you're happy with the material terms and have an investor you trust and want to work with.

Bonus Tip: Run a Great First Board Meeting

When the cash is in the bank, you're not done; in fact you are just starting. Once you've raise your round, you'll almost certainly end up with at least one new board member. It's really key that you run a great first board meeting at this point. If this is your first round, this may be the first formal board meeting you've had, so prepare for it and make sure you know what you want to accomplish. This will set the tone for future board meetings so make sure that board members take your meetings seriously. There are a number of great posts on this topic and I may try to summarize these in a future post, but one of my favorites for now is from Guy Kawasaki on "The Art of the Board Meeting."

As I said at the beginning of this post, this isn't an exhaustive list. I'd love suggestions in the comments below for other tips when raising a venture round.

Thanks to Mark Coggins for creative commons use of the photo.

If you haven't read my colleague Scott Fulton's post on "The Steve Jobs Formula and Why It Works" go read it right now! It's a very insightful piece written by an expert who literally watched Apple grow up, and there are plenty of lessons for all entrepreneurs in the Steve Jobs formula he spells out. However, to be "fair and balanced" here at ReadWriteWeb I think it's also important to point out some things that as an entrepreneur you'd be well served to disregard. What follows are four factors of the Apple formula to ignore. I'd love to hear what you agree and disagree with in the comments below as well as other factors that should have been included.

Don't Be Secretive...Go Anti-Stealth

Steve Jobs is notorious for how secretive he is. Every product is built in isolation, and while the details of Apple's product development process are not that open either from what I've heard, often engineers don't even have a full picture of the product they are building.

A few months ago, returning from SxSW, I wrote about my concerns about the increasing percentage of business I heard that were building "stealth." As I pointed out in the post, there are three big advantages to building your business in anti-stealth:

• Leveraging product feedback earlier in development
• Building a reputation and community in your target market
• Building relationships with potential investors pre-fundraising

Don't Expect a Perfect Version 1.0 ... Release Early & Often

Related to this first point, there was an expectation when Jobs stood in front of a crowd to unveil a new product that it was going to be truly amazing, groundbreaking, revolutionary and life changing. As an Apple fan, I must admit I do truly find myself feeling that way about my iPhone, iPad and MacBook Pro. However, as Reid Hoffman is famous for saying, the better advice for most entrepreneurs is to be embarrassed by their first product.

Basically, I think this one comes down to the fact that very few teams are as strong as the team that Apple assembles, in terms of understanding what a group of people want and building that with limited feedback. In other words, you are no Steve Jobs or Jonathan Ive and so it's extremely unlikely you'll predict as accurately as they what needs to be built. Instead, think about testing your idea before you write your first line of code.

Don't Start Building in Isolation...Look to Swarm Existing Communities

Apple basically starts with the assumption that it can build a community from scratch instead of swarming an existing one. This works for them in most situations - although I think there are even examples where this hasn't worked for Apple (Ping).

As an entrepreneur, this is foolish. I had the pleasure to meet Chad Hurley for coffee a few months before he sold YouTube to Google because we had a close mutual friend. One really interesting thing he talked about, which I've found myself reflecting on often over the years, is that both PayPal and YouTube were businesses built to swarm existing platforms with unmet needs (payment on eBay for PayPal and videos on MySpace for YouTube).

Now obviously over time as both - but especially the YouTube/MySpace example - show, you may becoming larger then the platform you start with, but it's very helpful to find an existing large community with a need for what you're offering to get started.

Don't Be Closed...Create an API Day 1

Apple products are also notoriously closed. In fact, they are so notoriously closed that Alex Payne wrote:

"The thing that bothers me most about the iPad is this: if I had an iPad rather than a real computer as a kid, I'd never be a programmer today. I'd never have had the ability to run whatever stupid, potentially harmful, hugely educational programs I could download or write. "

This also doesn't work for a startup. As venture capitalist Fred Wilson said at Future of Web Apps last year:

"I think it's important to make your application programmable, and make it possible that others can build on top of or connect to or add value to, in some way, your Web application. That means API's, and in my opinion read/write API's...Not all of our companies, by the way, have launch read/write API's, and we're constantly hounding them to do that, but the important thing about programmability is that when people can add value to your application, they are in effect adding energy to your application, bringing more users to your application, and also bringing more data and more richness to your applications."

So as I said at the beginning, I'd love to hear other factors you think entrepreneurs should avoid from the Steve Jobs formula, or things I've included you disagree with, in the comments below.

1. Know your site demographics. Sawyier checks Google Analytics and other website tools daily and understands how his search rankings and traffic patterns change and what he has to do to keep the page views coming.
2. Know your business plan is wrong and keep tweaking it in real time. Anyone who tells you that they have things figured out right off the bat is just plain lying. Don't be afraid to make your biz plan a living, breathing entity.
3. Don't be afraid to leave town to get more money. St. Louis is not the hotbed of VC activity and especially not for Internet firms. Sawyier went to New York City to get investment capital and is most likely to go there for additional rounds.
4. Understand your distribution channel, or how you reach your customers. Sawyier early on hired college students on different campuses to promote his service and get landlords and property owners involved in listing their properties. Having feet on the street was a good complement to gaining market share and attention, especially for an Internet business. Don't just rely on Facebook friends and other virtual methods in building your channel.
5. Take risks, innovate constantly and learn from your mistakes. You aren't selling soap or machine tools. If you have an online business, you need to be continually trying out new ideas and seeing how they fail and figure out what the next tweak will be. Think of this as akin to agile management and don't be afraid to take small risks to learn how to improve your offerings.
6. Organic search is more art than science. But you need to understand how the daily tweaks that Google makes to its algorithm will influence your rankings and what you have to do to adjust your page content accordingly. If you don't know how to use these tools, watch some videos and learn, and more importantly, figure out what metrics and stats you need to know to be effective. As Mark has told me before, "at the end of the day, the most important thing is having a website that provides the right answers and information to the searchers."
7. It is all about your content. Moving Off Campus, his major venture, has tons of content - some 80,000 individual pages, let alone hundreds of thousands of apartment listings. But the content is relevant to one particular audience and one only: college students who want to move out of the dorm, and listings for just their immediate geographic area surrounding the campus. And because the firm is so laser-focused on this content and his audience, he can charge a higher premium for his search traffic than general real-estate want-ad listings. ]]> http://readwrite.com/2011/08/17/what-skills-every-new-internet http://readwrite.com/2011/08/17/what-skills-every-new-internet Gritty Entrepreneurs Wed, 17 Aug 2011 05:30:00 -0700 David Strom John Borthwick is doing a fireside chat with me next week at our 2WAY Summit. If you aren't familiar with John, he is the CEO of Betaworks, one of the most fascinating companies focused on building internet-focused startups today.

   You may not be familiar with Betaworks but you certainly are familiar with some of their companies: Tweetdeck and Summize (both acquired by Twitter), as well as other startups still independent (at least for now) like Bitly, Social Flow, Chartbeat and news.me.

   The focus of our conversation will be on the lessons John has learned about designing products and businesses for the emerging Web. As a general framework to explore these lessons I'm planning on talking to John about the past, present and future of Betaworks.

   As fellow entrepreneurs, I'd love suggestions from the ReadWriteStart community on topics you'd like to see discussed. To get the creative juices flowing you can check Richard MacManus's two part interview with John our our site last year.

   Also, if you haven't registered yet - get your tickets now with the discount code "BETA" to get $200 off and enjoy two days of amazing conversations about The Future of the Internet.

   ]]> http://readwrite.com/2011/06/10/help-me-interview-john-borthwi http://readwrite.com/2011/06/10/help-me-interview-john-borthwi Gritty Entrepreneurs Fri, 10 Jun 2011 08:00:00 -0700 Sean Ammirati In my last post on ReadWriteStart, I talked about how, in many cases, it wasn't an advantage to build your start-up in stealth mode. As a continuation of that theme, I thought it would be interesting to explore five tools you can use to iterate and improve your startup idea before writing one line of code. There is nothing worse than building a tool no one is interested in, so I'd encourage you to consider these options before starting down the path of building your next startup.

   Specifically, these five tools can help you do three critical activities before starting to write a line of code: create a wireframe, get feedback from the target market and test value proposition through multiple landing pages.

   iMockups for Wireframing Concepts

   If a picture is worth 1,000 words, then a good mockup is worth 1,000 lines of code. If you own an iPad, iMockups is a killer solution to quickly and efficiently create wireframes. It's been interesting to watch a number of the startups I advise shift from trying to use PowerPoint or Keynote to flesh out concepts, to using iMockups. The feedback from those startups has consistently been that the iMockups tool makes it so much faster to put wireframes together that the time savings was well worth the $10. Check out the video below to see iMockups in action:

   Feedback on Concept from Target Market

   Once you've got a concept put together, it's often valuable to get some early feedback from your target market. Obviously, in many cases this can be done by setting up meetings with your target customers and walking them through the idea.

   

   Another simple and relatively low cost way to get feedback from a critical mass of potential users is to use Ask Your Target Market. While there are a lot of online survey tools, the nice thing about this tool is it has developed a great network of respondents (or "panel" in market research parlance) who you can target for response. This allows you to get statistically meaningful feedback from a specific target audience.

   Build & Test Landing Pages

   A final obvious technique to testing and improving your idea is to build some landing pages to test out different value propositions.

   LaunchRock: We've covered them a few times before, but with tools like LaunchRock that have automated the process of developing these landing pages this is a great way to test interest and get signups.

   If you aren't familiar with LaunchRock, see the video the team did for a demo with Robert Scoble:

   A/B Testing Different Value Propositions: To take this approach to the next level, you can even use a solution like Optimizely, Google Website Optimizer or Sumo Optimizer. For a thorough review of these options check out this analysis on our SMB channel ReadWriteBiz of the tools. The general technique of optimizing your landing page is a practice most startups should do. But before you build out your solution you can actually see which value propositions and features are more compelling by testing which call to action - for example "find new sources of information" vs "filter the information you already read" - gets a higher percentage of requests from users.

   Conclusion

   As an entrepreneur, you have to figure out the right plan to test and build your product. However, locking yourself in a room and designing and then building your product is rarely optimal. Before opening your IDE of choice, maybe the best step next time is to launch one of the tools mentioned above and started getting some feedback? Do you have other techniques to test out your ideas? Let me know in the comments below.

   Test tube image from Horia Varlan

   ]]> http://readwrite.com/2011/04/05/5-tools-to-improve-your-idea-before-you-write-a-line-of-code http://readwrite.com/2011/04/05/5-tools-to-improve-your-idea-before-you-write-a-line-of-code Gritty Entrepreneurs Tue, 05 Apr 2011 06:00:00 -0700 Sean Ammirati Personalized news recommendations on the go - that's the dream of many an online news nerd and the startups that would serve them. One strong entrant into this field is My6Sense, a well-designed, venture-backed, Israeli company that uses implicit behavioral data from users to recommend the most relevant content in your personal river of news.

   It's a good service, and one you're likely to hear a lot more about soon. The company will announce this week that it has hired Louis Gray, a self-made Silicon Valley internet celebrity and startup consultant, as its VP of Marketing and first US employee.

   The Good Stuff Machine

   Using My6Sense is easy. We first reviewed it last Summer, but here's how it works. Sync your Google Reader, Twitter, Facebook or other account, or add default recommended streams. Click through and read, share or delete the stories you do or don't like. It's a well designed feed reader. Then, the service will learn what you like and offer two views: most recent and most relevant news for you.

   There are many apps that offer personalized mobile news reading experiences. Many people believe that mobile recommendation technologies are to the future what web search was to the previous iteration of the web.

   My6Sense is the one most closely aligned with your existing streams of content. I have a very large list of subscriptions in Google Reader and the latest version of the app was able to pull those feeds down and let me read them very quickly. After one session of using the app, it started offering me a recommended stream. The user experience is suitable for both beginning and advanced news feed readers.

   Will novice web users, everyday people, care about a service like this? That will be the challenge faced by the company's new Marketing VP.

   Hiring Louis Gray

   My6Sense will announce this week that it has hired tech blogger Louis Gray as its first US employee. Gray is on the short list of the web's best examples of bootstrapping-by-blog. He's got an inspiring and accessible story.

   Gray was the Online Editor for the UC Berkley student newspaper at the end of the 1990's. Shortly after graduating, he took a job marketing a firm that describes itself as providing "unified network storage systems to enterprise markets." After eight years of what sounds to me like a terribly boring position, Gray used his personal blog LouisGray.com to launch a new career.

   In 2008, he started breaking news - often about tiny, experimental, new feed-reading services. He would find them in his traffic logs as referring URLs, reach out to the founders of the still-unlaunched startups and then write long, in-depth explanations of their features and strategies. It was a time when new startups were thought of as exciting and blog audiences cared about more than just Facebook, Twitter and Google.

   TechCrunch and Robert Scoble began to link to his posts. He was beating them to stories, and writing well. He developed a following of like-minded feed-wonks on sites like FriendFeed and later, Google Buzz. He kept finding apps before anyone else, and writing about them in great detail.

   Some of us wondered which leading tech news blog would hire Gray first, but we assumed that with eight years of experience as a marketer in enterprise software - he was out of the pay range of most upstart online news outfits.

   Some times Gray takes on an air of undue self-importance, and sometimes he's too verbose. But he's a blogger, a person who built a career of his own choosing through hard work and the democratic power of free, easy, self-publishing technology. Such Old West style figures are never perfect, and they shouldn't be.
   It was also unclear, and it still is, whether Gray can reach audiences outside of tens of thousands of news-feed magicians and other people who enjoy discussing things like the role of online user attention data standards in tackling information overload. (Saying there are tens of thousands of those people in the world may be generous, too.)

   Some times Gray takes on an air of undue self-importance, and sometimes he's too verbose. But he's a blogger, a person who built a career of his own choosing through hard work and the democratic power of free, easy, self-publishing technology. Such Old West style figures are never perfect, and they shouldn't be.

   In the Spring of 2009, Gray left his marketing job and co-founded a startup-advising consulting company. It made sense, these were the types of startups that got their first breaks being covered on his blog, and he offered good advice. Now, 18 months later, Gray says that company, Paladin Advisors, is still growing and hiring - but he's decided to join My6Sense, one of the group's clients, as an employee.

   "It's good to feel like I can have an impact on the things that are most interesting to me," Gray told me today by phone.

   "Often, bloggers feel like they have to sit on the sideline and comment. It can be easy to be an armchair quarterback, but it's quite another to get your hands dirty. Social networking is important - it's important that everyone has a voice and that you can share your voice in whatever medium is most appropriate for you. It's important to me to be an active participant in this market."

   Louis Gray is a man with a family, who left a good job of many years to live the startup life. It's something he's able to do because he combined free online software with elbow grease. Now he's going to become the only US employee of a small startup that ingests feed reader subscription lists and implicit mobile news-reading behavioral data to power personalized content recommendations. That's really bleeding-edge stuff. He's doing it, he says, to get some skin in the game in an industry that's offering anyone in the world a voice, just like it did him.

   That's pretty awesome.

   Photo: Gray in 2008, with his twins wearing Google and FriendFeed outfits. Photo by Robert Scoble.

   ]]> http://readwrite.com/2010/08/23/blogging-to-get-a-job-recommendations http://readwrite.com/2010/08/23/blogging-to-get-a-job-recommendations Gritty Entrepreneurs Mon, 23 Aug 2010 12:33:05 -0700 Marshall Kirkpatrick So you have a couple of people, a decent idea and that's about it - what next? If you're in the San Francisco Bay Area, then the answer might be Kicklabs, a new startup incubator launching today for very early-stage technology and online media startups. That answer, then again, might simply be investment by a venture capitalist, but the pros and cons of incubation should be evaluated first.

   Kicklabs is a 23,000-square-foot space in the heart of San Francisco that hopes to help launch up to 20 startups in 2010, and already there are a number of companies on the roster. Focused primarily on early-stage companies consisting of two to eight members, Kicklabs will offer not only office space on a six to 12 month lease, but advisers (such as Blippy co-founder Phil Kaplan), investors and other entrepreneurs.

   Why Incubate?

   As Paul Graham, one of the partners in venture firm Y Combinator discusses in his article "How To Fund a Startup", there are ups and downs to getting incubator investment instead of venture funding that should be taken into consideration.

   First, getting involved in an incubator can come at a higher cost, but offer value beyond that cost. As with Kicklabs, there are a number of other companies going through the same trials at the same time and there are a number of advisers who have been there before to guide you along the way. In return for the environment, office space, advice and investment, you give the incubator, Kicklabs in this case, a share of your company in either equity or stocks.

   As Jordan Krechtmer, CEO of Livefyre, said in the Kicklabs press release, "Being around other startups who we can grow with is really important. The moment we walked into KickLabs we could feel the energy of the space."

   On the other hand, operating under the same roof as your investors can come at a cost - your freedom. Graham argues that he thinks "it's better if startups operate out of their own premises, however crappy, than the offices of their investors." So, while the incubator may foster a creative environment, it may also foster a spirit of control. Perhaps it isn't the worst type of control, though, to have the advice of entrepreneurs who have helped grow companies like Google, Yahoo, Facebook, Digg, Monster and more.

   In the end, whether or not to get your startup going with the help of an incubator is a personal question, but for our money, having the opportunity to grow a startup in the heart of Silicon Valley with the Kicklabs advisory team is one we couldn't see passing up.

   ]]> http://readwrite.com/2010/06/09/to-incubate-or-not-to-incubate-kicklabs-incubator-launches-in-san-francisco http://readwrite.com/2010/06/09/to-incubate-or-not-to-incubate-kicklabs-incubator-launches-in-san-francisco Gritty Entrepreneurs Wed, 09 Jun 2010 07:30:00 -0700 Mike Melanson Forget MTV's reality show "The Real World" - if you're considering getting into the startup game but want to get a glimpse of what's in store, then The Founders 2010 is for you. The weekly video series is in its second incarnation and follows three startup companies - content crowdsourcing service Grogger, mobile augmented reality platform creator Omniar and property management software RentMonitor - in their adventures through Techstars.

   Techstars is a 90-day program that provides seed capital and mentorship for Internet startups. The program offers up to $18,000 in seed funding as well as "the chance to pitch to angel investors and venture capitalists at the end of the program", according to the website. From what we've seen, the program has quite the success rate, with nearly 70% of companies coming out of Techstars raising outside funding or becoming profitable on their own.

   The series follows "the experiences of three companies throughout the summer in Boulder, Colorado from the time they arrive through investor day and beyond" and looks at what it means to be a startup going through Techstars.

   In the first episode, David Cohen, the managing director for Techstars, explains that "when people think about the startup and why do you do it, they always think about the exit and getting out and making a bunch of money, but it's really all about the ride. It's a huge adrenaline rush."

   From showing how startup partners can quickly become family members as the business operates from the basement, to the difficulties and sleepless nights, "The Founders 2010" gives a sneak peek into the world of Internet entrepreneurship.

   While "The Founders 2010" follows startups in Techstars Boulder, the program is also available in Boston and recently expanded to Seattle. The entire 2009 season of "The Founders" is also available on the Techstars website.

   "The Question is Why" The Founders | TechStars Boulder | Episode 1 from TechStars on Vimeo.

   ]]> http://readwrite.com/2010/05/25/move-over-real-world-the-found http://readwrite.com/2010/05/25/move-over-real-world-the-found Gritty Entrepreneurs Tue, 25 May 2010 09:00:38 -0700 Mike Melanson With only one day until the Le Web Conference, ReadWriteWeb invited editor of ReadWriteFrance Fabrice Epelboin to share his thoughts on this year's theme - the real-time web. While many choose to focus on the negative aspects of real-time technologies including information overload, Epelboin offers a positive view of how the real-time web offers French netizens an effective tool for political commentary.

   In a Facebook post marking the 20th anniversary of the fall of the Berlin Wall, French President Nicolas Sarkozy claimed that he'd taken part in the event at Checkpoint Charlie on November 9, 1989. Nevertheless, according to Epelboin, after some fact checking, journalists discovered that the date of the event was unlikely to be true.

   In protest to what appears to be Sarkozy's effort to rewrite history, bloggers across the country got creative. Nicknamed, "Sarko on the Moon", real-time netizens tweeted their best rendition of the President Photoshopped into historic scenes.

   

   While a fun exercise in citizen-driven political satire, the campaign renewed criticism of Sarkozy. Many netizens have openly railed against the President for his aggressive enforcement methods. Most noticeably, Sarkozy enacted the internet policing agency HADOPI, an organization authorized to monitor innocent citizens for illegal downloading.

   For more on the real-time web, check out ReadWriteWeb's latest report

   ]]> http://readwrite.com/2009/12/08/readwritefrance-and-the-power http://readwrite.com/2009/12/08/readwritefrance-and-the-power Gritty Entrepreneurs Tue, 08 Dec 2009 06:30:00 -0800 Dana Oshiro After successfully selling MyBlogLog to Yahoo, it was surprising to see Lookery founder Scott Rafer write a blog post announcing his company's "orderly shutdown". In heartbreaking detail he took full responsibility for the company's demise saying, "In chronological order, the sins Lookery committed under my leadership were continuing our dependency on a large partner, not knowing when to cut bait on a failing asset, and building ahead of the market." While Rafer is still advising half a dozen startups and API management company Mashery continues to thrive, the loss of Lookery has taught the entrepreneur some hard lessons.

   "It's important for a company to exist at all," said Rafer, "But once you've gained some traction you should work to reduce your dependencies." With Lookery, Rafer's company was completely dependent on working within the Facebook ecosystem. Said Rafer, "I've ranted for years about how bad an idea it is for startups to be mobile-carrier dependent. In retrospect, there is no difference between Verizon Wireless and Facebook in this context."

   After realizing that Facebook would not release anonymized data in a timely fashion, the CEO changed the scope of development. The team first began cloning the Facebook targeting system and then sold the network to build out Lookery's universal cookie mechanism. Rafer admits that this second project was created well before the market demanded it. Since announcing plans to close down Lookery, the entrepreneur offers sage advice to others.

   Lessons Learned: Advice to Others

   1. Ramen Profitable: Rafer maintains his belief in the "ramen profitable" model of business. He says, "If you can, bootstrap for as long as possible. You need to build something solid and meet those needs first. Then try to postpone fundraising until you've got scaling issues, not survival issues."

   2. Understand Expectations: As a precaution for those who do take on funding, Scott Rafer explains, "You need to know what you owe your investors. If you've already built on one platform, do you owe it to them to build elsewhere? Know their expectations before you take their money."

   3. Gain Control: Rafer believes that one way companies with largely Facebook-based audiences can mitigate risk, is to utilize Facebook Connect. This way they can gain access to at least a portion of users in the event of a devastating platform change or alteration to the terms of service. Says Rafer, " Basically you need to exist first and then think about how you're going to get out from under the thumb of a single entity."

   Photo Credit: David Sifry and Boris Veldhuijzen van Zanten

   ]]> http://readwrite.com/2009/11/07/lookerys-scott-rafer-advice-in http://readwrite.com/2009/11/07/lookerys-scott-rafer-advice-in Gritty Entrepreneurs Sat, 07 Nov 2009 03:10:00 -0800 Dana Oshiro This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

   You did it all: you built a valuable venture and sold it. The contract was signed... finally! The wire transfer came through. You are wealthy. Congratulations! So, what's next?

   Why even think about that ahead of time? Two reasons. First, if you think about it clearly now, you will be better positioned to know what you want when you negotiate your exit. Secondly, many people go a bit "off the rails" when they finally get to relax after years of hard venture-building. This post assumes you had a big payday; if the exit was just enough for you to pay off some debts, you'll probably be back at work on Monday -- not much else to consider.

   5 Tips for the Recently Cashed-In

   1. Take at least three months fully and completely off. Really switch off all electronic devices. Reconnect with friends and family. Do whatever you love doing. Recover some of the health and fitness that your years of stress and overwork undid. Only after this sabbatical will you be able to think clearly about anything.
   2. Don't make any high-risk investments for at least a year. You may become an angel, and that's a great thing to be: it can be fun, you can give back to the entrepreneurial community, and you may even make some money. But recently cashed-in entrepreneurs have a habit of jumping into bad deals quickly. Keep track of the deals you want, but don't hit the "Send cash" button until you are clearer about how you want to operate as an investor. Tell all the great entrepreneurs whom you want to maintain relationships with what your game plan is, so that expectations are clear.
   3. Avoid the "Coulda, woulda, shoulda" return act. You probably had to make trade-offs in your venture because of capital constraints and/or investor pressure. Now with money and fame, you could jump back in (if the non-compete terms from your last venture permit) and show them all how it really should have been done. These often turn out to be disasters, because the motivation is unclear.
   4. Take time to evaluate the bees in your honeypot. You are suddenly on the wealth management industry's map. A lot of folks want to help you manage that loot. Many of them are real professionals, and you will need some help. But there are also scammers and people who simply don't add any real value. Take your time.
   5. Re-connect with a long-lost passion. This may take you completely away from business. Or it may point you to your next venture.

   (Photo credit: danesparza.)

   ]]> http://readwrite.com/2009/09/02/congratulations-whats-next http://readwrite.com/2009/09/02/congratulations-whats-next Gritty Entrepreneurs Wed, 02 Sep 2009 10:00:38 -0700 Bernard Lunn This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

   There are two schools of thought about founders as CEOs. One school says that founders rarely make good CEOs: the skill sets are simply different. The founders may make more money in the end, but they need to hire professional CEOs. The poster children for this school are Sergey Brin and Larry Page as Google's founders, with Eric Schmidt as CEO. The other school says that no one has as much passion, drive, and deep market and technological understanding as the founder, and so they are best off remaining as CEO. The poster children for this school are Bill Gates and Larry Ellison. As a founder, which school of thought do you belong to? If you have a point of view, how do you make sure your point of view prevails? Above all, make sure you at least have a point of view.

   Three Classic Scenarios

   1. Two equal founders + one new CEO
      This is what happened at both Yahoo and Google. (Yes, the Google story is different in most other ways, and no need to rehash Yahoo's later mistakes.) This seemed to work for them. The two founders made good money and avoided a lot of work they did not understand or enjoy. It also avoids the issue of which founder should become the boss.
   2. Triumphant return
      This has one blazing success story: the return of Steve Jobs to Apple. But other ones did not work out so well: Jerry Yang at Yahoo comes to mind.
   3. One partner who emerges as CEO
      Bill Gates emerged as the leader of Microsoft, not Paul Allen.

   Which Scenario Do You Want to Play Out?

   Some founders have no doubt. They fall clearly into one camp or another. They say either...

   "No way in hell is anyone else running my business. Back off. Outta my way!"

   Or...

   "Who wants to do all that boring stuff anyway. Let me do the creative stuff. and let someone else make money for me."

   If you don't have such clarity, you will need people whom you trust and who know you well to give you an honest assessment. And you will need to do some soul-searching.

   Your decision will depend on many factors, mostly personal ones. You could hire for any skill-set you are missing. You might want to re-read the early chapter "Are You Really an Entrepreneur."

   It's Different When the Game Changes

   Markets can change. Let's say you are a techie, and your venture was set up as a consumer website but then morphed into a B2B venture, for which sales skills are paramount. Or vice versa.

   In such circumstances, you may be smart to say, "I need someone else at the helm."

   Don't Let Investors Make This Decision

   This is your decision. Some investors have a very firm view on this. Some fall into one school of thought or the other. However, some are agnostic, letting circumstances guide their view. Knowing their view before you sign the term sheet would be good, to make sure you both see the world in the same way.

   If the VC has a strong view that founders never make good CEOs, and the founder thinks, "No way is anyone else running my business," then get ready for one big bruising fight!

   ]]> http://readwrite.com/2009/08/25/when-and-how-founders-should-hire-professional-ceo http://readwrite.com/2009/08/25/when-and-how-founders-should-hire-professional-ceo Gritty Entrepreneurs Tue, 25 Aug 2009 22:30:30 -0700 Bernard Lunn This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

   If you have raised money from investors, you will need to sell the company at some point for them to get a financial return. It's simple: if you don't want to sell your company, then don't raise external equity capital; if you want to maintain control indefinitely, then opt to incur debt instead (and meet your debt covenants). You may find an unusual breed of equity investor who is looking for long-term dividends. But the normal deal with venture investors is to sell the company within approximately five years so that they can get a capital gain.

   Four Tips to Get a Sky-High Valuation

   Ever hear about those deals that have sky-high valuations at exit? How do they do that? Here are the four things you need to do:

   1. Create competition for a critical scarce asset. The best exits come when two Goliaths fight in a market and you have that one critical strategic thing (customers, users, technology, whatever) that makes the difference. Two Goliaths are sufficient as long as they really hate each other and the market is big and the winner is undecided. Having a scarce asset means that you have already beaten the other early-stage ventures: you are the declared winner of the new kids in town.
   2. Make sure time is on your side. If you are burning cash and your current investors are less than supportive, even the hottest negotiator will fail to get a great exit deal. You need positive cash flow from operations. That will put time on your side. If the markets crash or your sector falls out of fashion or the offers you get are not good enough, you can just hold on until the right deal comes along.
   3. Enable potential buyers to get to know you over time. Deals don't get made overnight. The final haggling happens quickly but usually after a long courtship. And during most of the courtship, neither party explicitly talks about acquisition (yes, it is like dating). Instead you do some business together, discuss synergy and partnerships, etc. This gives the buyer's negotiator the support for the deal they need to justify a big valuation. A lot of the managers there should be saying "We need these guys."
   4. Exit early in your hockey-stick-like growth. If you are saying, "We'll grow fast when X happens," you're leaving room for skepticism. If X is expected to come from the buyer, then your negotiating position is weak. Your metric for growth could be used as a proxy for revenue if you're in the late stage of a bull market (i.e. a bubble). But in a normal market, real revenue and even profit growth determine valuation. The good thing about selling in a down market is that expectations are lower. When flat is the new 30% growth, you will get a big premium if your growth is 50%. Why not exit later? Three reasons:
      • Markets can change and growth can slow,
      • Investors want their return sooner than later,
      • Buyers of early-stage ventures buy more on future expectations than past results.

   What If Those Four Pieces Are Missing

   If you have all those pieces in place, you will have built the perfect venture, and any competent investment banker will be able to get you a great deal.

   What if only some of these pieces are in place? The result depends on how many pieces are missing. Most exits can be put into one of the following categories:

   1. Liquidation, which is opposite to the sky-high deal (described above) on the spectrum. Your goal here is simply to pay off creditors. Investors and the management team lose everything.
   2. Investors get their money back (through Liquidation Preference), and the founders (management team) get nothing. The consolation for the founders is that their reputations remain intact.
   3. A reasonable return for all, which happens when you have perhaps only two out of the four pieces in place.
   4. Sky high, when all four pieces are in place.

   The One Piece You MUST Have in Place

   You must have either positive cash flow or so much cash in the bank that even the most skeptical analyst believes your runway is long enough for you to lift off.

   If you have neither, you had better be a superb poker player and lucky. Yes, both!

   Three Things to Prepare Early

   1. Eliminate any due diligence show-stoppers. You don't want something that you could have easily fixed early on killing the deal at the 11th hour. That something could be a litigation-related issue, the poor reputation of a team member, a corporate structure that doesn't sit well with the buyers, anything. A good investment banker or deal specialist can help with this.
   2. Get to know some investment bankers. Get to know the ones in your market early on; you can decide on one when you are closer to exiting. Investment bankers do the same thing themselves; expect a lengthy but low-maintenance courtship. You can get some free advice and good lunches, and you will be able to make a better call on whom to choose when the time comes.
   3. Do some real work with potential acquirers. See point #3 in the first section above: allow potential buyers to get to know you over time.

   Timing

   Venture investors usually like a return within five years because this is how they plan their funds, but the range is usually more like two to seven years, and some go way beyond that. Essentially, holding on longer is much better if you can reasonably expect your venture and/or the market to improve.

   Don't set an exit date. Your venture's momentum will determine the timing.

   ]]> http://readwrite.com/2009/08/13/planning-your-exit http://readwrite.com/2009/08/13/planning-your-exit Gritty Entrepreneurs Thu, 13 Aug 2009 07:00:57 -0700 Bernard Lunn