Category Archives: Entrepreneurship

A Different Approach to Fund Raising

Guy Kawasaki -entrepreneur, venture capitalist and blogger- writes a funny article about how entrepreneurs usually approach venture funding, compared to a new way to start up your company, what Guy calls “Plan B for Fund Raising” and others call bootstrapping.

To summarize Guy’s article, he tells the typical story of a start-up getting a round of financing after another, only to end up being sold by the venture capitalists when customer projections delay (as usual) and the VC lose patient after a few millions were burnt. Guy’s suggest a Plan B: Do not leave your day job at Microsoft. Leave with your parents. Target a niche market (Rather than trying to boil the ocean […], you boil a tea kettle). Build a prototype and use Internet and the blogosphere to promote it. Then raise capital if needed to expand your business (rather than to create it). 

Read the full post from Guy. It is quite funny.

Indeed, Internet makes bootstrapping easier than ever by providing great tools:

1) Test the market. Even before you build your product, you can start advertising and selling it on-line. Build a site to sell your “product”, set your price, spend $1000 in AdWords and see if you get enough customer to place orders. If you see that demand exists in numbers to make your case fly, you go and build your product.

2) Outsourcing. Internet simplifies working as a virtual company. You should aim at orchestrating a zero-employees company (except you). With sites such as elance.com you can get manpower to build your prototype, and use manufacturing companies to produce it. You can also outsource customer care, order administration and your secretary or Virtual Assistant with YMII or Brickwork.

3) Cloud Computing. If your product/service is an on-line application, cloud computing is your solution to avoid investing capital in a server farm to cope with your traffic dreams. Instead you buy capacity as the demand grows from Google App Engine and Amazon Web Services.

When we say Internet is a true engine of innovation, it is not only for the new ways of sharing and accessing information, the new on-line applications or how it has changed the way we buy and sell things. Internet is also the best tool for innovators to start-up a business.

SpinVox: Do just one thing but do it right

SpinVox, founded in 2003, is a pioneer in delivering speech-to-text applications. SpinVox claims it has agreements with twelve telcos, to provide a system to translate voice mail messages into SMS or emails. These days SpinVox has been in the news because it just secured $100 Million financing from Goldman Sachs, GLG Partners and others, to fund their international expansion. See the blogsphere reaction:

Considering Automatic Speech Recognition as just a Voicemail feature, $500M valuation seems really high when compared to Voicemail suppliers.  Current price for Voicemail systems can easily be under $2/user. Even assuming Spinvox could sell the feature to carriers at $2/user, how many customers do they need to have to justify their valuation? Note the many competitors in this domain: startups (Jott, GotVoice, SimulScribe), specialized software (Nuance), big players (Microsoft, IBM, Google) and messaging vendors such as Comverse, Openwave or Alcatel-Lucent. The valuation reminds me of the Internet Bubble, where money was coming from investors instead of from the customers.

Nonetheless a good learning for any start-up seeking financing. SpinVox just does once thing, speech-to-text, and builds on its core competency to provide related applications (voicemail, blogs, social networks, etc). Do one thing, and be the best at doing it. Venture capital will love you, and hopefully your customers too.

Myths of Entrepreneurship

This is a guest post on Guy Kawasaki’s blog from Scott Shane, professor of enterpreneurship, author of The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live

Below are Scott Shane’s top ten myths and the realities behind:

  1. It takes a lot of money to finance a new business. Not true. The typical start-up only requires about $25,000 to get going. The successful entrepreneurs who don’t believe the myth design their businesses to work with little cash. They borrow instead of paying for things. They rent instead of buy. And they turn fixed costs into variable costs by, say, paying people commissions instead of salaries.
  2. Venture capitalists are a good place to go for start-up money. Not unless you start a computer or biotech company. Computer hardware and software, semiconductors, communication, and biotechnology account for 81 percent of all venture capital dollars, and seventy-two percent of the companies that got VC money over the past fifteen or so years. VCs only fund about 3,000 companies per year and only about one quarter of those companies are in the seed or start-up stage. In fact, the odds that a start-up company will get VC money are about one in 4,000. That’s worse than the odds that you will die from a fall in the shower.
  3. Most business angels are rich. If rich means being an accredited investor –a person with a net worth of more than $1 million or an annual income of $200,000 per year if single and $300,000 if married – then the answer is “no.” Almost three quarters of the people who provide capital to fund the start-ups of other people who are not friends, neighbors, co-workers, or family don’t meet SEC accreditation requirements. In fact, thirty-two percent have a household income of $40,000 per year or less and seventeen percent have a negative net worth.
  4. Start-ups can’t be financed with debt. Actually, debt is more common than equity. According to the Federal Reserve’s Survey of Small Business Finances, fifty-three percent of the financing of companies that are two years old or younger comes from debt and only forty-seven percent comes from equity. So a lot of entrepreneurs out there are using debt rather than equity to fund their companies.
  5. Banks don’t lend money to start-ups. This is another myth. Again, the Federal Reserve data shows that banks account for sixteen percent of all the financing provided to companies that are two years old or younger. While sixteen percent might not seem that high, it is three percent higher than the amount of money provided by the next highest source – trade creditors – and is higher than a bunch of other sources that everyone talks about going to: friends and family, business angels, venture capitalists, strategic investors, and government agencies.
  6. Most entrepreneurs start businesses in attractive industries. Sadly, the opposite is true. Most entrepreneurs head right for the worst industries for start-ups. The correlation between the number of entrepreneurs starting businesses in an industry and the number of companies failing in the industry is 0.77. That means that most entrepreneurs are picking industries in which they are mostlikely to fail.
  7. The growth of a start-up depends more on an entrepreneur’s talent than on the business he chooses. Sorry to deflate some egos here, but the industry you choose to start your company has a huge effect on the odds that it will grow. Over the past twenty years or so, about 4.2 percent of all start-ups in the computer and office equipment industry made the Inc 500 list of the fastest growing private companies in the U.S. 0.005 percent of start-ups in the hotel and motel industry and 0.007 percent of start-up eating and drinking establishments made the Inc. 500. That means the odds that you will make the Inc 500 are 840 times higher if you start a computer company than if you start a hotel or motel. There is nothing anyone has discovered about the effects of entrepreneurial talent that has a similar magnitude effect on the growth of new businesses.
  8. Most entrepreneurs are successful financially. Sorry, this is another myth. Entrepreneurship creates a lot of wealth, but it is very unevenly distributed. The typical profit of an owner-managed business is $39,000 per year. Only the top ten percent of entrepreneurs earn more money than employees. And the typical entrepreneur earns less money than he otherwise would have earned working for someone else.
  9. Many start-ups achieve the sales growth projections that equity investors are looking for. Not even close. Of the 590,000 or so new businesses with at least one employee founded in this country every year, data from the U.S. Census shows that less than 200 reach the $100 million in sales in six years that venture capitalists talk about looking for. About 500 firms reach the $50 million in sales that the sophisticated angels, like the ones at Tech Coast Angels and the Band of Angels talk about. In fact, only about 9,500 companies reach $5 million in sales in that amount of time.
  10. Starting a business is easy. Actually it isn’t, and most people who begin the process of starting a company fail to get one up and running. Seven years after beginning the process of starting a business, only one-third of people have a new company with positive cash flow greater than the salary and expenses of the owner for more than three consecutive months

The article is so good that I had to paste it here to make sure I can read it in the future, just in case Guy would change his mind about his blog.

Entrepreneurship 2.0

Thanks to Internet, entrepreneurship is getting much easier and less risky than ever.

In the past, to create a start-up, the first steps were to put the team together, gather an initial investment, work on a prototype, test the market, and sell your vision to seed or venture capital, to fund your growth.

Now, more entrepreneurs are having a different approach, as they aim at turning an idea into a business on a low budget. This is called “bootstrapping“, and Globalization and Internet are enabling it.

Tim Ferriss, in his book “The 4-hour workweek“, gives some interesting hints to bootstrap an start-up.

1) Customers first. Select a narrow segment of customers you want to serve. Select a nich that you know weell, because of your job or because as a consumer, you are part of it.

2) Define your Product and your Unique Value Proposition, for your selected niche. Look for high margins (product price should be between 4 -8 times your cost)

3) Test the Market, before you start any manufacturing or any investment into the product

– Use eBay to test the market price. See what prospective customer would be willing to pay.

– Build a simple web page for your Product. You can find developers in www.elance.com to create a professional site. The message should get across in only 1 page. Even if not ready to ship yet, add a “order now” button to track how many of your visits would turn into an order

– Use Google AdWords to drive a test campaign – do not spend more than $500, over a short period. This will drive traffic to your product website.

Check how many visits turn into orders, and do your numbers to see if your product passed the Market Test and keeps profitable.

4) Orchestrate your Business. In case the market test flies: Outsourcing,outsourcing, outsourcing…

 
You should aim at no employees in your company. Outsource:
– Virtual Assistant to YMII or Brickwork
– Web design, and software development: www.elance.com,
– Contract manufaturing. See a list in www.thomasnet.comAvoid inventory, only build product once customer order is received. As the business scales, you might consider additional functions to outsource: Customer Care, Marketing Campaigns, Credit Card handling, etcThere is much more than this in Tim Ferriss book, which is a good reading for those dreaming of becoming New Riches, not only in financial terms but, more importantly, in free time.