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Posts Tagged ‘broken’

breakingthroughAs we’ve outlined on this blog over the last few weeks, the system for raising early stage capital today is fundamentally flawed. Even though the road to success for entrepreneurs trying to kickstart their visions is littered with potholes and deceptive directions, it can all be corrected with a little teamwork. If change is going to happen, we can’t just tease the entrepreneurial community with brief moments of candor and transparency. The only way we truly accelerate the rate at which that innovation is created in this country and solve our financial crisis is for us to come together and provide enormous value back to the very entrepreneurs from which we expect that innovation to come. By the way, that busted road we mentioned…it’s a two-way street.

So without further ado, here, in no particular order, are North’s 10 Rules for Breaking Through:

1. Listen To The Challengers, Not Just The Congratulators.

listentoyourcriticsTurning an idea into an actual operating company is hard work. So make it easier on yourself, bounce your concept off those people that have no problem ripping it apart. Seriously, if all you do is play “show and tell” with your trusted inner circle are you really going to learn anything new? Feedback from candid and objective outsider can often make the difference between your business growing and maturing vs. remaining underdeveloped. Are you listening?

2. Don’t Buy Anything That Doesn’t Provide Value Back.

As mentioned throughout this paper, there are a ton of services marketing at entrepreneurs, especially those that pitch the promise of raising money or connecting you with investors. However, before you take the plunge (or get out your credit card) ask yourself a simple question, “am I getting useful value back?” What you’re doing is hard and takes a lot of time, don’t waste it. Surround yourself with experts that can inspire and help you reach your goals.

3. Those With Fewer Words Win.

We can’t express enough the importance of being able to concisely state your business idea in a very persuasive manner. Investor’s have limited time and even a more limited attention span (do you know how many pitches they hear a day?). If your “single sentence” about what you do and how you make money is confusing, you’ve wasted your breath and other’s time. Take time to dial this in. The results will follow.

4. Talk To Anyone Who’ll Listen.

Okay, quit hiding behind your laptop screen and go talk to people. If you’re too remote and working from a tropical island somewhere (good for you), but at least pick up the phone. Investors know each other and if you talk to large number of them it can actually create more buzz about you and your concept. Healthy competition is good when it comes to raising money. The more options (and contacts) you have, the better off you’re going to be. Lastly, when you’re doing all that talking, be sure you don’t forget to take pauses and listen! (see #1).

5. Momentum Is Your Friend, If…

Don’t waste precious time hunting for cash if you’re not yet “investor ready.” Keep dialing in your business model and make that sucker bulletproof. As an entrepreneur, it’s important to stay focused, inspired, and moving forward with steady pace. If you know which direction you’re going, it’s okay to sprint. On the other hand, if you have no clue where you’re headed, slowdown hombre. Speed without direction is the fastest way to getting nowhere.

6. Start Smart Or End Stupid.

Take it from people who have “been there done that.” Be wise with your time in the early stages. If you’re not truly confident and frequently find yourself second-guessing your path, stop. “Green” entrepreneurs blast out their concept stage plans when they’re not even mature enough to be considered for funding (and then wonder why they hear crickets?). Instead of taking this route, go meet with experts that can help you tighten up your concept, train of thought, and give you an indication whether you even have a viable idea in the first place. You’ll be smarter for it, and a more prepared entrepreneur the second time around.

7. Heighten Your Bullshit Radar.

The early stage investment capital space is crawling with unsavory characters. Do all you can to avoid a lengthy unfruitful and expensive ride on the scam tram. We already mentioned in #2 above that you should seek out value. Well, in order to do so, you must first sharpen your perceptive skills. If someone says they “know how to find you capital” (and they haven’t shown you and credible evidence that they know how), ask them how they intend to do that. Remember during the last presidential race when John McCain proclaimed, “I know how to catch Bin Laden.” Hey, if he knows how to “do it” then why hasn’t he shared it with anyone already. It’s because it’s just desperate drivel from a man seeking votes from unperceptive swing voters.

8. Cash Is King.

Do your economic models scale beautifully? Do you have a solid way to make money? Can you prove it? If this part of your plan is not credible, you will quickly be voted off Start-up Island. No question about it. If an investor were hosting the show Survivor, they’d say, “Bring your business plan up here (after handing it to them, they toss it in the fire). The tribe has spoken. It’s time for you to go. The rest of you looking for funding, head back to camp and work on your financial models.”

9. Don’t Wait In Line.

beheardQuit trying to shout “me…me…me” in the crowded pitch farms. This is a complete waste of time, effort, and money. In order to break through with investors, you’ll have to take risks and do whatever it takes to get noticed. Don’t just show up on the congested scene with one arrow in your quiver. Arm yourself with third party due diligence, a working prototype, or some other vehicle that demonstrates that your business is worthy of attention and funding consideration.

10. Sell Something Dammit.

cashregisterIf you are starting a business, sell something. Nothing builds excitement, momentum, and revenue faster than actually ringing a real register. Far too many new ventures focus on research and development and by the time they have a product, the market has moved. They never got real consumer feedback and they wound up running out of money before they were able to hang that first dollar on the wall. If you want to succeed, make sure the “selling” component is a well-oiled machine. It’s the difference maker.

This is the conclusion section from our recent paper, Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

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thefunded-logoAdeo Ressi, the founder of the TheFunded.com has joined a long list of entrepreneurs and investors that say that the venture capital industry is broken. However, Ressi decided to put his (didn’t use outsider funds) money where his mouth was and built a site that allows entrepreneurs to critique and rate the actual audience that was evaluating them…the investors.

Ressi argues that airing the venture industry’s dirty laundry will ultimately improve the efficiency of the funding process as well as the rocky relationships that exist between investors and entrepreneurs. TheFunded also allows entrepreneurs to view and share term sheets, to assist one another finding good investors, and to discuss the many facets of operating a business. While many entrepreneurs applaud Ressi for clearing out the cloud of smoke that surrounds the VC world, many simply see TheFunded as only an arena for disgruntled entrepreneurs to vent.

“The problem with sites like TheFunded.com, or any site with user reviews is that the reviewed product will always be at a disadvantage. For every unhappy customer, they tell 9 of their friends, and for every happy one they tell 3. The odds are against the VCs here. Of course the majority of turned away entrepreneurs will put a negative review – it’s a form of vengeance. But those that did have a happy experience will have little reason to post anything. They have already researched for information from the site, got what they were looking for and will not likely return without proper incentive.” Ian Bell, Entrepreneur

Because of this lack of positive reviews, many entrepreneurs accuse the VCs of gaming the system where they’ve asked entrepreneurs they’ve backed to submit a favorable commentary about them and their fundraising experience. This boosts the firm’s rankings on TheFunded’s leaderboard, and has resulted in many in the industry to question the sites credibility.

For example, if a disproportionate number of members enter the site to provide a single comment on a given firm’s profile, this sends a red flag to TheFunded’s system. TheFunded looks for other behavior, too, for example, unusual semantic characteristics of the written fund reviews, such as excessive use of exclamation points and superlatives. It also looks at how many entrepreneurs voluntarily admit they were asked by their VC to submit a review (entrepreneurs are asked this when they provide a comment, and they check a box to say they’ve been asked).

Before this site can truly becomes a quality resource for the start-up community, they’ll need to become more respected (from both sides) by attracting additional traffic and even more helpful reviews to their site (Psst…a new Toyota Prius has over 160 consumer reviews on Edmunds.com compared to just 30 entrepreneur reviews of Kleiner Perkins on TheFunded.com). Unless these numbers pick up, it’s hard to look at this site without some real bias. At the end of the day tough, the TheFunded has definitely made Investors way more aware of their perceptions in the venture marketplace, and if that’s the nudge they needed to become more transparent and helpful to entrepreneurs; they deserve some applause, but not quite a standing “O” just yet.

“If their tool did such a good job, they’d raise a fund themselves and beat the tar out of us.” – Paul Kedrosky, investor & entrepreneur

“It’s a wantrepreneur focused product. Real VCs and real companies with a legit shot at VC money wont use it.” – Jeff Martens, strategic consultant

younoodleThe above quotes are referring to the highly controversial YouNoodle.com, an online platform for start-ups and early stage ventures. The feature that has sparked a lot of debate in the investment community is their YouNoodle Start-Up Predictor that analyzes data on early stage ventures and generates a report on what that start-up will be worth in three years. For real? Yes, they’ve developed a software program that claims it can predict the valuation of early-stage start up companies (yes, companies that haven’t come within a whiff of a dollar in revenue…). The model relies on basically four areas: 1) the team; 2) financial factors; 3) the concept; and 4) advisors. How’s it work? The entrepreneur fills out the survey and provides a little detail, and like pulling a rabbit out of a hat, presto…YouNoodle spits out a valuation. Smells about as real as the future predicting information Miss Cleo (the famous TV psychic and shaman), provided after calling her “900” hotline. misscleo

It’s hard for us to look at this with a straight face. Seriously. Has the venture community been Punk’d? After all, a “noodle” is defined in the dictionary as a fool or simpleton. Can you really believe that two teenagers working on a few lines of code in the basement have developed a $2.75 million dollar idea? Ridiculous. Be very afraid of this tool, looking at some number on the screen followed by a huge string of zeroes right next to the name and your start-up feeds the entrepreneurs ego like nothing else can. Think about the Far Side cartoon where the kids are all eating ice cream in front of the windows of a gym filled with overweight people sweating on treadmills. It’s pretty sick. We think it’s nothing more than a way to grow their real ambition – – yet another social network for entrepreneurs. If it isn’t, then why haven’t their own founding members run themselves through their magical predictor?

The following excerpt is taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

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tigerroar
Unfortunately, today’s early stage venture investing market is a little bit like following Tiger Woods on the golf course. This trend makes it extremely difficult for new innovative ideas to grab the attention from their desired audience. While there are hundreds of world-class golfers playing on any given weekend (who are plenty entertaining to watch), once the crowd following Tiger roars, everyone turns their eyeballs to Mr. Woods (even when he’s 6 strokes back). Because of the inherent high risks involved, the investing community is so susceptible to this herd mentality; when a top tier firm or individual invests in a space, it seems that everyone follows.

These “me too” investments lead to businesses, which often are inferior to other start-up ventures, receiving full funding simply because they operate in a space that has garnered some interest from the recognized big boys (i.e. Sequoia, Kleiner Perkins, Greylock, etc.). Is this playing it a safe or just playing it stupid? If innovation is going to solve the problems of tomorrow, do we really need investor dollars going to yet another video streaming site with a social networking component that’s primary revenue model revolves around advertising?

Another problem with the industry is that it has become entirely too incestuous, with the top firms and individuals pouring larger and larger amounts of money into only a very small percentage of the companies that actually need it. As VC funds have grown, so has the size of their investments, leading to a “handful of big bets” mentality that leaves a lot of promising early stage companies standing in the cold. Although placing large chunks of capital into ventures with established traction is valuable (and lower risk), it also means true innovation is being left on the sidelines when it should be cultivated in an efficient manner. We don’t need seven great new companies right now; we need seven hundred. Young stars who are new to the game are being overlooked for individuals with more experience, not necessarily because it’s the experience that makes their venture better, but simply because they know someone who can get them money.

“The real issue is that getting financing is difficult and inefficient for the investor. I’m having to create a whole slew of personal relationships, networking, etc… – just to get small amounts of money. While I like being social and getting out there, it’s slow. We need a Wal-Mart model for “common’ money” (i.e. under $500k using a typical business model). The real issue is that many people could be funded so much more efficiently, with better returns, if the industry was more transparent.” – Adam Nelson, Founder of varud.com

While investor attention is being paid to the Tiger-like entrepreneurs and ideas of the world, the next great phenom is sitting on a hell of a smart concept and still waiting to be discovered. How can this talented bunch break through and get some time on the field?

Excerpt taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

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Before the Internet, entire industries emerged that helped investors find “good” entrepreneurs; trade shows, print publications, and an army of investment banking connectors who helped investors and entrepreneurs find each other (for a chunky fee of course). You can spend half your career (and life savings) at trade shows and more often than not all you would have to show for it would be extra airline miles and a desk drawer full of name badges.

conferencebadges

Today’s investors rely more than ever on their personal filter of trusted referrals and connections with friends. Tip: trust is not earned swapping cards at a trade show booth. Just because you shake hands with an investor doesn’t mean he’s ready to give you a giant check. This traditional process of finding entrepreneurs needed to evolve, and in some senses it has. Thanks in large part to the Internet, investors are buried in new business plan submissions.

As of this writing, there are over 37,000 business plans on AngelSoft.net, over 100,000 plans on FundingPost.com, and over 6,000 plans on FundingUniverse.com. Sounds great for investors, right? But let’s take a closer look at the math: If an investor tried to review all these plans for 30 minutes each it would take over 34 years reading non stop for 8 hours a day, 5 days a week, for 52 weeks a year.

Where’s the Brita water filter for business plans when you need it? Out of those 143,000 plans described above, how many are actually high quality, better to digest, “investor-ready” ideas? Investors are thirsty for exciting opportunities, but they’re not quite ready to wrap their mouths around a fire hose. As for the entrepreneur looking for a leg up, blasting your business plan out to several thousand investors with the click of a button is about as strategic as buying a Powerball ticket.brita

The Internet has created a massive pool of investment opportunities, which has shifted the real problem from an issue of quantity to throughput and yield.   Adding another 140,000 business plans to the un-harvested fields of internet “pitch farms” will not increase yield any more than it already has. Angel investors are already using this huge pool of business plans and their throughput has likely increased by an additional 10 or more deals per month at most.

But while this increase in reviewed applicants should lead to slightly stronger funding candidates, the overall problem is still NOT being solved. In fact, the minimal gains from reading a few more plans each month doesn’t actually increase the number of deals that an Angel group can seriously evaluate or fund. That number (based on their in house resources) remains constant no matter how many ventures are knocking on the door.

The cold fact is that most investors still won’t even glance at a business plan unless it’s gotten a referral from a credible third party. It’s not only about who you know, it’s also about how you know them. Entrepreneurs and business plans referred by others who have proven to be good filters for garbage ideas, often float to the top of the pile. How else do you expect investors to filter through 34 years of reading material? Everything else usually gets dumped into the circular filing cabinet. Today most investment deals come down to personal TRUST, which is pretty hard to create in a virtual world.

Websites like Linkedin are useful tools for examining a person’s work history and experience, but they are not a substitute for one on one interviews and the ability to make an objective investment decision. Characteristics like work ethic, ability to handle risk, verbal skills, and attention to detail are learned through personal interviews, not back and forth emails.

It does, after all, take the same amount of time to read a bad business plan as it does a good one, and even on the top funding websites (though they’d probably dispute it) there’s still not an effective way to filter out all the junk. As an investor, becoming a member of a small Angel group that exposes you to “quality” investments usually costs money (annual dues), and more often than not, you end up doing all the deal review work anyway. So, what are you really paying for? If you’re going to pay to join a social club, join the country version, at least you’re guaranteed a good tee time and some exercise.

Excerpt taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital. In the coming weeks, we’ll be posting even more insightful nuggets from this paper. However, if you’d like to read & download all 33 pages of constructive prose right this moment, it’s sitting on our website: www.dontgosouth.com.

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As you know, the North team is on a mission to accelerate the rate at which innovation gets created in this country; and that effort begins with being more transparent with and helpful to entrepreneurs. Our new paper called Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital has over 30+ pages of insight, inspiration, and rarefied honesty on what’s wrong with the early stage venture capital market and of course some suggestions on how we (that’d be you and North) can fix it.

The feedback has been fantastic. In just over two weeks, we’ve had thousands of entrepreneurs and investors download the guidebook. Get your own FREE copy on our website www.dontgosouth.com.

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