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Posts Tagged ‘Transparency’

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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Many new gimmicks and stunts marketed at entrepreneurs now exist as ways to rise to the top of the sea of investment opportunities. While we have to admit there is an intoxicating rush from pitching your innovative venture in front of an audience, the end result usually feels more like a hangover. Investors leave with more questions than answers, and entrepreneurs are left wondering if their choice of wardrobe sealed the fate of their company. Whether it’s a trade show, mixer, or conference they’re usually marketed around the emotional value proposition of “meet real investors.”submityouridea

Just in case you weren’t paying attention, any investor worth his salt is already plugged in to a complex social network from which he or she plucks prospective deals. What makes you think you’ll actually find a reputable investor or advisor at one of these events? Oh, and you think that entry fee is paying only for the catering service? These events are run by businesses looking to make money. They don’t necessarily care if you close a deal while you’re there, only if your registration check clears. And this just in, handing a spiral bound PowerPoint to an investor in an elevator is about as effective as a guy throwing himself at a female bartender in a packed club on a Friday night.

You should also know by now that the Internet is full of charlatans, scam artists, spammers and a myriad of other people with questionable morals. And because there’s not a lot known about the investor process, entrepreneurs don’t really know whom to trust when they scour the web looking for funding. They’re always suspicious of something that’s offered for free (like a new online business plan farm) and are just waiting for the hidden fee to rear its ugly head. Free usually means you need to put in a credit card and spend the rest of your life trying to cancel a recurring charge for $19.99 a month. If you’re going to invest in outsourcing your capital raising work (which is not unreasonable) try to make sure that the approach is smart, that you are going to get the feedback you need to improve over time, and try to save the fantasy of a lottery ticket for the check out counter at 7-Eleven. internetscam

And lastly, if you happen to be sitting on the couch in the early am, with your computer in your lap, watching TV and one of those “We’ll Pay Money For Your Idea” infomercials comes on, you should probably view it the same way you do a fake ad on Saturday Night Live. Of course not every “invention” firm has bad intentions, but let’s just say there are a larger number of scam companies than those actually helping the entrepreneur. So do your homework and background checks. If after submitting your materials for consideration you’re having trouble making contact with a live and knowledgeable voice, it’s probably not worth your time.

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

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chessclubpractice

There’s no question that success comes through hard work and persistence. If that’s the case, why does the media focus only on those stories of achievement? Flip through the pages of Inc and Entrepreneur, or watch Donny Deutsch on the Big Idea and you’d think wild and immediate success is the norm for an entrepreneur. Well, the fact is, the majority of new businesses fail, but the learnings from these failures can be invaluable if an entrepreneur uses the setback as a chance to dig in and come back stronger.

In order for innovation to take flight on a grand scale two things need to happen. First, we need to provide entrepreneurs with more honest and candid feedback on what it takes to succeed. Currently, it seems that most investors still aren’t willing to roll up their sleeves to help nurture and cultivate new entrepreneurial talent. Read any entrepreneur blog these days and you get the feeling that investors are out to make entrepreneurs feel unworthy of their money. While it’s not true, the best way to stunt innovation is to offer no constructive feedback at all (positive or negative).

The second necessary ingredient for innovation to expand is for entrepreneurs to make the personal investment it takes to be a success. In Malcolm Gladwell’s latest book Outliers, there is a chapter about what it takes to become a world-class talent. Gladwell quotes neurologist Daniel Levitin, “The emerging picture from such studies is that ten thousand hours of practice is required to achieve the level of mastery associated with being a world class expert – in everything. In study after study, of composers, basketball players, fiction writers, ice skaters, concert pianists, chess players, master criminals, and what have you, this number comes up again and again.”

Entrepreneurs pay attention; success in business or sports isn’t based on luck or talent, but hard work. When asked to sacrifice their time, salary, or personal savings to make a business fly, far too many entrepreneurs walk off the practice field, refuse to hire the high priced coach, or simply cut corners. The insight here is that there is no easy path to greatness; to make it you have to pay your dues and commit completely. Could you imagine an amateur athlete telling the New York Yankees that “after” they pay him millions of dollars, “then” he’ll go hire a batting coach and spend 10,000 hours to learn how to hit a 95 mph fast ball?

failletters“The odds aren’t that much different for start-ups. You are going to be embarrassed, ashamed, labeled as an idiot, shunned, ridiculed, and occasionally driven from the village with pitchforks. On average, YOU ARE GOING TO FAIL. MULTIPLE TIMES, in NEW & INTERESTING ways. GET USED TO IT. In fact, the more you are used to failing — and failing fast, with data on how you fail — the better off you will be.” start-up advisor Dave McClure.

Remember, most investors are completely buried in business plans and simply can’t dive deep into each one on a personal coaching level. So, just because an individual is not willing to fully commit to funding your venture does not mean your idea is a bad one. Perhaps it’s just not “investor ready” and what you really need is a nudge in the right direction. Even if it means no money (yet), an investor’s comments and suggestions may prove to be the pivotal moment in the path to success for a young company. Insight; don’t just make it your mission to get in front of people that will listen, but people that will also dole out generous portions of perspective.

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

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humanpyramid

Let’s not forget that entrepreneurs, and the investors that support them, need all the help they can get to turn their ideas into world-changing realities, and contrary to popular belief, more money is not the only answer.

The central issue is not with the quantity of ideas or number of willing investors, but rather in properly pairing the two. There are plenty of investors willing to provide the capital needed by the entrepreneurs working to change the world, but there is often a communication breakdown between the two parties. On one side there are the mysterious “deal makers” who might seem easy to reach with the click of a mouse, but in reality are incredibly difficult to engage with meaningful dialogue. On the flip side, there are the passionate entrepreneurs who are eager to find out what an experienced investor thinks of their “big idea,” but usually hear back nothing at all after submitting their materials for consideration.

So what’s the rub?

Well, there are a number of problems that are holding us back. For one thing, the process for raising venture capital is shrouded in secrecy. Isn’t it strange that in an industry hell-bent on building new companies and “inspiring innovation”, most investors aren’t even willing to take the time to give entrepreneurs some valuable feedback; specifically telling what they’re looking for, and guiding entrepreneurs to focus on certain areas of a business if they want a legitimate shot at raising investment capital? Don’t you think if entrepreneurs built their businesses around the actual criteria they were being evaluated on, they’d have a much better shot at connecting with investors? Of course both parties have to be judicious with time and energy, but the complete lack of communication is beneficial to no one.

What is so frustrating is that both parties really need each other; the future of the world (seriously people) can be very positively affected if this communication gap is bridged. Bottom line, while investment capital injected into a handful of new ventures is great, most early stage companies need much more than money. The benefits of transparency, guidance, and mentoring that an experienced investor can provide can ultimately prove to be the difference between success and failure. If an investor has wisdom to share, they should be generous with it, not hold it so close to their vest. As Ronald Reagan might say, “Tear down this black box and start to educate entrepreneurs and other investors about what works and what doesn’t.” After all, neither investors nor entrepreneurs (or our economic recovery) are well served by spending weeks or months to move a venture forward if it’s fundamentally flawed in its infancy.

With the number of new small businesses expected to rise in 2009 (with job losses high and traditional employment options limited), many will take the opportunity to test their entrepreneurial chops. Start-ups are now cheaper to launch than ever before, as $500K has become the new $5 million. Primarily because basic software that was once absurdly expensive is now free (open source), and astonishingly good hardware (or virtual processing power) is now very affordable. But before an entrepreneur will be able to transform an innovative idea into a real operating company, they’ll most likely need to seek a credible outside source of capital (and counseling). While the choices are abundant, the routes for depositing a round of funding in your bank account still remain challenging to navigate. The benefits of secrecy are far too one sided. To change our future we need to re-think the past. Moving forward into an era of collaboration and transparency isn’t just a nice idea; right now it’s an imperative.

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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