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Posts Tagged ‘Whitepaper’

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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compforcapitalThis section wouldn’t be complete if we didn’t mention the plethora of contests and competitions out there for entrepreneurs. Most of these are business plan writing competitions that target upstart entrepreneurs to enter in hopes they are going to get in front of a panel of investors who will then choose their venture and write them a big fat check.

For young entrepreneurs, it seems that every college with an MBA program is promoting one of these. But again, if you happen to enter one, don’t just fall under the spell of dollar signs. Most of the competitions offer entrepreneurs the opportunity to: 1) help crystallize their thinking (and making them more investor ready); 2) receive feedback and advice from forward-thinking entrepreneurs and investors; 3) network with fellow entrepreneurs and distinguished investors; and 4) sharpen their skills in analyzing, writing, and presenting their business plan. Again, the more value one of these contests provides back, the better it makes the entire process for starting and funding a company.

riceThe Rice University Competition has become one of the premier collegiate competitions in the world; with over 35% of its entered teams (since 2001) going on to successfully launch their business. These impressive numbers can be directly attributed to the counseling and feedback all of these teams received at the competition. Now that’s entrepreneurial education done right.

“The support of business leaders and successful entrepreneurs ensures that tomorrow’s leaders can pursue their dreams by utilizing such an investment to refine their business plan and presentation, potentially develop a prototype or begin the patent process, and build the foundations of a viable business – ultimately attracting additional capital and fostering the spirit of entrepreneurship in the US,” explains Steven C. Currall, PhD, and Founding Director of the Rice Alliance for Technology and Entrepreneurship.

Alternatively, many VCs and Angel Groups are now holding “segment specific” competitions to generate quality deal flow in hopes of surfacing the next big thing. Entrepreneurs submit their innovative ideas on everything from gaming to green energy to senior products & services to social media. The winner can usually drive home with as much as $100,000K of start-up capital in their front seat.

One interesting newbie on the competition front is Ideablob.com. Run by Advanta, one of the largest credit card companies in the States, Ideablob is a place for entrepreneurs to post their ideas and get real-time feedback from their peers. The site was developed around the premise that there are tens of millions of entrepreneurs and small business owners in the United States, but no real way for them to network and bounce ideas off of each other. Eligible individuals can submit their business ideas to ideablob.com, and based on votes from the ideablob.com online community; which includes other innovators as well as friends, family, colleagues, associates, teachers and mentors – one idea every month will win $10,000. Here’s to growing the blob and mentoring entrepreneurs in the process!

googlelunarxprizelogoLooking for something a little more unconventional? As of this writing there were already 16 announced teams registered for the Google Lunar X Prize competition. The Google Lunar X Prize will reward the first privately-funded team to land a rover on the moon (and travel at least 500 meters across its surface) with the $20 million purse. If no one is able to complete the mission and send video, data, and images back to Earth by December 31, 2012, the first prize drops to $15 million. The big challenge for these braniacs will be to do it affordably. Many are already raising money and even turning to corporate sponsorship to help get their idea on the launch pad. Let the countdown to liftoff begin.

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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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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There is a common misconception that start-ups can’t get traditional bank loans. Not true. Banks, do, however, require some sort of collateral. So if you’re fresh out of college and your personal balance sheet is the title to a beat up 1998 Honda Civic and no significant credit history, than you have very little chance of squeezing any kind of money out of a bank. And in today’s market, forget it, financing is going to be tough to come by unless you have a stellar credit rating and something that the bank can use to offset the risk of the loan.underwater

Even if you do have some assets you should still be realistic, don’t just expect a bank to fork over their cash unless you can prove to them that there is a high potential of generating enough revenue to repay that loan. If you can’t, you better be prepared for the bank to take something of value if you default. (p.s. hiding from a repo man sucks, so think long and hard before you get in deep with the banks). In this down economy, it’s become harder and harder for banks to lend out money. The Federal Reserve recently reported that 75 percent of domestic banks have tightened lending standards to small firms, and about 95 percent (up from 70 percent just a few months earlier) say they are charging more interest for loans to small businesses.

But there is some good news at the end of the dark tunnel. President Obama’s nominee of Karen Gordon Mills to lead the Small Business Administration is a positive step (btw – the SBA’s budget was cut in half over the past eight years of the Bush). Mills, a venture capitalist and successful entrepreneur from Maine has promised to take some aggressive strides to foster economic development and the growth of small businesses. Let’s all hope so.smallbusinesslogo


“The small business sector in this country is the engine of economic growth, and we need to keep the engine running during this financial crisis. The best way to do that is through expedient, targeted and effective lending through the SBA.”
Senator Chuck Schumer (D-N.Y.)

Time will tell whether the Obama administration is indeed going to be able to walk their talk. According to all early indicators though, bank/loan capital should start to become more available cheaper and easier than it has been in years. But with a credit crunchy market, this option still may prove to be just as challenging as the others. Is next year going to be the Year of Small Business Loan? Stay tuned.

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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hanggliders
Angel investors carry the heavenly name for a reason; most can (and are willing to) offer much more to your venture than just money. They can provide experience and mentorship to carry your business to the Promised Land.  Angels are usually entrepreneurs themselves, successful ones who are looking to offer up help to the next generation of fresh-thinkers. But don’t be fooled, just because these guys aren’t bankers, doesn’t mean that they don’t have serious skills.

Angels usually invest in spaces that they themselves have experience, a trend that can prove to be very helpful to an early stage company, especially one whose founders lack experience. An Angel usually has the time to provide guidance, as many of them are no longer working full time and enjoy becoming advisors to those companies in which they invest. Remember, Angels are entrepreneurs first, so offering them a hands-on investment provides them with the opportunity to live vicariously through the founders and keep their skills sharp, without having to take the heat.

“You make money in Angel investing by killing off your losses early, as quickly as possible. The entrepreneur really believes that success is just around the corner, and you’ll quickly go broke investing for ‘just-around-the-corner’.” – Houston-based Angel, Richard Holdren.

Angels thrive in a space that VCs and banks often fear to tread (very early stage pre-revenue ventures) in hopes of generating impressive long-term returns. One study cites a rate of return of about 127%, on average, or 2.6 times the investment in 3.5 years. The risks, of course, are steep. Still, 258,200 angels pumped $26 billion into 57,120 ventures last year, according to the University of New Hampshire’s Center for Venture Research. Combined with the potential “financial returns” an Angel gets from playing a role in building a successful business, the “emotional returns” one gets from a playing a role in a building a successful business makes Angel investing that much more rewarding.


Traditionally, the problem with Angels was finding them. However, there’s recently been a proliferation of formal Angel investor groups and websites that screen investments and pool money on a local and regional level.  According to the Angel Capital Association, there are now over 330 Angel Groups in the U.S. and Canada. Like most high net worth individuals, Angels don’t walk around with a sign on their back that says “investor”; so use your Google hunting skills to track them down (psst…if you haven’t already mastered this craft, should you really be starting a company in the first place?). What this expansion of formal groups and Internet enabled “pitch farms” has created is a familiar problem to VCs, a deep ocean of potential investments where quality yield is far more important than quantity of submissions.

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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pathmountain1

To an entrepreneur, fundraising is scary stuff, and rightfully so. Make no mistake about it; FUNDRAISING IS HARD, and even harder during leaner times. However, those working on the next big idea shouldn’t lose their faith. They should keep plugging away, stay inspired, and conduct careful research on the options available to them.

Besides the current recession, most of the fear around raising money comes simply from a lack of understanding. The world of start-up capital is a foreign one to most entrepreneurs, partly because investors are so unlike them (deal makers vs. creators), and partly because they don’t have an intimate understanding of how the world of capital operates. Well, let’s try to straighten out some of the confusion.

There are two main types of investors: Angels and Venture Capitalists. Angels invest their own money and VCs invest other people’s. The other main options for funding are to solicit your friends and family, or to just do it yourself. Given our current economic climate, and the fact that innovation by entrepreneurs is essential to right this economic ship and restore the confidence in our global economy, all options are on the table. So read up, welcome to business financing 101.

The VC Route

Venture capital is the most highly regarded form of funding, but it’s also the most misunderstood. Venture Capital (VC) is funding that comes from professionally managed funds that have roughly $25 million to $1 billon to invest in promising new businesses. Because there are so few of them, and they have control the money, VCs are extremely choosy on who they decide to fund.

VC funding is certainly not for every company, and timing is critical, but if you’re a high-growth company capable of generating significant revenue in the short term (or already have a nice revenue growth curve), funding from an institutional venture fund provides a fantastic opportunity for accelerated growth. Such acceleration, however, does not come cheap.

Most VC firms offer a few other undesirable “benefits” in addition to their money. In many cases they will require the addition of a few senior management roles (of their choosing) to your team. Remember, VCs are usually bankers at heart, so don’t expect them to be able to help with or understand your technology or target consumer’s emotional needs. Go to them when money is all you need. A big name VC will look to own AT LEAST 25% of the company to cover their time and energy for a particular investment. Venture capital is by far the most expensive money you will ever raise both in terms of equity and sanity.

The existing VC model centers around a short-terms focus on a big payout. VC firms do not typically invest in businesses that have a promising long-term future but rather in ones that will likely see a liquidity event in 3-5 years. Because these investors aren’t putting up their own cash, they feel substantial pressure (it’s their job after all) to see significant returns on their investment over a set period of time. The fastest and biggest way to do this is for their portfolio companies to either get bought out or go public, so you can expect them to push for unnatural things to happen. $5M to break the space-time continuum usually looks better on paper than it turns out in practice.

In addition, VCs almost never look at a business plan or listen to a pitch if a trusted individual didn’t refer you. While this practice certainly limits the amount of junk plans (i.e. cubic zirconia) on their desks, it also leaves out the possibility of discovering a true gem. Yes, the old boys networks is a great thing if you are part of the in-crowd, but both parties could benefit from a more open and efficient approach to finding and filtering investment opportunities.

giantpumpkin

“VCs do initiate on their own when they see a bright startup. But it’s so rare that you seldom hear such stories. And when it does happen, it becomes legend.” – Vikas Rana, entrepreneur

As funding becomes tighter and tighter (until the economy begins to bounce back) the rate of innovation will likely speed up; out of necessity to find new ways to make portfolio companies profitable quickly. And, just as people always say it will be hard to get VC funding, the large VCs will have money to invest. For those fortunate enough to stand out and make a favorable impression, funding will still be available, as it was after the dot com bubble; but it will just take a little more work to get that cash in hand.

It is important to have your priorities straight and your feet planted in reality. If you’re new to the game and have a very early stage venture that hasn’t yet figured out how to make the cash register ring, you are probably better off working out the kinks and creating value than you are putting on a silicon valley road show. Don’t fret, there are other options.

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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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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