Eight Strategies to Consider Before Starting A Tech Business
So, you’ve got an idea for a tech business, but you’re unsure about your prospects. What are important strategies to consider before starting a tech business?
A premier consultant, Joey Tamer, consults to Fortune 500 companies and capitalized start ups to launch, build and expand technology companies. She knows where to find capital and she is a wonderful person with whom to work – a true professional.
Here are Ms. Tamer’s answers to questions on how to launch a tech business:
Q: How much capital do you recommend?
A: Have at least one full year’s capital to support yourself and the costs of your business before beginning; have six months of capital liquid at all times. Nothing kills a business like lack of capital. Recovering from an under-capitalized business failure, particularly one fueled by debt, can take years. Beyond that, you are likely to make mistaken decisions based on the pressure of your debt. Capital allows you options and room and time to stumble.
Q: What kind of support system do you recommend?
A: Ensure your partner’s support. No matter what kind of business you start, get your partner’s support. Nothing will erode your joy or confidence at becoming an entrepreneur faster than negativity at home. What does your partner really feel? If you have chosen a business partner, ensure that partner’s support by creating clear legal documents spelling out ownership, roles, and responsibilities, including a buy/sell agreement, should one of you change your mind.
Q: What do you mean by planning for the hidden year?
A: Understand that there is at least a full “hidden” year in beginning your own business. This includes the thinking, the planning, the testing, the preparation…before you actually get into play, begin to raise capital, or bring your service to a client or your product to a market. Plan for the time and cost of this hidden year.
Q: What about assessing the risk of capital?
A: Whether you risk your own money to begin your business, or your extended family’s and friends’, or outside investors’, be careful to understand the impact of taking this money for your venture: what it will mean to succeed, and to fail with it; if and how it needs to be paid back or rewarded. If possible, build your first business simply, without needing outside investment, to go up that learning curve with less pressure. If possible, do not risk your mortgage or your pension to build this first business.
Q: What about starting a service vs. a product business?
A: Product businesses require more time and capital to build than service businesses. Certain back-bedroom businesses, particularly Internet-based ones, can reduce your capital outlay. Consider building a service business, like consulting or internet-based services, focused on your professional expertise, for your first business. If you do build a back-bedroom Internet business, put out your product or service as soon as possible, even as a “free trial” offering, so you can understand the market response. From this response, you can adapt or expand the product or re-direct its target market before too much time or capital is committed to an untested idea.
Q: You offer a great reminder that business is not revenue and revenue is not profit. Can you explain?
A: You may be fooled that you are working successfully because all of your time and thoughts are absorbed by the new business. Not true. Being busy does not necessarily create revenue. And revenue coming in does not necessarily create profit. Learn to work smart, not hard and to judge whether you are adding any profit to your pocket – what remains after the business costs and the taxes, including a reasonable salary to you. The IRS considers any business that does not show a profit within the first five years to be a hobby.
Q: You recommend getting needed expert help by creating a virtual team. How so?
A: There is much that you are expert in; there is much you do not know. Get the help you need from industry experts in start ups, technology, finance, marketing, law and so on. Network among your colleagues, friends and groups to find these experts, and pay the experts what they are worth. Get at least five references on each candidate and check every one.
Be clear what you need, what the expert will provide, and what costs you will pay for that help. If your expert does not completely please you during the first couple of months, determine what needs to be done to get you satisfied. If that fails in the next 30 days, find another person to help. You can create your initial staff through virtual teams, avoiding the complexity and legal demands of employing folks.
Q: Finally, you advise staying flexible and create no blame. What do you mean?
A: Running your own business is not for everyone. If you don’t like it, or you find it too overwhelming, or it is more trouble and cost than it is worth, close the business. Eight out of 10 businesses fail in the first two years; of those remaining, another eight out of 10 fail by year five. To fail at your first business is not to fail as a person. If you liked running your business but it failed due to unanticipated market changes, or unexpected product competition, or some other factor, learn from what happened, assess the risks, and build your second new business. Life is long, and filled with opportunity.
Note: As a fellow member of Consultants West (www.consultantswest.com), a roundtable of consultants that meets regularly in Los Angeles, I’m proud to say I’m well-acquainted with her credentials. Ms. Tamer also advises consultants on the growth and profitability of their service companies. Clients include J.P. Morgan Capital, Sony, IBM, Apple, Hearst, Blockbuster, Technicolor, Harper Collins, NEC, Time-Warner, Agfa and Scitex.
Her Web site: www.joeytamer.com.
For more of her strategies, here’s her blog in the Wall Street Journal on Strategies For Finding Venture Capital In 2010.
From the Coach’s Corner, here’s a tip on branding your business:
Not to point fingers, but the State of Washington’s failed branding tagline, “Say WA,” serves as a good reminder about creating top-of-the-mind awareness.
It drew widespread criticism, including from me, when it was unveiled a few years ago. After market research, the Washington Department of Community, Trade and Economic Development finally dropped the approach.
The slogan failed to answer the basic Marketing 101 question, “So what?” that every buyer subconsciously asks. It’s all about value mixed with a dose of minimalism, thriftiness and conservation. That’s especially true even in our recovery from the Great Recession. Many Americans have learned the lessons that senior citizens have known since the 1930s.
The economic climate reminds me of what my beloved dad used to say to me during my misspent youth: “It’s not how much you make; it’s how much you bring home.”
A cute tagline may appear to be clever, but it usually does not deliver a return on the marketing investment.
Another way of putting it, make it easy for your target audience to make a buying decision by keeping in mind a consumer-oriented acronym, WIIFM, or what’s in it for me? Remember every buying decision is based on emotion. Pique the emotional interest of your target customer. If the consumer can easily make a favorable decision after seeing the slogan, you’ve got a winner.
Breakthrough Strategies to Land Venture Capital in 2010
If you follow eight tactics suggested by premier financial strategist Joey Tamer, my sense is that you will greatly enhance your odds for landing venture capital.
She shares her expertise in a Wall Street Journal blog, Strategies for Finding Venture Capital in 2010.
Ms. Tamer is an expert consultant for early-stage technology and media companies whom I rely upon as an authoritative source on finance-related matters in my Biz Coach columns.
Whatever Ms. Tamer says, you can take it to the bank with confidence.
How to Attract an Angel Investor
Now that a University of New Hampshire study indicates early stage financing by angel investors is more advantageous than venture capital money, what now? How do you get the angel funds?
Noted angel investor John B. Dimmer offers seven tips.
The 2009 study – “Initial Public Offerings and Pre-IPO Shareholders: Angels Versus Venture Capitalists” – shows evidence of under-pricing by venture-supported IPO groups in initial public offerings vis-à-vis angel investors. The study was conducted by Professors William C. Johnson and Jeffrey E. Sohl.
So what does it take to land an angel investment? Noted angel investor John B. Dimmer offers seven tips.
Acknowledging the difficulties of entrepreneurship, the successful angel investor in Tacoma, WA, who likes technology, says he looks for tenacity: “I want people with the moral integrity and intestinal fortitude to make the difficult journey through the Valley of the Shadow of Death and come out the other side,” says Mr. Dimmer. “It’s fun to greet them on the other side, hand them a margarita, and toast the success of their achievements.”
In the third installment of my profile of Mr. Dimmer’s insights, he graciously explains his comprehensive approach in how he selects investments:
Q: What mistakes do new companies make in applying for funding?
A: As I indicated, people are the single most important element in making an investment. As such, I generally don’t see business plans unless I know the people who are involved, or I know someone who knows the people involved. I think that to a large extent, most venture investors share this philosophy.
The business plan always comes first. I want to see a compelling market opportunity, and I want to know how the company intends to capture a meaningful share of that market. Mistakes I often see in this segment of the presentation almost always center around unrealistic sales assumptions. Overly aggressive projections relative to the percentage of market share the company will capture is one common mistake. Another mistake is a fundamental lack of understanding of the sales cycle, and the organizational structure required to produce the target revenues.
Q: Preference on projections?
A: Three years worth of financial projections is adequate, but five years is preferred. I would like to see the first year broken down into some detail, but future years can be prepared on a condensed basis. Having been involved with a myriad of start-up companies, I know that the financial projections will not be accurate; however, the forecasts provide valuable insight into the thought process of the people involved.
The most common mistake companies make in this area is a failure to understand and exhibit the financial metrics of their particular business. For example, software companies should normally generate 90 percent gross margins. If you are coming to me with a software investment, and your forecasts show a 55 percent gross margin, unless you have a very good answer as to why you deviate from the norm and how you are going to make money, I will assume that your business will fail because you don’t understand the financial metrics. Likewise, if you present me with an opportunity in the professional services space, which normally generates 50 percent gross margins, and you tell me that you are going to generate an 85 percent gross margin, I will assume you don’t know your financial metrics and pass on the opportunity.
Q: Structuring the deal?
A: Angel investing is risky business, with many of the portfolio companies ultimately failing. Accordingly, angel investors need to see an opportunity for substantial returns in order to offset the losses on bad deals and generate a reasonable return on the entire portfolio. What kind of a return is required? Well, a lot of that depends upon the timeline between the initial investment and exit, but traditional metrics suggest angels are targeting five to ten times their money back from a successful deal. It should be a given that any company approaching me for funding will have established the asking price for my initial investment.
Q: Exit strategy in proposals?
A: This should include the type of exit transaction, which may be a merger, an IPO, or something else, the timing associated with the exit, and the valuation metrics at exit. The mistakes I see here fall into one of two categories, those being an initial valuation that is set too high, or an unrealistic assumption about the exit timing and valuations. As the exit strategy is simply a forecast of a future event, my solution to either of these problems would be to try and negotiate a lower initial valuation.
As an example, I recently looked at a company that had their financing pulled out from under them. They had a big business opportunity ready to go, and needed capital to execute. While I liked their business plan, I felt their valuation was exceptionally high. I compared their valuation metrics with those of similar publicly-traded companies, and found that I could own these public companies for about 20 percent of the price they were asking. I ultimately went back to them with a proposal, but slashed their valuations. They weren’t too happy and so went looking for money elsewhere, presumably under different deal terms.
Q: Legal controls?
A: I believe that items such as voting rights or preference provisions should be allocated and enjoyed equally between all the parties involved with a company. Periodically I see instances where the founders have preferential rights to voting or liquidation. I’d like to think that we are all on the same team, which means if one person wins, we all win. Preferences then make it possible for one party to win, and another to lose, cause the creation of multiple agendas and ultimately lead to failure.
Q: What are the components of a successful presentation?
A: It’s pretty simple: brevity, clarity, honesty. A quality opportunity should be somewhat self-evident. I might need a little help starting down the path, but if I don’t pick up on it pretty quickly, I’m never going to buy into the deal. So, don’t be too long, don’t get overly complicated, and don’t try to pull a fast one on me.
The other thing I am going to look for in a presentation is the ability of the entrepreneur to think on their feet. If you really know your stuff, this shouldn’t be too hard. I periodically like to ask questions where I already know the answer just to see if the entrepreneur knows what they are talking about. Likewise, I sometimes like to ask questions that are outside the box just to see how the entrepreneur handles obtuse ideas. If you know your stuff, you can digest the inquiry and quickly formulate a meaningful response. If you stumble, you don’t know your stuff, and if you don’t know your stuff, I don’t want to give you any of my money.
Q: What trends would you care to predict?
A: I do not consider myself a visionary, but I’ve certainly worked with visionaries. My strengths come in the form of listening and then determining if there is a realistic opportunity for the vision to be commercially implemented within a reasonable time period. The only prediction I will make is that as our world advances, each advancement creates more opportunities…More opportunities for services, products, and technologies to be developed and delivered to consumers. The world of the entrepreneur is expanding at an ever-increasing rate, and I don’t see this changing any time soon.
The other columns in which Mr. Dimmer shares his expert opinions:
- “Investor: Tips for Increasing Cash Flow, Profits”
- “How Investor Has Fun in Business and Technology”
From the Coach’s Corner, to see the University of New Hampshire study, visit: http://www.unh.edu/news/cj_nr/2009/july/lw22cvr.cfm
Also, here are some Pacific Northwest angel-investment resources:
Boise: www.boiseangelalliance.com
Portland: www.oef.org/home/
Seattle: www.allianceofangels.com/
Spokane: www.connectnw.org/
Vancouver, WA: www.vef.org/angels/
WA statewide: www.watechcenter.org/
What No One Tells You about Raising Investment Capital
Investment capital is available during all economic cycles, according to leading consultant Joey Tamer.
Ms. Tamer consults to capitalized start ups and in-house ventures within the Fortune 500 to launch, build and expand technology companies. She advises product and service companies on their growth and profitability. She has consulted since the early days of the PC through to her Web 2.0 and Web 3.0 clients of today.
Her clients have included: J.P. Morgan Capital, Sony, IBM, Apple, Hearst, Blockbuster, Technicolor, Harper Collins, NEC, Time-Warner, Agfa and Scitex, and many early stage ventures such as Earthweb (IPO 1998), and iSuppli.
As you might expect, she’s regularly invited to chair venture and investment panels in technology sectors.
“In good times, risk capital is available from all sources, and they compete and sometimes share hot deals with each other; the practice is termed syndication. In downturns, venture money is available from venture capitalists who have raised their funds recently, in the past year or so, and have not yet deployed all the capital,” said Ms. Tamer. “In bad times, funds that are near the end of their seven- to-10-year cycle will use their capital to safeguard existing portfolio companies and will commit to fewer, if any, new investments.”
Ms. Tamer has proven approaches for raising money.
“Capital strategies allow the CEO to know what kind of money – private, angel, VC, strategic corporate – to take at what time to drive up the company’s valuation, and to keep control of the board,” she said. “These strategies are sensitive to economic times as well. I do not find capital for companies – that’s the job of the CEO. Another major strategy I prefer involves identifying sources of non-equity capital – strategic alliances and alternative revenue sources, bringing in early revenue rather than giving up equity at a low valuation.”
She graciously answered questions about raising funds:
Q: Regarding your five strategies for raising investment capital, you suggest creating a “unique product or service in an empty space.”
A:I often help my clients define and present their unique value proposition (UVP) – the special technology or service offering or business model that makes their company different, more valuable, and more likely to succeed than their competitors. CEOs are often too close to the business to do this easily.
During one “down” year, I defined one company’s UVP and wrote its pitch piece for its first round of outside capital, and with these documents they sold the company within eight months during a difficult investment year. Sometimes the right pitch to the right audience works regardless of the economic conditions.
Q: You warn about defensibility.
A: The product or service must be defensible from “copy cats.” Companies must beware of “proving the market,” only to have a large company duplicate their efforts and take away their market share.
Q: What do you mean about scalability?
A: The product or service must grow quickly enough (scale) to offer institutional investors a 10-times return on their investment in the first five years. Private investors are sometimes more patient or expect a bit less of a multiplier.
Q: What is your thinking about management?
A:Investors trust management teams with a proven track record of prior successes. First-time entrepreneurs should gain commitments from experienced players and advisors.
Q: How much capital should be requested?
A:Companies asking for too-little capital often are dismissed as naïve. Capital strategies should define the current round and the subsequent round that will be needed to reach break-even and to predict profitability. Also, CEOs must understand the criteria required by each kind of investor – private, angel, boutique VCs, tier-one VCs, corporate strategic money, and when it is best to engage each kind.
Q: What do you recommend to get investors’ attention?
A: Here are four strategies:
- CEOs must master a 30-second sound bite of their unique value proposition and the potential return on investment (ROI) for investors. CEOs must be able to speak and write this sound bite in one or two sentences. For investors, this is the uniqueness that will result in a significant return on investment.
- Write a pitch piece – a business plan in sound bites. The secret sauce of this pitch piece is to tell the story addressing the investors’ interests in clear powerful language. Use text (3 pages maximum) or PowerPoint (10 slides maximum). Tell the value story to the investors, not the whole story. Have full financials prepared. Investors read a summary, then the financials. Then, if they are interested, they read more or ask more. Long business plans are rarely read these days. Even 10-page executive summaries can be ignored.
- Don’t apologize. Tell the plain truth. CEOs should not aggrandize their company or UVP. An investor will discard the offer if he or she needs to verify the truth of the presentation.
- Take a power position when asking for the investment. Don’t be shy. CEOs should say what they have, why it is unique, why it will create an ROI, and what they need for capital, simply and with confidence.
Q: What techniques are best for presenting an opportunity?
A: I suggest three:
1. CEOs should explain the amount of the raise they are seeking at the beginning. Investors want to know this as soon as they understand the opportunity. This should be part of the 30-second sound bite, and stated in the first couple of slides or paragraphs of the presentation.
2. Early in the presentation, the CEO should define the projected ROI, to keep the attention of the investor.
3. CEOs should then back up their request with their pitch, in positive language and a slow, confident tempo. In the first few minutes, the CEO should define the UVP, the amount of the raise and projected ROI, and the company’s defensibility and scalability. Then, be ready to back up these assertions. At this point the investor may ask questions rather than listen to the pitch. Often CEOs get only a few minutes before being interrupted – these minutes need to make the company’s case.
Disclosure: I write with utmost confidence about Ms. Tamer, www.joeytamer.com. I’ve had the opportunity to observe her and her expertise on many occasions. We’re both members of Consultants West, www.consultantswest.com.
From the Coach’s Corner, in order to achieve strong results in the future, consider assessing your past performance. View your year objectively as though you were standing off to the side as another person.
Without making it an occasion for guilt or regret, start by answering these questions:
What progress have you made this year? How have you fallen short? What are your strengths and weaknesses?
And if you’ve never done so, I’d recommend a SWOT analysis – an inventory of your strengths, weaknesses, opportunities and threats. Then, follow it up with a strategic plan.