For those of you in the dark, Scale is the reason updates to McStartup have been few and far between lately.
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We (I) take a break from our (my) normally riveting startup-centric commentary to bring you this exciting piece of gratuitous, self-promoting news:
]]>There are hundreds of reasons why someone, be it an individual, a bank, or a venture capitalist, might pass on your investment. They might have different portfolio requirements, they might have competing investments, they might be on a different time horizon from what you present, they might not like the color of your tie, they might be out of money, they might not like where you are located -- who knows.
However, I think if you go into the process with the right mindset, it makes this all a little easier to understand. I view raising capital as being similar to an aspiring actor auditioning for a part. Sure, if you don't get the part, there is going to be a piece of you that takes it personally -- but there's also an understanding that you probably won't get the part, and that if you don't, it *might* be because they think you are a lousy actor, but it might also be that you were too tall, your eyes were the wrong color, your voice was wrong for the part, or that they just ate a bad tuna sandwich for lunch and were more focused on that than on your audition.
So what is an aspiring actor to do? Lots and lots of auditions, of course. The same holds true for raising capital -- they key is to schedule lots of "auditions", dust yourself off from rejections, and get back into the mix until you "get the part".
And guess what? Over time and lots of these auditions, you'll get better at it, you'll start to understand what the investors expect and are looking for, you'll become more confident, and your whole pitch will move to the next level.
I can tell you some statistics from personal experience: I've successfully raised capital for my companies 7 times or so -- but I've literally been rejected more than 100 times, probably more than 200 times. This is how the game works, and if you aren't getting rejected, you aren't trying hard enough to raise your funding.
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But he's right, I do need to try and stay more on top of this, if for no other reason than I enjoy helping entrepreneurs get their ideas off the ground.
All that said - I was asked by a number of folks who attended the presentation to make the slides available to them, so I'm posting them here. There is no recorded voiceover, so I'm not entirely sure how useful these are if you weren't there to hear me, but you're welcome to have a look at them. If enough people ask, I will go ahead and get a recording up of the actual presentation.
More >> Idea to Business Seminar
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City Journal - What Ever Happened to Work Ethic?
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You need to quit your job, and you need to do this full time.
I am not naïve. I know that you’ve got bills and mortgages and student loans and car payments and you really wanted a new hamster. Those things aren’t going to go away, and there is really no substitute for jumping in full time.
There are really three reasons: First, unless you are planning on working in the US and selling stuff to China (or vice versa), all of your customers are going to be sleeping when you are working, or at least, wanting to work. Business gets done live, whether that’s in-person, on the phone, or email. You’ll never get enough done, and you’ll never be responsive enough with your customers if there is a 16 hour lag between every piece of an email conversation. Think about it – if you were there in front of the computer trading emails with someone, you might go back and forth 8 times in an hour answering and asking questions. That would take a full WEEK or more if you could only respond once a day. The inefficiency is going to kill your fledgling startup, and you’ll be discouraged at the lack of progress.
Second, you are going to be too darn tired to really put in a full day of work after you’ve already put in a full day of work. You’ll either kill yourself with Red Bull trying to plow through it, or you’ll simply stop after spending an hour or two working on the business. Again, you could accomplish in a single day what you’d get done in a week or two part-time.
Third, there is nothing more motivating to making your business work than NEEDING it to work in order to make that mortgage payment or feed your family. If you are working part time, the reality is that your primary source of income is elsewhere, and mentally you will be dedicating resources to maintaining that source of income either consciously or sub-consciously.
Finally (I did say there were four reasons, right? LOL), there’s the simple matter of spending time on the business, and learning how a business works. In the book Outliers, the assertion is made that it takes 10,000 hours to become an expert at something. That’s a crapload (official term) of time. You just can’t get there, or even close to there, spending part time on something. It’s for this reason that I regularly encourage those graduating from college to go straight into business for themselves. There is something to be said for spending time learning your trade, but the “trade” of running a business is something you just can’t learn from a book. You don’t learn to shoot a basketball by reading books on the subject, and you won’t learn to run a business purely by reading books. You certainly can learn a lot from books, but it’s no substitute from picking up the ball and shooting. Great books and great coaching will make all that practice much more effective, but you still have to shoot. Business is the same way, and you can’t start taking shots until you get fully engaged in the game.
If you think about this 10,000-hour number for a minute, it’s pretty clear why you need to go full time. If you jump in full time, spend, say, 60 hours a week working on your startup, you’ll be a business-master in little over 3 years. That’s a lot of hours. But, you’ll be well above novice in a short while, and will show steady improvement all along the way. And of course, you’ll keep getting better even after 10,000 hours. However, the point is, that if you’ll have a VAST amount of experience and knowledge after 3 years compared to where you started. That experience, those hours of “practice”, makes a huge difference.
Compare that to the “part-timer”. 10 hours a week spent working on the business (and that’s probably a stretch for a part timer) is going to get you to 10,000 hours in 20 years. Seriously. So forget it – you’re never going to stick it out that long.
Even if you want to go part-time to gain some experience, how many hours do you need to get to make it that far. Outliers suggests it’s about 4,000 hours to make it to a professional type status. That’s 8 years of part time work, versus 15 MONTHS full time. In other words, if you jump in, you’ll start to fell reasonably confident in your abilities right around your 1-year anniversary. The alternative is to wait until your Kindergarten student is in high school. No chance. I just don’t see anyone working away, steadily and without interruption, part-time for a decade of life, just to get the the point where they MIGHT go full time. Ugh. The knowledge of a decade-long part-timer is equivalent to a 15-month full-timer.
About two years ago I decided to learn to play the drums. On a perfect week, I might get 7 or 8 hours of practice in. On a bad week I get an hour or two. So, lets say on average I get 4 hours a week, which is probably not far off.
If I wanted to become a rock star, I’m looking at 48 years of practice at my current level. Over 2 years I’ve racked up something like 420 hours of drumming practice. I'd better start looking for rock bands that will need an 83 year old drummer to hit the world tour when I'm finally ready...
So, now lets say some freshman in high school decides to take up the drums, and comes home every day after school and starts banging on those things. Maybe he or she gets 4 hours of practice a day. They’re going to hit 10,000 hours in 7 years, and they’re going to pass up where I am right now, after 2 years of steady, part-time practice, in just over 3 MONTHS.
I give you that example because it illustrates that you need to really think about what it is you are trying to do. I am not trying to become a rock star. I play drums because I like to play them, I find it a challenge, and I enjoy it. It is not my profession. I wish I could spend an hour or two a day consistently practicing, but I can not, and that’s fine, because I have other areas where I choose to focus my time. Essentially, I’m just jacking around on the drums for enjoyment. Sure, I WISH I could play like someone with 4,000 hours of practice when I have just 400, but that's just not happening, no matter how much I wish it were the case.
So, if you want to jack around with business for the enjoyment of it, then by all means go part time. But, if you intend to make some real money at it – to become a professional entrepreneur who has a thriving business that sustains them, then you need to quit your job and get practicing, because you’ve got 10,000 hours of experience to start racking up to get there.
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What's your take on "pay for present" Angel Groups? We've been asked to present on Friday to an Orange County group who wants a $50 application fee and a $1500 presentation fee. I keep thinking of Hollywood agents that can make me a star for the same figure.
I would welcome a differing opinion, but my take is the same as your take. Certainly there is not going to be much wrong with a completely nominal fee (say, the $50) just to get the folks that aren't really trying to start a company scared off. However, the point of presenting is to raise money, not spend it, and if you are looking at Angel investors, you are very likely in the earliest stages of a company when you are least likely to be able to afford anything like $1500 (and I've seen more).
I've sometimes seen these wrapped up in a broader conference, where you pay for a little table/booth, make your pitch, and get to watch other pitches. THAT may well be worth it. I wouldn't really expect to raise any money in that type of forum (too much noise), but paying to see other people give pitches while you have a seat in the audience is a very valuable experience. You'll quickly see what works, what doesn't, and just how crisp your presentation needs to be.
In general, I'm not a huge fan of presenting to angel groups, as I'd much prefer to talk to the individual angels, even if they ultimately participate as a group. There's too much risk of one sour-apple driving the whole conversation negative in those pitches, so if you can do it, try to meet with just one or two of them at a time.
That said, presenting to an angel group is better than not presenting to anyone at all, but I wouldn't expect to pay to do it.
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Toby wrote:
I have been offered the role (with a euphemistic ring!) of CEO of a new startup - I will also be the sole employee to begin with...
I have not yet developed a clear business model, but there is one complexity I am unclear on.
I have been offered an immediate salary $70k (~50% of my current salary as a professional) and a 5% equity stake. We're still talking in loose terms, but I was guaranteed that this would be 5% AFTER two rounds of capital raising (small seed, and then second round IF pilot is successful). 5% is also on a 'vested' employee share type arrangement (although I may suggest your "founder's shares" idea).
Can you explain how we are to compare salary to equity in a start-up context (My intuition was that the salary was higher than I would expect a small VC backed startup could offer, but the equity lower, given I will be the sole initial worker, and to be honest, very well qualified)?
Well, there is really no "standard" that we have to go off of, although the concept of being "guaranteed 5% after two rounds" is a bit odd, because it's usually the job of the CEO to secure and negotiate those rounds of funding. I would rather see you get a larger percentage now, that, according to plan, would have you end up at 5% after those rounds. If you end up getting a higher valuation for the company because of performance between now and then, you have a clear reward (less dilution) for your efforts. If you under perform but still need the money, you'd have the obvious penalty. Also, if you somehow end up in an interesting situation before raising those two rounds (an early buyout opportunity), you should not get penalized for that by having less equity rather than more.
That said, I have to ask where the other 95% equity ends up. You said you're the only employee - which implies that investors own 95% of the company? Is that right? The arrangement in that regard seems very odd. I'd be happy to provide some more opinion if I had more detail around the overall business plan, financial backing, and equity structure.
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For those of you in the dark, Scale is the reason updates to McStartup have been few and far between lately.
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Gayle writes:
I've read your articles but first time I've been out to you site. Good Stuff!
Question: I am raising $35,000 capital for a start-up company (seed money/pre-start-up). I have an investor willing to invest $10,000 but wants 10% of the company (1% equity for every thousand). Is this typical with private/angel investors?
Also, will probably need some consulting down the road - have never taken a start-up through this. What are your rates?
Any and all info appreciated! Thanks!
The problem you have isn't really about what percentage should you give an investor, it's that $10,000 just shouldn't be structed as outright equity if you're a brand new startup. This should be structured as a convertible note, which I described a bit in this post about a new video game startup. Perhaps you can add a clause in there which says if the note has not converted after some period of time (say 5 years) that you can buy it out for a fixed amount, or then convert it to 10% equity. Depends on what works for you, and you didn't give me much info about the long term business plan.
On the other hand, you are well within the area that an SBA loan or commercial loan from your bank could address. Lending is tough these days, but you should pursue several options. For that amount you may also consider some of the online peer-to-peer lending services.
In any case, I would not say you should just start selling stock for a $10,000 or $35,000 investment. You need to let the business grow before you can accurately analyze its potential valuation.
Good luck!
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Thomas wrote:
Four of us just graduated college, and have started a video game company together. One guy's dad is putting in up to $50k to help us get our first title out there. Who knows if we'll make revenue from it, but it should be enough to get us to publisher financing or potentially other investors next.
BTW, we are an S-Corp, I believe we have 10,000 shares setup, and the dad financing would be for 20% in shares or a convertible note (still don't know enough to decide).
Everyone on the team but me has a full time job, with the plan to work on our company during the evenings and weekends.
I'm only working part-time at my other job, so I'll be putting in at least 20 hours a week into our company, plus any possible evenings and weekends too.
I need to get paid at least for the 20 hours to be able to eat and pay student loans. But, in order to save capital, the other guys feel strongly about getting stock in exchange for their hours. Setting up an option pool is a bit confusing, but I don't feel good about just saying "You worked 10 hours, normally paying $15 an hour, so here take $250 in stock".
Would it be wise to sync the founder share vesting to some minimum amount 'off-time' hours worked?
I would say that rather than try to track "hours for shares" is that you should probably take a stab at how much time each of you will put in between now and getting the game out the door, and divide up the stock that way. Then, as time goes on, if things aren't progressing with one team member as planned, you guys need to have a chat about expectations vs. delivery.
The reason I say this is because there should be a known piece of accountability before you get started. If you are "paying by the hour" then the expectation is "if I work this much, I get this much". While a bit of nuance, I'm sure you can feel the difference between that and "the guys are expecting me to work this much, so I'd better get cracking".
As for the $50k financing, I would definitely structure that as a convertible note, probably with a pretty big discount into the next round, given that there is a tremendous amount of risk between now and then. However, $50k is not really enough of an investment to warrant setting a valuation for the company -- in fact, the company is probably worth far less than $50k right now, so if you wanted to set the fair valuation, $50k would essentially buy the whole thing.
As proof, you might consider what would happen if I called you up and said "Hey, I heard you had an interesting idea for a new video game. I'll give you $50k to tell me about it now and never mention it again". I'm guessing you'd take that deal, unless you've already spent hundreds of hours developing code and plans.
Something simple - maybe to say a $50k note, that earns 10% interest per year (added to the note), and converts into equity at a 50% discount. So, for example, if you raise money 1 year from now, the $50k + interest is now $55k, and that would "buy him" $110k worth of equity at the next round valuation. By setting the discount, you are effectively saying "we don't know what the company is worth today, but it's probably half of what it will be worth when we raise money". It's not unreasonable to say the discount should be more than that, but that's the basic structure and thought process.
Now, onto a slightly bigger topic...
I often advice people that if they are starting a company, to do it full time, starting right now. The feedback I've received from those that followed my advice has been tremendous, and I can't tell you how strongly I encourage you to think about getting you and your team to focus on this full time. To illustrate, here are two scenarios:
Scenario 1: You all quit your jobs and do this full time.
So, what happens here is that your entire future earnings is based on how much you start working on this thing, and so you get up, hit the "office" which could be your bedroom, your parents basement, or whatever, by 7 or 8am, and start cranking away. There are no distractions - no bosses checking on reports, no co-workers coming in for chit chat, no girlfriends calling to go out (she's at work, right?), none of that. Just you guys working away. At 5pm, you probably don't even notice the time, you keep on working, have a frozen pizza, and work until 8 or 9pm. The next day, you do it again.
Ok, so...
Scenario 2: You keep your jobs and work on this "part-time".
So, you hit the office at 8am, you're going through your daily tasks doing whatever it is, half distracted by the thought of getting to work on your own business that night, and half distracted by what you are really supposed to be working on. All the stresses of the day come in, compounded by the fact that your mind is only half-committed to doing a good job, which adds to the stress. By the time the day ends, you head home, have dinner, and your brain is fried. If you start working you'll only get 2-3 hours into before you go to bed, which is about the amount of time that, in my experience, it takes to really just get rolling and hit your stride. So now you aren't doing your best work at your job, or at your own business, and that's if you have the strength to work in the evening at all.
You said you are just out of college. If you have the option to live at home, or live with a friend, take advantage of not having a whole lot of life's financial baggage (school costs for kids, mortgage payments, car payments, etc), and find a way to get by on hot dogs and pizza while you pursue your dream.
I realize that is not an easy decision to make. However, those that have done it, have all told me how shocked they were at the amount of work they got done once they made the full time commitment. If you have any way to make it happen, think about doing it.
Best of luck to you!
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