How Much Money Should I Raise…$29,542?

Hilarious scene…serious question.

Hilarious scene…serious question.

Hopefully, you remember the classic TV show Taxi and its despicably lovable character, Louie DePalma.  In one memorable episode, the unforgettable Jim Ignatowski accidentally burns down Louie’s apartment. Jim’s wealthy father sends Louie a signed blank check to cover the damages and Louie faces the question that every high-tech entrepreneur faces:  How much money should I ask for?” (Trust me, you’ll like the rest of this post more if you spend the 4 minutes to watch the clip!)

It’s a classic strategic question asked by every entrepreneur that I’ve ever worked with.  And it is obviously a good question to spend some time thinking through because the amount you ask for reveals how much logic and business savvy you have in your bloodstream.  By the way, you will always be wrong in the eyes of at least half the experts you ask.

I certainly can’t answer your specific “how much” question in a single 1,000 word blog post.  But I will suggest there are only three main buckets in which to place your answer generally.  Once you’ve placed your trust in one of these buckets, then you can get to work on your specific amount:

  1. “raise no money now, keep bootstrapping” (~20% of deals should do this)
  2. “raise only what you need to get the current job done” (~70% of deals should do this)
  3. “go big or go home” (~10% of deals should do this)

Understanding the value of your business is a major factor in raising money.  Remember, that investors typically obtain ownership in your company in exchange for their investment.  If, like some that show up at my door, you are only part-time at your venture and the product isn’t quite built and you have no prior experience in a market, your business is not going to be worth more than $1 million in all likelihood.  If you were successful at raising $2 million, the new investors would own 2/3 of your business.  You probably don’t want that and believe me, THEY don’t want that.  These early-development stage companies should continue to bootstrap until they have created some value.  It’s also possible that your company may fall into this category and not be so early-stage.  If you’re just beginning to find your way in a market, or have discovered some traction after a strategic pivot, grinding it out for another 12 months at less than optimal cash positions may be the right path. Developing a proven business model, even the earliest stages of one, is a sign that it may make sense to raise some outside cash.

Raising capital when you shouldn’t is extremely frustrating.  Most experienced investors understand that they may not be the final investors in your company.  If more money is needed later, those later investors will get to set the rules and those rules may not be friendly to earlier investors. This awareness adds to their reluctance to invest so early and, rather than ask for more onerous terms from you, they simply decline to invest.  And you are likely to spend a lot of wasted time and face a lot “no’s”.  The smart founder knows the difference between dogged persistence and foolhardiness.

If you’ve decided that raising money NOW is the only way to go, I find that a majority of early stage companies should probably be raising a moderate, specific inflection-point-inducing amount of capital (#2 above). This is true whether your company has no revenue or millions in revenue.  And this is really where the Louie DePalma conundrum takes hold: How much to ask for?  Here is how I typically go about helping my clients figure out how much to raise.

I take the founders best assumptions and projections for 2 years after I’ve begged them to be as objective and cold-calculating as their entrepreneurial minds will allow!  Then we spend about 4 hours talking about a much more modest set of assumptions for both revenue and expenses.  Then you add up the shortfall and add 6 more months of burn rate to get your total.  Now stand back and stare at the number and assess what that number means for ownership in regard to the current value of the company. Evaluate what that number means in terms of milestones you’ll achieve and what timeframe is targeted for them.  Be sure to tie these…amount, milestones, timeframe…together in your investor pitch as you start to consider whom to approach and it should yield a rational and credible amount of cash to seek.  Yes I know…you hear that devil on your shoulder saying “go big or go home” and you’re afraid you’ll regret, like Louie, not listening to that voice when he discovers $200,000 was possible.  (To be clear…if you are offered a larger amount of money…consider it and its implications, of course.  What I’m talking about here is what you go out there asking for).

Trying to raise a distractingly large amount of money…say enough to pay for operating shortfalls AND enough to pay for a new round of product development AND get through regulatory approvals AND begin making product in quantities AND launch the sales effort on that new product…is a “go big or go home” strategy.  I do not advise this strategy in most cases, especially in the past 5 years or so.  The funding climate and valuations have not warranted it.  If your company has gotten to 1) rapid revenue growth (10-20% per month?) and 2) operational normalcy (i.e., predictable margins) and 3) you are facing a very large market opportunity for which you’ve  placed yourself at the forefront in your industry and 4) the external funding winds are in your favor then a “raise as much as you need to get you to an exit” strategy may be worth considering.  I’ve often heard this strategy espoused by very respectable people who understand well the dynamic in raising capital.  They say it this way, “You’re not raising enough money.” Maybe you set out to raise $500,000 and they say “you should try to raise all $4 million you need for your plan.”  There are times when this could be true, but usually, I find that founders are blinded by the flattering nature of this comment. “Yeah, I deserve to raise more.”

As I said at the beginning of this post, what your company should specifically raise can’t be handled by the advice in a single blog post.  You should seek out some objective advisors who can help guide you first to the right “high level strategy” and then within it, figure out the detailed strategy.  I’d also suggest that you create a strategy for each…that is, know what you would do with a bootstrap, middle-of-the-road or go big strategy amount of money.  Don’t present each scenario, pick your preference.  But do be prepared to discuss each with investors.  Or, at your own peril, follow Louie’s lead, just stick a finger in the air and ask for a number between “whoa” and “meh”.

Check out these other posts on starting and financing your venture

Ohhhhh. I Get It Now. You Said Valuation…I Thought You Said Value.

Every Top 10 List Deserves a Few Cautions

Let Us Begin with the Beginning

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VentureTips: Don’t Say It! Don’t Say It! Don’t Say It! Ugh, You Said It.

What Not To Say To An Investor

What Not To Say To An Investor

I get to listen to the stories of lots  of entrepreneurs.  I’ve probably spent at least 30 minutes with more than 1,500 of them by this time.  Many of them say some pretty naive things. In fairness, most of them have never stepped out onto the ledge of entrepreneurship before, so a little naiveté is to be expected. Despite this, it is hard to not roll my eyes or sigh audibly when some classic uninformed comment comes out of an entrepreneurs mouth.  I apologize to any entrepreneur who has received this reaction from me…I know you’re just learning the ropes and some of the things to not say to an investor may sound logical.  In order to make a good early impression, please consider the following advice carefully and take it to heart when approaching someone from the investment community.

Do not say “I need you to sign an NDA”

Probably 10% of the first time callers or emailers to my office lead off with a statement like “I’ve been working on something really incredible for 3 years and I need investment to change the world. I’d like to tell you about it, but I need you to sign a confidentiality agreement first.” Before we’ve spent 2 minutes together, I’ve decided that you have nothing that you can turn into value.  In general, it is good to be careful with the amount of information that you share with strangers.  However, we do not sign NDA’s at the very beginning of our relationship with you.  In fact, it will be a fairly infrequent event for us to do so at any point.  We see ideas all day long every day.  Investors will dig into the validity of your technology at some point, depending on the nature of the technology, but for the first few conversations, we want to understand the bigger business context of where your concept fits in the world. Who will use it? How will you sell it to them? Who are you, anyway, and what experience do you have with the customer set? How much will it cost to sell the first one? Etc., etc.  You need to be able to describe a LOT about the technology and potential business without me signing a document.

There are many critical elements to starting a business of which “having the idea” is only one.  I can’t steal relationships that you have with people important to your business. I can’t purloin your professional experiences. I can’t abscond with your know-how and education about your target industry. Your idea is important, but not all-important. It is ok to say something like “If you’re interested in getting to know the secret sauce, we can move into confidential due diligence later, but here is the business plan for what we think we have.”  But first, be sure you have more to your story than just a technology concept.

Do Not Say: “We have no competition for this product”

Probably 2/3’s of founders I work with have uttered this to me, and it has been a lie every time.  And, when you say it, it is obvious to me that you have not done enough to understand the environment in which you’ll be competing.  Don’t ever think of your “competition” as a product/service that your product will sit next to on a shelf.  Rather, think of the “competitive landscape” in which your business will operate.  When you think of your competition more in terms of “what other courses of action might my ultimate customers have”, you would never say “my customers have no choice but to buy from me.”  I don’t think you’d ever suggest this to a potential investor…would you?

I’m sure that the particular configuration of your product or service is new…but in the end, your specific product or service configuration is irrelevant.  The problem that it solves is what matters and you have to view your product or service in terms of the problem it solves as opposed to its intrinsic values and characteristics.

Do Not Say: “We’re a virtual team”

I completely understand the idea of how “Skype, dropbox and IM make us productive even though we’re 3,000 miles apart”.  However, in my opinion, this is an organizational model that is only relevant to an investor when used in the past tense.  As in “we hacked our prototype in a virtual way”.  A serious business has a founding team and that team is in a room together often.  You can build a functional prototype, a beta site or a proof of concept working from 2 or more garages or kitchen tables.  But you cannot build a serious, scalable business from them.  You can have high-performing, valuable team members and outsourced service providers at globally diverse locations, but the big strategic decisions that need to be made on an ongoing daily, and sometimes hourly basis must be made in a synchronous manner; on the same whiteboard in the same room kind of way.  Read the histories of the successful companies.  A lot of virtual hacking probably occurred, but the BUSINESS…where the real value was created for founders and investors…emerged from a single room where the team was together for a majority of the working week.

There are other things we investors don’t like to hear.  Personally, I don’t like to hear “We’re going to replace the need for landfills in 5 years” or other audacious mankind-saving prophecies.  We’re trying to build a business together, not a new society.  None of us like to hear “Our projections are conservative” or “We only need 1% of the market to be a $100 million business” or “Our competitors are too big to react quickly enough to us”.  I know you mean well, and I do greatly respect your hopes and dreams, even though I may cross my arms and shake my head.  Just be careful what you say!

Other Venture Tips from TechonomicMan:

Writing a Business Plan

Your Customer Base is your Biggest Asset

Where to Get the Best Advice

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The Four Seasons of Your Start-Up…Winter

If you’ve been reading along in this 4-part series of the evolution of your start-up, you may be expecting that Winter is the end of the line.  You may be thinking that somehow I’m going to wrap up the series with a story about a wintry mix of decline and a slide into a dark and cold and gray well of business-dormancy.  That is not, however, what happens in the Winter of your start-up.  As with life on earth, Winter inexorably leads to Spring.  In start-ups, this transition takes you from the Winter of your start-up to the Spring of your growth-stage company.  If you want to catch up on the series, click here for Spring, here for Summer and here for Autumn

Only in the Winter of your start-up do your financials start to normalize into some repeatable mode.  You probably start to notice some predictable seasonality in customer acquisition.  Volatility in margin swings is reduced.  The top line growth rate may take a flatter-curved breather.  Your start-up venture has reached a sort of cruising altitude and the turbulent air of your ascent is just a confidence-shaking memory.  After several years of mostly probing markets, experimenting with sales models and reacting to obstacles…the Winter is a time to think and maneuver with strategic intent about what comes next and how to find that next level of revenue.

Winter inside your start-up does not really look like this.

Two lines of thinking typically emerge at this point inside the management and investment team of the start-up.  One line of thinking takes the founders down the path of “growth capital”.  On this path, the founders would be looking at their situation and thinking things like “we’ve got a huge pipeline of customers that we just need to follow up with”, and “version 2.0 of our product will allow us to serve a new group of customers that we’ve had to turn away before” and “we’re winning customers from our competitors, several of whom are going out of business.”  If these are the lines of discussion going on at board meetings and in management team conversations, then your conclusion is likely to become something like “We should try to raise $3-4 million in equity, and grow from $5 million to $10 million in revenue in 12-18 months.”

The other type of discussion that might be occurring inside the business would sound something more like “Our valuation won’t support a $3 million raise given our post-money valuation from the last round,” and “we spent way too much on developing version 2.0 to support a solid market rollout,” or “Founder A can’t keep bootstrapping after all these years,” or “Investor A, the largest, says he needs to find a way to liquidate his holdings.” 

Whichever conversation is occurring, and my experience tells me that both sets of conversations are going on simultaneously, a major self-analysis should be underway by all involved.  The late stages of “start-up” are a good time to think about re-writing the business plan.  Not an update…a start-from-today-oriented plan.  Your business has taken countless zigs and zags and pivots and plot-twists since first writing the plan.  Without a doubt, external factors have changed dramatically since the business launched–the economy is up/down, the stock market is up/down, private sector investment climate is up/down, etc.  It is important to allow senior management team to take a serious look at where the business is and where it is going strategically.  Whether the “go forward for growth capital” or “go forward with a partner-merger” path is chosen, this is a good time to re-evaluate how your company is positioned against others in your industry. 

Compare yourself on size, market segments, breadth of product offering, etc., and be objective! Plot your company and your competitors on a series of X-Y axes that compare some of these attributes and position yourself on the graph. You know much more about your industry now than you did when you started your multi-season journey…use that knowledge to take some reflective time and assess where you are and how to maneuver to get where you’re going.  

You’ll also want to use the X-Y analysis approach to give some thought to your potential acquirers.  Who are they and how do they compare to each other?  Obviously some potential acquirers will also be on your “competitor” chart, but there should be numerous others as well on your “strategic acquisition fit” chart.  Based on what you see, what sort of story do you need to tell each one in order to be attractive to them?  To which among them do you offer the most value? This is probably a good time to spend a little cash on those investment banker types.  If you do, make sure you find one who’s been in the middle of lots of similar transactions to yours.  It can become very compelling to select an investment banker who has done deals with the biggest stars in the universe.  Don’t be starry-eyed…select the one with the best fit with the groups that you think are the best potential fits for you.

Transitioning from a nice start-up story to a nice growth stage story is perhaps more difficult than passing through the other seasons you’ve had to pass through with your start-up…and they were ALL difficult.  This season is all about strategic maneuvering…and like with the other seasons, evaluating the people involved is critical.  Your “start-up” should feel more like a business now, and a certainly a bit more bureaucratic than it was when it was 2 or 3 people in an incubator.  Know who you are as a person, and that will help you know whether you’ll be able to live inside this structure…or whether you’ll need to start something new.  Either way…the Spring once again awaits!

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Can Humanity Be Saved From Instant Replay?

Global life is increasingly obsessed with instant replay of all types.  In the pre-digital days, the extent of instant replay for use in judging actions and words by people, was largely limited to newspaper editorial pages.  If enough readers read an article and noted a mistake, AND took the time to write to the editor pointing out the error, the newspaper might print an apologetic retraction that few people would ever see. Humanity has evolved technologies that make these analog days seem quaintly blissful.  Mistakes were more easily hidden and humanity was generally more ignorant of the dizzying magnitude of mistakes being made.  I’ve recently become a bit more worried that technologies making our lives ever more scrutable and may be undermining what it means to be human.  In other words, I think instant replay is destroying humanity.  

Ok, so while that may sound like an exaggeration, I don’t think it is an enormous exaggeration.  My logic is as follows: 1) Mistakes are made by humans and are therefore part of humanity, 2) Humanity learns from mistakes, and therefore improves, even though individual humans are sometimes punished for making mistakes,  3) If humans stopped making mistakes, humanity may stop improving, and 4) Instant replay of all kinds may inhibit humans from taking action in order to avoid mistakes. It’s that last order of logic that may get a bit shaky, so consider this a theory a work-in-progress, but my overriding concern may nevertheless be true: every scintilla of every action by every member of our planet is being increasingly reviewed by others.  I think this direction inexorably leads to a society in which those who review the actions of others have more power than those who take action.  Worse, those doing the reviewing won’t be humans at all…but rather the cleverly automated systems vigilantly ever-scanning for human mistakes.

NFL games have come to epitomize this climate of over-reviewism.  George Will once quipped that “Football combines two of the worst things in American life. It is violence punctuated by committee meetings.”  More recently, a third leg has been added to that stool…violence and committee meetings punctuated by legal proceedings.  Officials seem to gather ever more often to confer on the calls that they made on the field. They use technology to slow down and zoom in.  I can hear a sports broadcaster saying this in a few short years:  “Was his elbow down at the 2.2 yard line or the 2.1 yard line? If you look extremely closely and FREEZE IT! RIGHT THERE!… you’ll notice that this blade of grass, that looks like a cell phone tower, is clearly touching his elbow. Let me highlight it for you with this scanning electron microscope image overlay.” But that is only the most well-known version of the increasingly ubiquitous instant review of humanity.  The same mentality is increasingly overtaking the lives of all of us.

The presidential debates this week and over the coming weeks are and will be instantly reviewed and the candidates fact-checked.  And this zealous fact checking doesn’t just occur with  the debates, but with public pronouncements of any kind by any person. Calling out a presidential candidate for lying is obviously not a new phenomenon, but the proliferation of so-called fact-checkers has exploded and they provide their truths in a virtually instantaneous manner.  The ability of the media and technology to provide us with these truth powers is, like instant review in pro sports, wonderful at getting the story straight.  But they are having an unintended consequence.  Digital video recorders and giant databases of information are not humans and yet they are beginning to have an inordinate level of control of human thought and action.

Kevin Kelly, former editor of Wired Magazine once provided this spectacular look at “the next 5000 days of the internet”.  In that remarkable TED talk, roughly 1,735 days ago, Kelly pointed out that soon, very soon, “no bits will live outside the one.”  What he means by that is that technology is increasingly making information and data so collectible, analyzable and reviewable that soon every action by every person all the time will be subject to instant replay.  Your life and all its actions are devolving into a long, long series of 1’s and 0’s.  And all of it, every bit of it, is increasingly available to everyone.  Did you zip through the intersection 0.1 second after the light turned red?  Were you at that restaurant in the same 5-minute period that a certain person of FBI interest was also there?  Did you visit a potential terrorist-oriented web site while trying to understand the motives behind 9/11?  Computers are watching everything you do.  Computers are storing every thing you do.  Every 1 and every 0.  And this perfect collection of your bits is increasingly available for microscopic review.  This will make it difficult to be the mistake-making human we’ve all known and loved for the past several hundred thousand years.

Civilized society is protected by a very thin surface from becoming an uncivilized society.  I’m not advocating that law enforcement shouldn’t have security cameras in high crime areas…I’m advocating that we limit the proliferation of security cameras TO high crime areas.  I’m not suggesting that public officials shouldn’t be fact-checked…I’m suggesting that even YOU will be increasingly fact-checked.  I’m not saying that humanity is about to succumb to technologically superior robo-analysis…I’m saying that another very-thin patina layer protecting humanity is in danger of being dissolved.

No need to double-check that.

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The Four Seasons of Your Start-Up…Summertime

Ah, summer. Margaritas by the pool.  A little Kenny Chesney on the patio.  Wearing flip flops to BJ’s (wait, that’s a different post!)  But this is not life during summer inside a start-up company.  It is certainly good news if you’re fortunate and smart enough to make through the rainy springtime of your start-up.   But all the burgeoning promise of spring can be quickly forgotten if you don’t work twice as hard in the summer of your start-up.

In my previous post, I described how the earliest phase of a start-up, call it the springtime, includes considerable experimentation.  The founders fight for their life.  They probe their marketplace with a host of messages.  They seek out customers anywhere they might be found, even in industries only slightly related to their “business plan” targets.  Pricing levels are adjusted…and adjusted again to try to find the right levels.  New partners and consultants are engaged.  Moderately-related consulting revenue will be taken to pay the bills.  There is a scrappiness that is called for and scrappiness is employed!  Probe, probe, probe all in the name of survival.  And if survival is achieved, and after one or two years the firm is able to nurture a seed of opportunity into marginal self-sustainability, that opportunity could thrive in the summer of the start-up.

I think of the summertime of the start-up as a period of “Tactical Execution”.  It is most characteristically marked by fairly rapid revenue growth.  Customer acquisition is the critical element to transitioning from spring to summer.  Founders figure out a way to frame a message that resonates with a second customer from the same industry as a previous customer.  Sometimes this second customer is enticed by the example set by the first customer, or even better, by a direct referral from the first to the second.  Usually, the founder stepped back from their first customer and carefully thought about and documented the steps that were taken along the way.  Perhaps the wording in an email is copied closely for the second prospect.  Perhaps targeting a person with the same title as at the first customer is worth trying.  The founder documents the tactical steps in the sales cycle from customer number one and begins to evaluate the stage of that sales cycle that the next several customers are in…and then focuses efforts on repeating what worked to move customer 1 along through to the purchase.

I believe the summer of your start-up is the most character-building period in the life of the company.  There is suddenly much less time for the founder to think about next moves.  Everything is happening with incredible speed and the founders instincts, guile and reaction time are most on display if the company is to thrive through the summer.  The 10 or 15 people being hired at this stage of the company are likely to be the people hiring the next 50+ people if the company continues to grow!  The DNA of the founder begins replicating as the firm builds.

Meanwhile, as revenue is growing, stretching past $500,000 to $1 million and maybe as far as $2 million, other dynamics begin occurring in and around the business and the founder must react.  What mattered most in the very beginning of the company was its ability to learn from its experimentation.  The company tried a few dozen things and only one or two worked.  What matters most in this early revenue growth stage of the company is that it execute incredibly well on those few things that worked–those tactics–especially with regard to growth of the revenue line.  The founder must understand what tactics are working to bring customers on board.  A routinized way of converting customer orders to products must be designed.  Product must be delivered to the customers ordering it.  Customers need to be billed and collected from in some way.  Additional skills need to be hired into the company value chain.  These things didn’t matter when revenue was in the $100,000 range.  I think of all these tasks as being very tactical in nature.  Daily execution in the field…on the fly…improvised actions that require good instincts. It would be helpful at this stage of the business if at least one key management member had been through, and preferably led, this sort of rapid growth-from-zero before.  Not mandatory, but preferable.

Like the springtime of your start-up confronted you with occasional heavy bouts of rain, the fast burn of summer can leave behind damage as well.  Rapid growth often reveals weaknesses in the team and product.  Sometimes attracting new customers means developing new products that may not be viewed as desirable by all founders.  Finding the capital to support the growth may include bringing in new board or team members that have poor dynamics with the rest of the team.  Lines of communication can get cut and crossed as team sizes might grow from 2 to 15.  And by the way, if we’re making so many sales, where the hell is all the cash?!  Stressors mount.  What I describe as “the extended grinding” occurs.  A hot summer can damage the lush green lawn of your spring-time emergent business, leaving patches of cash-deprived growth.  The tactics and instincts that allowed the business to lift off were critical to survival, but usually result in a patchwork of systems and relationships that could limit further growth.  Cash is the nutrient needed to keep the heat damage down and this is the stage when investors finally start taking your company seriously.

Organizational systems and relationships need to be evaluated, codified, improved and institutionalized–organization operationalization–but there is time for that in the autumn.  For now, the summer is all about grillin’ and chillin’ and…wait, is that another order that just came in?!

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Ladies and Gentlemen…the Next President of the United States…Alexander Hamilton!

Alexander Hamilton, Father of Business Incubation?

I woke up this morning from a dream which was set in the late 1700’s.  I believe it was 1796, because I was presenting to an enormous room full of people and the banners hanging declared “Welcome to the Federalist Party National Convention.”  I was wearing pantaloons and extremely uncomfortable shoes.  But I looked good, and on behalf of Ben Franklin Technology Partners, I had just accepted the “Incubator of the Year” award from the National Business Incubation Association (NBIA).

In my acceptance speech I thanked Alexander Hamilton who was sitting with the New York delegation.  Hamilton, in my opinion, was the father of modern business incubation.  Mr. Hamilton was not a big-time free-trade guy in the late 18th Century.  He believed that support for private enterprise was the BEST way to protect the newly minted America from its enemies and from tyranny itself.  A few years before, in 1791, he delivered to Congress a report called, blandly, “Report on Manufactures”.  The report essentially outlined what later would become the baseline for the long-lost Whig party and was one of the divisive issues that had moved him to the right of his Federalist colleagues like John Adams.  His report declared that only by providing subsidies to the new manufacturing industries could our nation become self-sufficient.  If that sounds like government handouts, you’re missing an important nuance.  His political opponents of the day, Jefferson, Madison, et.al., wanted to maintain a “craft” industry based economy.  Think local smithy and cooper.  Think draught-horse drawn ploughs.  Noble and proud yes; but not the future.  Jefferson and his supporters would have put up intimidating tariffs to protect existing business formations, but would have done little to support infrastructure development and new industry.  Jefferson was most importantly not a fan of bigger businesses.  As visionary as he was, he did not see how America’s future was tied to the growth of private enterprise.

Hamilton begged to differ.  Hamilton and his followers believed that support for new industries was the better way.  In his report, he said  “The embarrassments, which have obstructed the progress of our external trade, have led to serious reflections on the necessity of enlarging the sphere of our domestic commerce: the restrictive regulations, which in foreign markets abrige the vent of the increasing surplus of our Agricultural produce, serve to beget an earnest desire, that a more extensive demand for that surplus may be created at home”.  I hate to trample on other’s deathless prose such as “abridge the vent of the increasing surplus of our Agricultural produce”, but what he was saying is true today.  Allow me to paraphrase: “Our domestic economy sucks eggs, and foreigners don’t buy enough of our stuff, so we need to invest in new businesses.”  Hamilton was right then, and his prescription is right for this time as well.  Support for new industries and new businesses is an important undertaking for the government.  I’m not talking about broad-based stimulus spending to save the economy for today.  I’m talking about systematic investments in efforts that support new businesses, during good times and bad times, for tomorrow.

The government’s role in the economy is not to be the economy, but to prep the soil for the economy.  Ironically, Hamilton’s Report on Manufactures was based to some degree on the same premise as President Obama’s recent comments about how entrepreneurs didn’t build their own businesses alone.  Hamilton and Obama would have agreed that every generation of industrialist and financier; every earlier Congress and local Chamber of Commerce; every butcher, brewer and baker from Adam Smith’s time until ours, built the foundation on which today’s economy is built.  We all indeed built that.  But the decisions of government spending should not be to create the economy, but rather to support the creators of the economy.  We all have the pieces of past generations to build on, but only the entrepreneur steps out and finds ways to assemble those pieces for the future.  The core difference between Jefferson and Hamilton then was the notion of who is best suited to lift the tide:  government or business.  Shadows of that disagreement loom over our current Presidential campaign.  In my weird time-distorted dream, I found myself saying all this to the Federalist Convention and I was about to nominate Alexander Hamilton for President of the United States…when I woke up.

It was, of course, actually 2012 and I realized that I had actually been presenting at the NBIA conference. The room was full of people who spend their professional lives working and coaching the entrepreneurs of our modern digital age.  To these supporters of entrepreneurs, I suggested that entrepreneurs would find a way to improve the economy of the world, and generally the state of man, with or without them.  It is the entrepreneur, I said, who would build great things, not the incubator manager like me. Hamilton’s Report on Manufactures sought to encourage the spirit of enterprise, innovation, and invention within the nation.  Our duty as incubator managers and believers in the spirit of free enterprise is to support the entrepreneur–to embolden and empower them in the Hamiltonian tradition–as they  seek to “build that”.

TechonomicMan proudly accepts NBIA Incubator of the Year award from Dinah Adkins, in May of 2012. I am not actually wearing pantaloons.

Posted in Commentary/Editorial, Economic Development Policy, Economic History Perspsective, Innovation and the World, Tech Based Economic Development | Tagged , , , , , | 2 Comments

VentureTips: In Defense of the Downtrodden Business Plan

The business plan is a mirror into the entrepreneurial soul.

The recent consensus from investors and experts on business plans is…don’t do them.  Most often I’m hearing that founders have not written a business plan document.  They’ve prepared executive summaries, powerpoint pitches and filled out forms at online pitch sites.  But they haven’t written a text-based document.  Their eyes say “You’ve got to be kidding,” when I suggest they need one to get funding from us.  Their body language screams “I already know exactly what I’m doing…what value can some outsider add?” when I tell them I want to bring on a consultant to help them write one.  “No way,” they say.  “Way,” I say.

I know the entrepreneur believes that writing a plan feels like busy-work.  I know I sound like a government bureaucrat when I ask for a plan (most ask me for examples or templates they can use).  I know that you didn’t pay attention in freshman english in college and I know you have a Ph.D. in Physics from SuperSchool.  But the act of writing, reading and editing a business plan does one critical thing better than the summary, powerpoint or online site forms: it illuminates your shortcomings.  And let’s face it Mr. Entrepreneur…that’s the real reason you don’t want to write, isn’t it?

Putting details in black and white for others to scrutinize forces you to confront the fact that you may not really know all that needs to be done next.    Writing the plan will force you to think 3 moves ahead, when you may not have thought any moves ahead.  It opens up to debate your thinly-thought-through theories.  Because of this, I’ll say it is a good idea to write a text-based business plan.  If you don’t believe me, you’ll see that Guy Kawasaki agrees in this article!

Writing a business plan is also better at requiring the entrepreneur to identify and confront risks that exist in the business.  When creating a powerpoint, the creator is spending too much time in the act of being artistic.  Deciding which color themes to use, and what style bullets and…just shoot me now…which animation and sound effects to use! All this distracts the founder from the hard work.  The hard work is confronting the risk that exists with any venture.  It is much easier to gloss over the reality of risk than to  choose pithy clip art.  Every entrepreneur I’ve met agrees that “sending” a powerpoint is less adequate than “presenting” a powerpoint.  Obviously.  The powerpoint leaves a great deal to the imagination…20 pages of text leaves far less to imagine.

By painstakingly choosing words to type on the paper, and putting the words in proper order to form complete sentences and thoughts, one is forced to think.  By being forced to think, and having the words remain in place on the page for others to consider, the entrepreneur faces his or her own inner fears.  And just like when you were a toddler, forced to face the fears of monsters under the bed, you’re better served today by braving them.  One of the most important jobs I do for my clients at TechVentures is to listen to them.  They’ll walk into my doorway and talk out loud about some business problem, or looming business problem.  Most often I do a lot of nodding and “mmm-hmmming”.  I swear that sometimes I say “How does that make you feel?”  Sometimes I argue with their premise.  But all of it is meant to help them confront the shortcomings of their plans.  And so it is with the business plan.

If you are thinking about launching a new venture, and especially a potentially high-growth technology venture, you should write a business plan.  From scratch.  Use an outline but not a “fill in the blanks” plan.  The goal is not to get it done…the goal is to do it.  I’ve put a sample of an outline here: Writing a Business Plan.  Think a few steps ahead.   Read what you’ve written.  Ask others to read what you’ve written.  Fear is not an option.  Remember the words of former Google CEO and current Chairman Eric Schmidt at the 2009 University of Pennsylvania Commencement address:  “If you forgo your plan, you also have to forgo fear.”

Posted in Business Planning, Entrepreneurial Advice, Seed/Venture Capital | Tagged , , , , , , , | 2 Comments

Even In the Beginning, Entrepreneurs Created Jobs

Where Do All Those Jobs Come From?

I’m going to get right to the point of this blog post.  Sometimes, shocking information is best delivered in a no-nonsense, unapologetic manner.  So, I’m just going to hit you with this right now and I just don’t want you to be completely freaked out.  So, sit down.  Here it is.

Entrepreneurs are the only people in the history of the world that have ever created jobs.

Are you ok?  The truth can really knock you for a loop, and sometimes facing the truth can cause sweating, rapid breathing, faintness, nausea and more.  If you’re experiencing any of those, get a cool drink (or a mixed-one) and come back to finish reading.

Some people running for elected office this fall and next spring, and every fall and every spring forever after, will tell you that they either will create, have created or could have created jobs faster than some other people running for the same elected office.  They may try to convince you that entrepreneurs “didn’t build that, we all built that.”  They may try to convince you that because they invested borrowed money in otherwise failing companies, that they created jobs.  Neither of these things is true.  Sometimes hearing things more than once helps you to accept it, so “Entrepreneurs are the only people in the history of the world that have ever created jobs.”

Allow me to provide some additional details about the history of the world so you can begin to accept this.  In the beginning, there was work to be done.  There was hunting and gathering to be done, fire to be discovered and maintained and apple trees to be managed.  These were jobs and for the first several dozen centuries humankind, we were all pretty much self-employed.  Eat what you kill.  The first self-employed entrepreneurs pretty easily identified needs like food, water, shelter.  And people either fended for themselves or gathered together to help each other fend for themselves.  Needs existed, and therefore, so did jobs.

Some were better than others at all these things and for the next couple thousand years or so, the first creators of jobs for others came into existence.  These were kings and princes and sultans and, unfortunately sometimes, slave owners.  Regardless of their morality, these people were entrepreneurs who decided to build things…even some great things like pyramids and castles, cathedrals and canals, aqueducts and armies.  These “supreme” entrepreneurs observed needs for their people and subjects.  Needs like clean water, eternal resting places, safety from invasion all not only existed, but were also observed.  Greater skills at gathering and organizing resources were needed.  The pyramids weren’t built in a day…they were built over decades and generations of resource management.  Some of the tactics of entrepreneurs weren’t exactly noble.  Nevertheless, needs of humans led to certain people comprehending those needs, and their personal efforts at the gathering of resources created jobs.

Perhaps we can fast forward to the last 250 years or so. Representative democracy was created, most notably in North America.  And representative democracy begat capitalism.  Capitalism created corporations.  Corporations were created by…please tell me you know this answer…Right! Entrepreneurs!  Entrepreneurs create corporations.  Why?  Corporations allow contemporary entrepreneurs to solve human problems that they’ve observed.  That should sound familiar if you’ve been reading along.  Modern day entrepreneurs see lots of  human needs.  For example, modern humans need new ways of obtaining information to keep their apple trees healthy.  We need ways of keeping the meat that we kill fresh for later eating.  We apparently need 309 different configurations of clean water in a bottle.  Entrepreneurs observe these needs and begin to organize the resources needed to satisfy these needs for humans.  Oh, and by the way, the organizations tend to need…you got it…jobs.

So, there you have it.  You now understand that  1) jobs have always existed; 2) jobs are needed in order to satisfy human needs, and; 3) entrepreneurs organize resources, and thereby create jobs, to satisfy human needs.  One Presidential candidate may tell you that the entrepreneur who started that high tech company in Ben Franklin’s TechVentures incubator didn’t really build that…his policies did.  One Presidential candidate may tell you that the founder of that little office supply company didn’t grow the business into Staples…his capital did.  One way or the other, these and virtually every other elected official ever will attempt to claim credit for the 132 million or so employed people in this country.  But you now know the brief truth.  Entrepreneurs have a special combination of skill and willingness to take action when they see need.  They go about organizing the resources around them, sometimes in spite of surrounding economic conditions and sometimes gifted by them.  Always, they do so in the absence of firm knowledge of how the effort will turn out…will they eat or starve?  The cumulative effect of these entrepreneurial humans in pursuit of personal interest while solving the needs of others is the beautiful and wondrous creation of jobs.

Long may they roam the earth.

Posted in Commentary/Editorial, Economic Development Policy, Economic History Perspsective | Tagged , , , , , , | 2 Comments

Entrepreneurial Quarks…the Elementary Particle of the American Economy

Behold the quark…the real builder of the American economy.

Some of you may have recently read about the Higgs boson particle and how its potentially confirmed existence would explain how anything with mass (ie, everything that exists) is built.  Some of you may have also recently read about how President Obama doesn’t feel that entrepreneurs actually built their businesses, but that the businesses were actually built by everybody else.  My conclusion from reading about both recently is that, like me, the President was probably not very good at Physics.

Now, I don’t want to bore my precious few blog readers with an overly complex discussion of the Higgs boson particle.  Ok, the truth is I am not capable of providing an overly complex discussion of Higgs boson because, as I suppose was true for the President, I was not very good at Physics.  To totally bare my soul, I don’t even recall my 9th grade Physics teacher’s name.  In fact, I was probably too busy daydreaming about the girl in the tight angora sweater who sat in front of me in Physics in 9th grade to pay any attention to anything else.  I do remember her name.  But I digress.

What I’ve learned in the past few weeks about Higgs boson is that world-renowned physicists believe that this little bugger is essentially the reason that things are able to exist.  The Higgs boson is thought to be the granddaddy of all elementary particles, existing in a family of particles that include other bosons, leptons and my favorite: Quarks.  Without the Higgs boson and a few other elementary particles like quarks, nuclei could not exist. Without nuclei, atoms could not exist. Without atoms, molecules could not exist.  Quarks and bosons and family are the smallest known things…it is believed that they are not comprised of other things but simply…are.  And because they exist, they have a mysterious power to build other things.  In other words, all things exist because of these most elementarily elemental of elements.

I believe the economy works that way too.  I may have struggled in Physics, but I did pretty well in Economics.  I believe that the world economy, like the universe, exists because it is composed of increasingly smaller components like national economies and currencies and natural resources.  They in turn are organized and exist, through the existence of roads and bridges, and internet infrastructure and usable sources of energy.  They in turn are produced and delivered through corporations and employees and taxes paid by them both.  And at the core, at the most elementarily elemental of all the economic elements in the world are entrepreneurs.  Entrepreneurs are the quarks of the world economy.  They just are.

My fundamental belief is that the world economy exists thanks to the basic entrepreneurial particles and not the other way around.  These particles, like quarks, have mysterious behaviors that, when operating in the aggregate, provide profound changes in the universe around them.  Why these elements would risk financial distress, familial bliss and more than two good nights sleep in a row is unknown, but there is a theory.  The theory of the entrepreneurial quark is something like this…through a desire to improve the condition of their neighbors, and a willingness to pursue their own long term interests by deferring their short term interests,  these entrepreneurial quarks have built quite the universe.

In summary then, all natural things in the world exist thanks to quarks and all man-made things in the world exist thanks to entrepreneurs.  From the bottom up…not from the top down.  If you believe that it actually happened the other way around, well…you’re simply ignoring the basic laws of physics and of economics.

Posted in Commentary/Editorial, Economic History Perspsective, Just Kidding, Uncategorized | Tagged , , , | 1 Comment

Entrepreneurship…Highway of the Future!

Why not the same “investment” hoopla for entrepreneurship?

I’d like to suggest a new way for governments to look at seed stage technology company funding.  

I’d like to suggest that state governments in particular think about funding seed stage tech companies in the same way that they look at funding highways, and sewer lines and schools and baseball stadiums; specifically, look at early stage tech company funding as a long-term infrastructure investment.  Invest in entrepreneurs…the highway of the future!

In 1956, the Federal Aid Highway Act was passed, setting in motion the largest single public infrastructure development program in American history.  Wikipedia says it may be the biggest public project since the pyramids!  I’m not sure about that, but it was certainly big!  And where would the American economy be today without it?  It would be nowhere.  If you read some of the legislative history of the bill, you might be amazed to hear that there was considerable opposition.  Just like there had been in the 1820’s when John Quincy Adams led the charge for dramatically increased spending on canal, communication and road improvements.  These projects needed long term visions and long term investment perspectives to reach completion.  Eisenhower prevailed, but Adams did not.

Investment payoffs come over time. Long term investments, in a private corporation, get placed on the balance sheet as an asset. Financing for the asset tends to be longer-term in nature and as time passes, the value of the asset is reduced gradually on the balance sheet through depreciation on the income statement.  The theory behind this is that the investment generates value for the organization over time as financial portions of the investment are “spent”.  What you expect is that the overall value of the organization is increased more over time than the investment costs you. Of course governments don’t work quite like businesses.  And investment in “entrepreneurship” is not exactly easy to quantify.  While physical assets like roads and sewers have relatively easy-to-guesstimate lifespans, allowing for reasonable-to-assume annual depreciation amounts, intangible assets do not lend themselves so easily to these calculations.  Often, then, investments in economic development programs that direct funding to seed-stage technology companies are not viewed as long-term investments.  They are viewed as expenses that are expected to support immediate results.  And when they compete on that stage, they inevitably lose in public debate.  We want our expenses to pay us NOW!

Having been around government funding of seed stage tech companies for quite a while now, I would suggest that the investments made in entrepreneurship do not behave like expenses, but rather like long term investments whose return-on-investment is expected to increase over time as that investment begins generating multiplier-effect returns.  These investments should be viewed as “long term intangible assets” whose value is measured over multi-decade time horizons. I’ve seen the long term effect of cumulative investments in high-tech entrepreneurship first hand over 20+ years in northeastern PA.  And I’ve read about it in countless other communities in the US.  If all you do is count the tax revenue generated from the investments, you might be looking at as much as 3.5 ROI!  If you tried to count the hard-to-value benefits like repeat entrepreneurs, private capital leveraged, networks of talent connected, abandoned industrial property reused, etc., etc., you’d really have a story to tell.  A private business would quantify that value and it would be added to its balance sheet, and investment would probably increase.

Unfortunately, too often, public debate forces elected officials to take a shorter-term view of these investments, in spite of their undeniable benefits.  Constituents today, as in Adams day, are driving elected officials to give them their benefits today!  I’m hoping for a return to more of the Eisenhower-result when a long run view of success prevails for states and the nation.

Posted in Commentary/Editorial, Economic Development Policy, Economic History Perspsective, Tech Based Economic Development | Tagged , , , , , , , | Leave a comment