- Silicon Valley entrepreneur, board member, and private investor. Extensive experience in founding and financing new companies and improving the performance of existing companies.
- Previously served as CEO, Chairman, COO or CFO of four successful startup companies that achieved an exit for investors, either through M&A or IPO.
- Functional areas of expertise include: general management, product development, fundraising, licensing, finance, marketing strategy, and governance.
- Specialties: Managing the start-up and high growth process, research and product development strategy, team-building, and M&A/IPO preparation and implementation.
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- Most startups struggle to fund their ventures.
Whether a new division of a Fortune 500 company or a one-person enterprise, funding is usually a major challenge. For most new ventures, capital must be raised to realize the full potential of the business opportunity. The more progress that can be made before seeking investment capital, the easier it will be to attract outside money. Then, one must assemble the necessary materials and sell the idea to investors. A detailed discussion of what is required for a successful fundraising can be found in Best Practice #7, "Create a milestone-driven funding plan."
- The venture has difficulty identifying, attracting or managing the right leadership team.
If you've got a great concept or product and a strong team, then you can usually obtain funding. But without at least two of these elements in place, you're probably not going to be able to accomplish much. The team should be experienced, trustworthy, generous of spirit, and genuinely enthusiastic about the product or concept. While it's often overlooked, interpersonal chemistry is also very important. It's an intangible that can have a big impact. A team that can communicate and collaborate with ease will tend to be more productive and experience fewer problems. It's no easy feat to attract this kind of team, and then, keep them inspired and motivated.
- Costs and risks are not accurately predicted.
Project managers often tend to underestimate how much it's going to take to develop and test a new product or concept and how much time it may take to get the business up and running. They often assume that everything is going to fall in line as planned, and that there aren't going to be any unexpected problems or unknown unknowns. Unfortunately, things seldom go so smoothly. Inventors often overlook the costs beyond basic product development and testing, such as the need for government approvals, third-party testing, and the like. Inventors often underestimate the risk of failure. They see an 80 percent chance of success when, in reality, it is more like 20 percent.
- The venture is in a "chicken-or-egg" situation with money and testing.
With any new technology, there are three key questions that must be answered: Will it work, will it work, and will it work? Credible data must back up the proposal. Sometimes, there's a way to do this more affordably. A university or government laboratory can sometimes be enlisted at little or no cost, for instance. R&D often leads to a "chicken-or-egg" situation, where there's a need for proof of concept to attract the money and talent, but a need for money and talent in order to do the work that will provide the proof. If you can establish the market need and the proof, or at least a strong likelihood that the proof is within reach, then you can usually get the remaining pieces to fall into line. The challenge is to do this quickly and efficiently. Time is often the worst enemy.
- There is a tendency to overestimate the value of an innovation.
Inventors often overestimate the value of their innovations. Is it really a better mousetrap? Is it really going to make a difference? Few are willing to admit that their baby is ugly or stupid. Not every new product concept has a market. Investors tend to look for products that answer a compelling need. They prefer to invest in pain pills, not in vitamin pills. Not every innovation is likely to be able to gain a competitive advantage. If you have a slightly better aspirin, but it will cost 10 times as much as the existing aspirin, and you haven't gotten it approved, then it's probably not worth pursuing. It's got to be a real breakthrough, and the market must perceive it as valuable. A cure for a migraine is likely to fare better than a cure for a headache. Before you go through the time and expense to get a product developed and approved, be sure it's likely to be valued in the market.
- In the push to be first to market, other key elements can be overlooked.
Being the first into a market can be a competitive advantage, but it's essential to also be prepared. Be able to clearly identify and differentiate your product or concept. Be aware of any and all similar products or services that are also currently in the market, and make sure you have a competitive edge. Know what's on the horizon. There may be a superior or more affordable product launching soon that could trump your invention. Product innovators are often overtaken by fast followers.
- The innovator is stuck on one approach.
Inventors and scientists can get stuck on their own invention or its application. It's their "baby", and they see it as the "next big thing." They can fail to see that the market is shifting and a change in strategy or the application may be needed in order to be competitive. There is often a delicate balance between the value of tenacity and the need to be nimble and adjust to a changing environment. Tenacity is important, but there are other times when the best option is to either pivot or move on.
- Too much money is going into legal and administrative costs.
While it's important to protect inventions and structure agreements properly, legal expenses can add up quickly. Entrepreneurs often rush into decisions and incur steep legal fees that could have been avoided. Patents are often filed too soon, before an idea is perfected and reduced to practice. This can be inefficient, and can ultimately result in less valuable intellectual property in the long run. Also a patent is not the only way to protect a new concept or invention. A combination of patents and trade secrets may make more sense, or an inventor may be better off just keeping the idea a secret and focusing all the resources on a speedy launch.
Further, it is often not necessary to pay up front for legal work. Many law firms will defer fees until funding is obtained for start-ups that they believe in. Savings can be had by negotiating fixed fee agreements for certain services. It also pays to frequently remind service firms of the need to be careful with billings. Also, to avoid running up a big legal tab, do as much of the work as you can using good templates, and then have an attorney review the work.
- Founders are unsure how to select the right legal structure for a new enterprise.
One of the first and most important decisions for any independent, new enterprise is the legal entity. The two most commonly used are the C corporation and the LLC. Each has advantages and disadvantages. For example, a significant potential advantage of the LLC structure is that tax losses flow through to the shareholders. On the other hand, the C corporation affords more flexibility in structuring financings. Subsequent changes are difficult, time consuming, and expensive, so this decision should be made very carefully. This is especially true when converting from a C corporation to an LLC.
- The startup is uncertain what type of financing structure to pursue.
Before any financing can be consummated, a deal structure must be chosen. While investors may drive this decision, entrepreneurs should develop a proposed structure as part of any financing initiative. The most typical are common stock, preferred stock, and convertible debt. Each has advantages and disadvantages for both the company and its investors. This issue is more fully discussed in Best Practice #7.