Monday, September 30, 2013

Lesson #156: How to Find a Co-Founder for Your Startup

Posted By: George Deeb - 9/30/2013

Often times, a startup entrepreneur has a good business idea, but doesn't know how to build the product. Or, the entrepreneur has deep t...

Often times, a startup entrepreneur has a good business idea, but doesn't know how to build the product. Or, the entrepreneur has deep technology skills, but is lacking in business skills.  In many cases, these entrepreneurs are on the hunt for co-founders to help them build their businesses.  The problem is, they often don't know how to start the process or where best to look.  Hopefully, this lesson will point you in the right direction.

The first thing you need to do is scope your needs.  Make sure you are perfectly clear on what skillsets will be most needed for the success of the business, and best fill a hole in your own resume and desired management team.  Back in Lesson #83, we talked about the various roles and responsibilities within a startup's management team, so figure out what role your desired co-founder can fill.  For example, you don't need five technologists in the senior team, all bringing the same skillsets.  Marry technology skills with marketing or finance or operating skills for an effective blending of complementary skillsets.

Once the role is identified, now you need to find the right type of person to fill that role.  Back in Lesson #27, we talked about how VC's define a backable management team.  It is those kind of attributes that make an ideal candidate, especially if you plan on raising outside capital.  Things like the candidate's past-start experience, industry expertise, intelligence, credibility, passion/energy, communication skills, personality fit, etc. should all be considered.

Now that we know "what" we need and "who" we need, we need to know "where" to find them.  To me, everything starts with my personal network.  Who do I know has a rolodex of people that could fit this role?  Somebody that I trust who can personally vouch for this person.  This would include people in your desired industry, people with the desired skillset or other people in the startup ecosystem (e.g., recruiters, venture capitalists, lawyers, accountants, consultants, entrepreneurs) who may know of logical candidates for your pursue.

If you don't know anyone in your own personal network (1st degree connections), try to find the same type of people in your 2nd degree connections.  Hopefully, someone you know can make an introduction for you, and help vouch for you and your idea with the 2nd degree connection, in order to get them to trust you and invest their time in helping you.

If your connections do not work, you have no choice but to find a stranger as a co-founder.  You can find them on startup networking websites (like BuiltInChicago.org).  You can find them at startup networking events (like Technori Pitch or Techweek).  You find them walking the halls of shared startup co-working facilities (like 1871 or TechNexus).  There are even websites and events specifically designed around matchmaking co-founders for startups (like Startup Weekend, TechCofounder, CofoundersLab and Founder2Be). 

The last category to consider looking for a co-founder is to hire a recruiter or place a job posting on the logical job boards.  Websites like LinkedIn, Monster.com, CareerBuilder or CraigsList.  Or, better yet, niche job boards, like Dice for technical hires, as an example.  And, remember, in addition to soliciting inbound resumes from sites like these, try to cherry pick logical candidates by directly reaching out to them.  For example, if you are building a travel website and need a strong digital marketer, try to identify logical candidates from Expedia, Orbitz or Priceline via LinkedIn.  Perhaps they are bored in their current role, looking for a new project to excite them.  Or, they may know people who are looking.

But, as you should when making any new hire, make sure you have thoroughly done your homework on a candidate before "jumping in bed" with them.

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Wednesday, September 25, 2013

Startup Survey--Looking For Tech Startups With a Couple Years of History

Posted By: George Deeb - 9/25/2013

Ensemble is working on better understanding what makes startups successful, by comparing various tactics used between those businesses and ...

Ensemble is working on better understanding what makes startups successful, by comparing various tactics used between those businesses and how it impacts revenue growth.  Therefore, we are looking to gather data from tech startups with a couple years of history.  The survey will only take 15-20 minutes to complete, and all reports therefrom will be shared with respondents.

Here is a link to the survey:
http://www.instant.ly/s/CkmDY

Thanks for your participation, and forwarding it to other logical companies.  And, feel free to share this with your social networks, if applicable.

New York or Chicago for Startups? MentorMob Compares Both.

Posted By: George Deeb - 9/25/2013

MentorMob is a rapidly growing startup in the B2C education technology space. The company was founded in Chicago in 2010, and was one of t...

MentorMob is a rapidly growing startup in the B2C education technology space. The company was founded in Chicago in 2010, and was one of the first tenants of Catapult Chicago, a shared location facility for startups. In 2013, MentorMob relocated to New York City, to participate in the Techstars/Kaplan Ed Tech accelerator program. The company has had the unique experience of living in the two cities, both with growing startup ecosystems. Vince Leung, MentorMob’s co-founder and CTO, was kind enough to share his experiences, helping us to compare the plusses and minuses of these two startup hotbeds.

Read the rest of this post in Forbes, which I guest authored this week.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Tuesday, September 24, 2013

A Blueprint for Startups--Try to Kill It Before It Starts

Posted By: George Deeb - 9/24/2013

Starting a business for the first time is one of the most rewarding, challenging, exhilarating and scary journeys an entrepreneur will face ...

Starting a business for the first time is one of the most rewarding, challenging, exhilarating and scary journeys an entrepreneur will face over the course of his or her lifetime. The first and one of the most critical steps in building a successful business is developing plan of action.

Below is a toolkit of things you need to successfully ideate, research, develop and grow a startup business. Hopefully, you have addressed all of the below in your business.

Read the rest of this article on Startup Beat, which I guest authored this week. 

For future posts, please follow me at:  www.twitter.com/georgedeeb.

Monday, September 23, 2013

The Unlucky 13 Reasons Startups Fail

Posted By: George Deeb - 9/23/2013

As the Managing Partner at Red Rocket Ventures , I have had exposure to over 500 startups in the last few years. I have seen really good st...

As the Managing Partner at Red Rocket Ventures, I have had exposure to over 500 startups in the last few years. I have seen really good startups and really bad ones. Below is a summary of the recurring problems I have seen in the flawed startups, and where relevant, how venture investors typically react to such problems.

Read the rest of this article on Forbes, which I guest authored this week.

For future posts, please follow me at:  www.twitter.com/georgedeeb.

Lesson #155: Best E-commerce Platforms for Small Business

Posted By: George Deeb - 9/23/2013

Choosing an e-commerce platform for your online store can be a daunting experience. There are many providers new, old, and truly tested, tha...

Choosing an e-commerce platform for your online store can be a daunting experience. There are many providers new, old, and truly tested, that are available in the market.  That said, it does seem like shopping for a new house - a very personal experience, as you try to find the platform that best meets your specific needs. To assist me with this lesson, I asked for guidance from Yulia V. Smirnova at CommerceBrain.com, an e-commerce marketing and technology consulting business.

Yulia pointed out that e-commerce platforms have some similar features between them and some unique features to themselves.  There is no perfect platform and there will be tradeoff you make in picking one over another. And, like with any system, there will be things you will learn along the way, that you wished you had known ahead of time. Hopefully, these lessons will help point you in the right direction for making the best decision for your business.

To decide which e-commerce platform is best for you, it comes down to: (i) your capital budget; (ii) your team resources (access to in-house developers); (iii) the scope of your e-commerce business (niche market or multiple revenue streams); (iv) your product offering (high-end vs. mass-market, depth of SKUs); (v) single retailer vs. multiple retailer marketplace; and (vi) expectations of your target audience (minimum features needed for them to effectively compare/buy what you are selling).

Below, Yulia selected and compared a number of cost effective providers that e-commerce startups and smaller online businesses mostly end up using, based on her experience.  She has broken the decision making process into four key user scenarios:

1.    Go with Shopify. Big Commerce or similar hosted solutions if . . .

·        you are a small startup that still needs to prove that you have a good market and that your product is in high demand.

·        you desire to keeps your back-office technology staffing costs low with an easy plug and play solution for your business people to use.

2.    Go with OpenCart, 3DCart or another open-source, self-hosted solution if . . .

·        you are tech savvy enough and need a low cost solution and have time to figure out the setup and implementation.

·        you wish to customize the solutions to meet your specific needs and want the control of a self-hosted system.

3.    Go with Magento, the largest and most-robust of the self-hosted solutions if . . .

·        you are a $10MM+ online business and need a more innovative user experience with custom functionality.

·        you wish to sell in international markets with no hassle on translations, pricing and fulfillment.

·        you need the capability to plug into the APIs of your vendors.

·        you have a team of smart developers to fine-tune the system.

·        you are up for playing a serious game in e-commerce built for scale.

4.    Go with building your own system if . . .

·        your tech team thinks they can build a system that is easier to use than Magento (complex to use), and you have the time/budget to build such.

·        you are building a longer-term enterprise needing highly customized solutions.  Not recommended for lean startups needing MVPs.

·        your other local systems do not work well with Magento or the others (you might be operating in an emerging market).

For a full comparison of the top 12 e-commerce platforms for small business, including the ones listed above, click here to learn about the pros, cons and costs of each.

It is also best to ask other e-commerce retailers in your industry or market to learn what they use and what works best for them, to get a better perspective.  Most of the times, it is these private conversations from the people running their stores which ultimately settles which system will work best for your business, getting their candid feedback.

Thanks to Yulia for sharing her insights here. She has made herself available for any e-commerce strategy, marketing or systems questions you may have from here.  Feel free to reach out to her at http://commercebrain.com/contact/ or 415-666-6002.
 
For future posts, please follow me at:  www.twitter.com/georgedeeb.  If you enjoyed this post, please click the social sharing buttons to share with your social networks.

Monday, September 16, 2013

Lesson #154: Entrepreneurial Lessons from "Breaking Bad"

Posted By: George Deeb - 9/16/2013

Breaking Bad on AMC is one of my favorite television shows of all time.  With the series ending this month, I figured I would honor the sh...

Breaking Bad on AMC is one of my favorite television shows of all time.  With the series ending this month, I figured I would honor the show with a case study of some key entrepreneurial lessons therein.  And, no, I won't be advocating you all start dealing drugs to make your fortunes!!  But, I think the show itself, and its main characters, Walter White (played by Bryan Cranston) and Jesse Pinkman (played by Aaron Paul), provide some interesting lessons for entrepreneurs worth sharing.
 
BREAKING BAD - THE STARTUP
 
When the producers of Breaking Bad first pitched the show to the networks, they were met with a lot of strange looks.  "Are you kidding me, a show about a high school chemistry teacher turned drug dealer", must surely have been their reaction.  But, with 42 Emmy nominations (and 10 wins) since the show launched in 2008, it is safe to say the risk takers at AMC, have seen a healthy ROI on this venture investment.
 
But, why did it work, from a startup's perspective?  It worked because it was a fresh idea in the entertainment market, and filled a big void with consumers.  It wasn't another hospital, lawyer or police drama, which we have seen scores of times in the past.  It was interesting subject matter we had never seen before.  More importantly, I can't think of another example of a show that evolves the sympathetic, cancer-fighting main character hero, into a power-hungry, money-grubbing anti-hero over five seasons.  That was the equivalent of evolving Batman into the Joker!!  And, it felt more like a 62 hour movie, with the brilliant writing and acting, than it did a typical television series.  So, a heavily demanded, innovative product is going to win every time.
 
WALTER WHITE - POWER OF THE PIVOT
 
Back in Lesson #31, I wrote about the power of making a pivot and thinking out of the box for getting startups onto the right course.  Walter White is the perfect case study in the power of making a pivot.  He took his skills as a chemistry expert, and instead of applying them as a high school chemistry teacher, where he made a modest annual salary, he began to use them in the production of crystal meth, in building an $80MM net profit business in two years.
 
I know, a bad example because he broke the law and endangered many people in the process.  But, the point here for entrepreneurs is: are you best using your assets or skills?  If not, point them in a new direction, where higher ROIs can be realized.  That could be shifting focus from B2C to B2B applications, or shifting from corporate to government clients, or selling into the healthcare industry instead of the financial industry, or whatever that can best leverage your assets and open up the biggest market for your business.
 
"I WANT THE BLUE STUFF"
 
But, what made Walter White's crystal meth particularly well-demanded was: (i) its highest premium grade quality which he acheived as a chemistry expert (and the better results it provided to his customers); and (ii) its unique blue coloring in the market, which made it stand out from all the clear product available on the street.  So, as a startup looking to break through the clutter of similar products out there, figure out what is going to be your unique competitive advantage (in this case highest quality which could demand highest prices).  And, figure out how to uniquely position your product in the market that will get your customers saying "I want the blue stuff".
 
PICKING YOUR CO-FOUNDERS
 
Talk about strange bedfellows partnering up to start a business.  On one hand, you have Walter White, the straight-laced high school chemistry teacher and family man.  And, the other hand, you have Jesse Pinkman, his drug-addict former student and lone wolf.  And, from a different perspective, you have an all-controlling Walter White, who basically uses Jesse Pinkman as his errand-running assistant, and not as an equally-contributing or respected partner to the business.  Not only was their business literally toxic, so was their working relationship.  It is no wonder, the relations between Walter and Jesse become strained overtime, putting both the business and their personal relationships to the test numerous times over the years.
 
When picking a co-founder for your startup, make sure you are both bringing something of value to the business (e.g., marketing skills or technology skills), and are both respected on equal footing.  Otherwise, you are teeing yourself up for failure, or an ugly transition down the road.

So, for all you Breaking Bad fans out there, I hope you enjoyed this unique look at the show from an entrepreneurial perspective.   Thank you Breaking Bad for the inspiration here, you will surely be missed.
 
For future posts, please follow me at: www.twitter.com/georgedeeb.  If you enjoyed this post, please click the social sharing buttons to share with your social networks.

Tuesday, September 10, 2013

Lesson #153: Healthcare Benefits Decisions for Startups (Post Obamacare)

Posted By: George Deeb - 9/10/2013

With the passing of the Affordable Care Act (commonly referred to as Obamacare) in 2010, many of the business impacts of that law are starti...

With the passing of the Affordable Care Act (commonly referred to as Obamacare) in 2010, many of the business impacts of that law are starting to hit the market in 2013 and 2014.  So, I wanted to do a few things in this post: (i) provide a high level summary of how Obamacare has impacted small businesses; (ii) provide a summary of what healthcare benefits small businesses are offering to their employees today; and (iii) provide a few resources which may be useful to you in making your own healthcare benefits decisions.

To assist me in this effort, I solicited the help of Michael Flanagan and Gene Smith at Alliant, a full-service benefits brokerage firm in Chicago with experience on the business impact of Obamacare and the general healthcare decisions startups are making today.

IMPACT OF OBAMACARE ON SMALL BUSINESS

Well, the good news is, companies with 50 or fewer employees (including 50% count for part-time employees), are NOT required to offer healthcare to their full-time employees.  But, many companies of this size, typically do offer healthcare as an employee benefit to attract new employees.  All companies with 51 or more employees, are required to offer healthcare benefits to their staff, effective as of January 1, 2015.  Such companies will be subject to a $2,000 per employee "play or pay" penalty of this employer mandate coming out of Obamacare.  And, to make matters worse, this penalty fee is NOT tax-deductible, like benefits expenses are, so it is really like a $3,000 per employee fee when you add in the lost tax deduction.

To satisfy the healthcare benefit requirement, small businesses have a few options available to them: (i) they can offer their own corporate-sponsored plan; (ii) the can offer their employees a payroll increase to allow them to purchase their own personal healthcare insurance directly through a carrier or through one of the public insurance marketplaces; or (iii) they pay the penalty fee for not offering healthcare benefits.  Their decision will come down to an analysis of what works best for them financially and what impact do they want to have on their employee benefits for recruiting and employee satisfaction needs.

In addition, Obamacare impacted small business as follows: (i) no longer can carriers base insurance approvals based on up to 10 age bands (they are now compressed into three age bands benefitting older individuals at the cost of younger individuals--and many startups have younger individuals); (ii) no longer can carriers base insurance approvals based on healthcare risk (benefiting the sick with pre-existing conditions, at the cost of the healthy--and most startups are healthy); and (iii) businesses now have to pay additional fees or taxes related to their healthcare programs (which adds around 4% to their healthcare costs from where they are today).

The three new fees include: (i) $2 per employee "comparative research effectiveness" fee; (ii) a $5.25 per member (employee and family) "reinsurance cap" fee; and (iii) up to a 2.5% "healthcare industry fee".  The first two fees are temporary during the transition period, and the last fee is permanent in perpetuity each year.  So, if healthcare costs were expensive before to small businesses, it just got a lot more expensive.  In addition, changes coming out of Obamacare have made healthcare decisions more complex and time-intensive in nature, making it harder and more costly to administer.

TYPICAL HEALTHCARE DECISIONS BEING MADE BY STARTUPS

Healthcare programs can be designed for companies starting with two employees or more.  For companies with 2-15 employees, approximately 35% offer healthcare benefits (so most startups have decided not to offer it).  And, for companies with 16-50 employees, a materially higher 65% of such companies are offering healthcare benefits.  All companies with 51 or more employees will now be required to offer per the Obamacare changes.  One way that companies are trying to get around this requirement is to use more 1099 contractors or multiple part-time employees to fill full-time work needs, trying to defer the added healthcare costs as long as they practicably can.

For companies offering healthcare, the 2-15 employee companies are typically only covering around 50% of the plan costs of employees and 30% of the costs of any additional family members.  And, for 16-50 employee companies, they are typically covering around 70% of plan costs of employees and 50% of the cost for any additional family members.  Most plans offered to date are from one carrier (although some private exchanges are trying to evolve to multiple carrier programs over time), and they typically offer three options for employees:  a PPO, an HMO and a high-deductible FSA for employees to choose between.

It is too early to tell how many companies are going to opt for their own healthcare program, vs. providing payroll credits for employees to source their own insurance or pay the penalty.  If they simply think of it economically, it could prove a lot cheaper/easier for them to go down the latter of these options.  Especially, since the company can decide the exact payroll bump they want to give employees, to satisfy their healthcare requirement (which may end up well-below the real market value employees may need to pay--as individual plans tend to be a lot more expensive than corporate group plans).  But, companies need to be careful of not being too short-sighted here, as what can financially benefit the company in the near term, could end up hurting employees or recruiting in the long term.  So, it will be an interesting dance as companies sort through this.

That said, we are no longer in the era of employees working for the same company for 20 years.  People hop jobs all the time, and may prefer a plan that is more "portable" as they move from company to company.  Therefore, employees may actually prefer the payroll boost to fund their own plan, even if it comes with more hassle and cost to set up their own plan, as they only have to set it up once.  And, the benefit of buying your own personal plan is you are guaranteed to pick a plan that works best for you (with your in-network doctors, family situation, health conditions and budget), and not what works best for the company.

A FEW USEFUL RESOURCES FOR MAKING HEALTHCARE DECISIONS

Buying group healthcare has never been an easy process.  So, my recommended solution would be to talk to your insurance broker and research various carrier-specific plans or private exchanges to see what group solutions are available to you.  And, where you can, try to find a solution that not only addresses your healthcare needs, but your other business needs (e.g., general business insurance, life insurance, disability insurance, dental insurance, COBRA administration, legal compliance), in crafting the best benefits program for your employees.  This includes making sure you are supported by a help desk to answer any questions your administrators or staff may have over time.

For you Illinois-based tech startups, the Illinois Technology Association (ITA) has partnered with Alliant to help bring cost-effective healthcare solutions to small businesses.  You can learn more at www.IllinoisTechInsurance.com.  Furthermore, Alliant has further partnered with Flexible Benefits on a full-service solution for private exchange buyers, which are typically self-service solutions.  You can learn more at http://ITA.FlexibleBenefits.com.  To take advantage of these services, you will need to become a member of the ITA.

For additional information on healthcare reform and its impact on Illinois based employers, Alliant and the ITA are hosting a live webinar on the topic at 11am on Tuesday, September 17, 2013.  You can learn more and sign up on their website here.

For all other questions, or for help in navigating your healthcare decisions and sourcing, feel free to directly reach out to Gene Smith at Alliant at gsmith@alliant.com or 312-589-6601.

For future posts, please follow me at:  www.twitter.com/georgedeeb.  If you enjoyed this post, please click the social sharing buttons to share with your social networks.

Tuesday, September 3, 2013

Lesson #152: The Importance of a "Clean" Capitalization Table for Investors

Posted By: George Deeb - 9/03/2013

A company's capitalization table clearly lays out all the equity and debt ownership and liquidation rankings of the various investor...


A company's capitalization table clearly lays out all the equity and debt ownership and liquidation rankings of the various investors or lendors invested in a business.  For most startups, that is typically a list of the various stockholders and their percentages owned, since most startups do not typically attract traditional debt lenders.  But, equity takes many forms, from common stock to preferred stock to convertible debt, all with various implications to current and future investors.

Here is an example cap table:

5% Convertible Notes:
     John Smith  $100K (converts to 100K shares at $1.00/share=3.6%)
     Susie Smith $100K (converts to 100K shares at $1.00/share=3.6%)
Preferred Equity:
     Dave Jones, Investor  $50K (200K shares at $0.25/share=7.3%)
     Mike Williams, Investor  $25K (100K shares at $0.25/share=3.6%)
Common Stock:
     Jay Johnson, CEO  (1.0MM founder shares at $0.00/share=36.4%)
     Kurt Matson, CTO  (500K founder shares at $0.00/share=18.2%)
     Lisa Francis, CFO  (500K founder shares at $0.00/share=18.2%)
     Employee Stock Options Reserve (250K=9.1%)
Total Shares Outstanding Today (2.30MM shares=83.6%)
Total Fully Diluted Shares Outstanding   (2.75MM shares=100%)

Notice that the cap table is in liquidity rank order, with convertible note holders the most senior security paid back before anybody, followed by the preferred equity holders, and finally followed by the lowest ranking common shareholders of the business.  Also notice that the cap table shows the fully diluted ownership of the company for currently outstanding shares, as well as contractual obligations to potentially issue future shares, like the potential convertible notes conversion and the future employee stock options reserve.  And, the cap table should also clearly detail the price paid per share for the securities, so new investors have a sense to the valuation history of the business.

Now, here are example of things that future investors will be looking out for in your cap table, before making a new investment into your business: 
  • Where will the new investor sit in the liquidity ranking--most new investors wants to sit on top of the pile, paid back before others. 
  • How many investors are involved--they prefer tightly held businesses without too many investors for easier communications and vote collecting. 
  • What impact will their investment/valuation have on the other investors--if they are investing in a down-round (lower valuation) than previous investors, the other investors will be disgruntled out of the gate and new investors will want to avoid any potentially litigious situations. 
  • Are there other professional investors involved--depending on stage, some investors want to be the first professional money involved with a business, and others prefer having other institutions involved. 
  • Who are the other investors--they want synergistic and "friendly" investors around the board of directors table. 
  • Is management properly incentivized--do the employees have a big enough stake to stick with the business. 
  • Are the founders' equity stakes tied to a vesting schedule which they earn over time--investors don't want founders walking away with a big equity stake if they quit.
So, based on the above, any actions you take today, as it relates to your investor base and capitalization structure, could have future implications on your attractiveness to future investors.  So, think far enough ahead, so you don't run into any potential problems down the road.

For future posts, please follow me at:  www.twitter.com/georgedeeb.  If you enjoyed this post, please click the social sharing buttons to share with your social networks.

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