Tuesday, June 23, 2009
Experienced entrepreneurs know that when it comes to slicing up the equity in their new startup companies, the longer you wait to hand out big slices, the better.
That’s because a startup company can create a ton of value in a very short period of time, and in many cases, with relatively little effort.
It’s exciting to get others wrapped into your new idea, and their willingness to bet on your idea may feel like something you want to reward with shares of the company. The issue isn’t whether or not you reward these individuals, but really when you reward them, and with how much of the company.
As a rule of thumb, the longer you wait to slice up the equity (assuming you’re growing the company) the less equity you’ll have to give up. Here are just a few milestones that you may be able to get to on your own, before you’ve begun slicing up the cake.
Get Incorporated
The fastest way to turn your idea into a company, at least legally, is to incorporate. You can incorporate yourself on-line in less than half an hour for a few hundred dollars at most.
The benefits of incorporating early are that you can force every discussion of stock into a legal matter, and not just a handshake deal. If I just tell you that I’ve given you 50% of a company that hasn’t even been incorporated, it’s not the world’s most binding document. But if I update the Operating Agreement of an incorporated company to show that you own 50% of the company, there’s no question that you’re a shareholder in the business.
The process may sound simplistic, but it helps create some value. People tend to take ownership of an incorporated company far more seriously than ownership of an idea you emailed them, which usually means it’s not as likely to get diluted as heavily.
Build a Prototype
The next step is to put together a basic working model of your idea. No matter how rough your prototype is, having an existing product to talk about is far more valuable than just talking about it in a PowerPoint presentation.
Your prototype can come in dozens of forms. It can be a barebones version of the Web site you want to build. It can be a service that you want to offer that you’re delivering to customers by yourself right now. It can be an artists’ rendering of the product you intend to build.
Regardless of its form, the prototype gives you the ability to switch from just talking about an idea and to start talking about an actual product. It’s also possible that an early prototype could even lead to a sale to a customer, which would be the ultimate value generator!
Building a prototype can be a challenging task, and one that you may find yourself needing to seek outside help on. If you absolutely feel that the only way to present the product to a customer or potential investor is to bring on another equity partner, then so be it. But if you can get by with just some sketches or a simple working model to convey the product idea, this would be a great time to keep that equity in your own pocket for a while.
Get Some Traction
If you can get past the prototyping stage yourself, without carving up much equity, and get on to selling even just one customer on your own, you’ll have achieved one of the greatest leaps in value creation.
Getting some traction with partners and customers completely changes the value of your company. Up until this point you had a company with an interesting product. Anyone could second guess whether your idea was useful. No one can second guess paying customers though.
It’s not impossible to get this far with your company idea without any help at all. You can incorporate yourself, piece together a working prototype of your product, and pitch it to some early customers that you setup meetings with. In essence, you’ve done the hard part by actually starting the company. The next step is to grow it from there.
Time to Slice it Up
Once you’ve put your company in a position that it simply needs to grow to create value, not just get started, that’s a good time to take on equity partners. At that point the value of having more employees, investors and partners will likely outpace the cost of giving up more equity.
In each step of the journey, you want to keep asking yourself “Is it at all possible for me to get to this next stage without taking on more help?” You may get past the incorporation stage and realize that any hope you have for growing your idea into a company is going to require a few partners. That’s not a problem, as long as you’ve agreed that unless you slice up the cake today, it’s not going to get any bigger.
Tuesday, June 9, 2009
About once a month I get a Google alert notifying me that someone is looking for a Web developer who can copy the functionality of my Web site.
The thinking goes that if they simply copy the Web site verbatim, they’ll essentially enjoy the same success. This sounds good in theory except for one truth - in five years across three different companies (Swapalease.com, Go BIG Network, and GotCast.com) no one has ever done it successfully.
That doesn’t mean people haven’t tried. Heck, people have gone as far as to literally copy our Web sites and just change a few of the colors and buttons. Yet time and time again, they fail.
The reason these companies fail isn’t because they didn’t make a good enough copy. It’s because they mistook copying the product for copying the business. As a business owner it’s important to understand the difference between what your competition can replicate and what they cannot.
You Can’t Copy Execution
Making a clone of a product is the easy part. The hard part is executing properly on a business in order for it to grow. In the case of our duplicate competitors, they usually die on the vine in a matter of months. They don’t seem to realize that even if you were to copy our product verbatim, using an identical logo and domain name, that the actual daily management and execution is what separates one company from another.
What we do day in and day out – marketing, branding, product development and customer service – is what drives the company toward success.
If your plan is to copy someone’s formula and use it for yourself, you had better have a much better plan for execution than they do. When Overture (now a part of Yahoo!) invented the model of putting paid text ads next to the results in your Web searches, Google flat-out stole the concept.
In Google’s case, however, they executed far better than Overture did on the very concept they stole. In this case, they were able to win not because they stole the concept, but because they executed on the concept better than Overture.
People Buy more than just Products
You’ll often find that copying the product alone, even if it’s an identical twin, isn’t enough. When people buy a product they are not just buying the item itself. They are buying the entire package it comes with.
In the case of a product like a Nike sneaker, they are buying the brand of Nike, not just the sneaker. You can build an identical pair of sneakers, charge half the price for them, and Nike will still outsell you. The product is only a fraction of the purchase. People are also buying the authenticity of the brand that they feel strongly about.
In other cases people are paying for efficacy. You may be able to copy the barebones format of the craigslist.org Web site, but you don’t have the traffic or the efficacy that craigslist does. You also don’t have millions of users who have successfully posted ads on craigslist and gotten what they wanted. That kind of activity requires an incredible amount of time and success to replicate, which copying a product verbatim doesn’t allow for.
Good Ideas will always be Copied
On the flip side, if you have a good idea you can pretty much guarantee someone will copy it. But your concern shouldn’t be whether or not you will be copied, it should be whether or not the person copying you is better at delivering your product than you are.
You can try to protect your idea with all of the patents, trademarks and copyrights you want, but at the end of the day if you’re not out-executing your competition, you’re going to get beat. Even patents will eventually expire!
Bad Competition is a Favor
To some degree you can think of bad competition as a favor. The more poor attempts your competitors make at copying your product, the better your original product looks by comparison.
Additionally, lots of bad competition makes the marketplace look artificially saturated to other would-be competitors. If someone performs a search for your product and sees ten other companies are offering the same thing, they may think twice about becoming the 11th. Little do they know that most of those companies are just cannon fodder in the war for customers!
What really matters is the competitor that enters the space fully loaded with the right management and experience to take you on. While having a good, original product is a great first step, it really is the people behind the product that make all the difference.
Wednesday, May 27, 2009
The "Great One" said it best
Hockey legend Wayne Gretzky, when asked how he was always on the puck before anyone else, pointed out that he was by no means the fastest skater on the ice. Instead he explained that he always just focused on skating toward where the puck was going to be. Gretzky knew that if he couldn’t be the fastest in the middle of the game, he would have to figure out how to stay ahead of the game.
Sometimes trying to keep up in the middle of the game is a wasted effort, especially if you’re not necessarily the fastest company in your market. Instead of wasting your energy trying to keep up with the big boys, think like Wayne and get your edge by moving ahead of the game.
If you can't move faster, take a shortcut
Taking a shortcut really means getting a sense for where the market will be at some point in time and heading in that direction now. It’s a lot easier to defend a space before people start fighting for it, especially if no one else realizes it's valuable yet. Taking the shorter path allows you to get in early and pick up a lot of the low hanging fruit.
Fortify your position
Chances are you're going to have a limited amount of time before the competition realizes they also need to be where you are. You need to spend this valuable time fortifying your position as best you can with your available resources.
If your business involves intellectual property that you can potentially patent, even provisional patent can be a valuable tool to ward off the competition. Additionally, you may be able to land some early customers with exclusive agreements that provide an effective barrier to entry to later participants. Keep in mind that you gain a potentially huge advantage from building early relationships in your space before your competition or your customers even know how big it could potentially be. Definitely take advantage of this.
Stay ahead of the puck, not out of the game
There is a big difference between being ahead of the puck, and being out of the game entirely. When thinking about where the market is headed, it's important to have a reasonable expectation of when the rest of the action will catch up to you. Sure, someday we'll all be flying around like George Jetson in hover cars, but before you build the next Spacely Sprockets to manufacture them, you may want to have a good guess when the future is going to show up at your doorstep.
Often when you progress ahead of the existing market you get into a position where there few (if any) customers looking to buy. To avoid this, it's helpful to pick a point ahead of the game that gives you a first-to-market advantage but still leaves you enough room to do business in the with current customers. Startup companies are often strapped for cash, so being too far ahead of the curve without any ability to generate revenue while everyone catches up can be disastrous.
Keep your eye on the game
Like a hockey game, the business world is in constant flux. It's almost certain that the path of progress will change as time goes by. This is fine as long as you continue to adapt your position to fit the path. If you ignore the changes in the existing market you may find that the "market-leading" position you created for yourself is not ahead of the game, but rather in the wrong game altogether.
Promote your early position
A nice benefit to being "first to market" in a new segment is the ability to claim that title early on. Claiming your "number one" status early on will help you build your position among customers, investors and even competitors. Even later on when the market catches up you may still be able to use your "we were the first" claim to legitimize the forward looking position of your product and your business.
Take your shot
With the right timing and some careful planning you will find yourself in the right place at the right time, with a healthy lead on your competition. This means it's no longer time to "plan for the market" but instead to execute on all of the planning you have put in place. Don’t hesitate here. Your early lead is only valuable if you use it to not only get ahead of the market, but stay ahead of the market.
Keep Moving
Some companies make their legacy from making one move ahead of the market at the right time and reaping the rewards for a lifetime. Short of making such a lucky move, you’re going to have to keep looking for new opportunities to take shortcuts and play ahead of the game. Hey, it worked for Wayne.
Tuesday, April 28, 2009
If you asked me to point to the heart and soul of a startup company, I would not say it’s the people, the culture, or even the product. I would say it’s the pitch. The pitch is that one message that, when delivered, makes people say “wow, that’s a great idea!”. The pitch gets everyone in the room excited about getting on board with your product and your company. It’s the inspiration that carries everyone along for the ride.
The pitch also determines whether or not the company's offer has any viability in the market. For this reason the pitch should always precede any other developments or decisions. Your pitch is your divining rod that helps you make decisions on where to go next. So working on the pitch should always be the first step toward introducing any new concept.
Pitch Early
Pitching early is about as close as you can come to having your own crystal ball to see into the future. Getting a customer to say “yes” today, even though the product may not exist yet, is as important as getting them to say “yes” when it’s actually available. This process allows you to probe your customers’ objections early and understand where the fatal flaws in the model or product offering exist. Better to find out now that customers aren’t dying for your product than after you’ve mortgaged your house to finance your idea!
Pitch Everyone
For the pitch to work, you need to see how it resonates with all of the usual suspects - customers, investors, and employees, in just that order. Each of these constituents thinks about your pitch slightly differently and for good reasons. Customers are interested in how your service improves their life. Investors want to know that your idea can turn into a profitable enterprise. Employees want to know that selling your service will create a great (and steady) place for them to work.
The reaction of each member of this trifecta merits careful consideration. For example, if your customers love your product but investors don’t see how you’ll ever make money, you have a potential problem. You will need to successfully pitch all of these groups eventually, so pitching them effectively early on is critical toward refining your offering and insuring its later acceptance.
Build the Product With the Pitch in Mind
Knowing the pitch allows you to make much better decisions when developing the product. If what you're building doesn't add to the pitch, think twice about adding it at all. In a startup environment you have limited resources, so you need to concentrate your time and effort on features that will lead directly to the customer's, investor’s and employee’s decision to say "yes". Your product should always be built with the pitch in mind.
Sculpt the Pitch
French author and aircraft engineer Antoine de Saint-Exupery once said a designer knows he has achieved perfection not when there is nothing left to add, but when there is nothing left to take away. Sculpting your pitch is no different. Keep paring your pitch down to just the most critical elements that make or break a customer's decision to buy. Anything else is just excess waiting to be scraped away, or worse yet, confuse the customer. Your pitch has become a masterpiece when it is as short and to the point as possible. The faster it hits home, the more powerful it will be.
Keep it Flexible
A good pitch is like a chameleon – it adapts and responds to a changing environment. You may find that what you once thought were the perfect selling points get morphed into a message that sounds quite different but is more effective. Don’t sweat it. There’s nothing wrong with changing the pitch over time as long as it continues to be more effective. There are no points won here for “getting it right the first time”, but there are plenty to be lost for never fixing it. Some of the best pitch masters out there are not only great at speaking, they are great at listening to what customers say and modifying their pitch accordingly.
If They Won’t Buy the Pitch, They Won’t Buy the Product
It’s rare that you will be present every time your customers are considering whether or not to buy your product. That said, if you can’t convince someone to say “yes” while you are standing there giving your pitch in front of them, you can rest assured you’re not likely to get a “yes” when you’re away. A good pitch should be so tightly integrated with your offering that it’s able to sell itself without coming from you. And it should be so infectious that customers can’t help but sell it to their friends.
Remember - if you can’t sell it, it doesn’t really exist!
Tuesday, April 14, 2009
If you’re going to be a leading company in any industry, you need to start acting like #1, even if you are #151. In today’s market, even being number two is just not good enough.
Almost anyone can tell you who the world’s richest man is – Bill Gates. But when asked who numbers two, three and four are, people get confused. The reason is simply that number one garners all the attention, while number two (in this case the great Warren Buffet) gets easily swept aside from our attention.
Who Loves #1? Everyone!
Everybody that interacts with your business loves number one.
Customers make product choices all day long based on number one status. Think about how you make those very same choices in your everyday life. Imagine you are suffering from a terrible cold and walk into the pharmacy to get some cold medicine. You stand in front of two medicines that both effectively treat colds – the “leading national brand” and the “generic store brand”. Even though the leading brand costs three times as much as the generic you find yourself walking to the counter with the leading brand. You believe that number one is better even though you (and the FDA) are pretty sure they do the same thing.
Your customers aren’t the only people fascinated with number one. Investors are equally enthusiastic about #1 companies because they carry an air of legitimacy and success about them. Positioning a company to make more money as number one is much easier than trying to bring number thirteen to the top spot.
And don’t forget the media. The media is in the business of getting customer’s and investor’s attention. Number two products don’t get anyone’s attention unless they are unseating number one products.
Make Yourself #1
So you’re not number one in your category you say?
No problem – just invent a new category!
As a startup company being number one may seem like a contradiction. How can you be number one in any category if you just started your company? At Swapalease.com we were a small company just entering the automotive market. So how did we dominate our space? We invented a new category - lease transfer - and built our reputation as “America’s Number One Lease Transfer Marketplace”. We were number one because no one else at the time was in our market!
Just about any category can be sub-divided into a position that makes you the “market leader,” so use some creativity to claim your territory. This is a simple but effective tactic to begin building your brand and your sales presentation and it’s truly powerful in the minds of consumers.
Even though Warren Buffet isn’t the world’s richest man, he is certainly the world’s oldest richest man. It doesn’t take much to differentiate him and still provide a legitimate number one status.
You can get too granular here, so let me warn you. Telling the world that you are the number one realtor on upper Main Street that sells white houses probably isn’t going to attract the number one status you desire. But telling people that you sell houses faster than your bigger competitors (even if you sell far fewer houses) may get the type of number one status that brings you more customers. Your approach makes all the difference.
Your customers will respond much more positively to your number one status if it is properly placed in the context of their needs. Think about what they want you to be number one for and focus your brand there.
“Woo-hoo! I’m Number One! Now what?”
Great, you’ve just promoted yourself from “aspiring startup” to “industry leader”. Not bad for five minutes worth of effort. Now let’s talk about what to do with your newfound status.
Remember when you were convincing yourself to buy that overpriced cold medicine in the pharmacy? How did you know that the leading brand actually was the leading brand? You knew because they told you they were – all the time – whether you wanted to hear it or not. You heard it on radio commercials, watched it on TV, and of course read the brilliantly colored statement on the otherwise generic box. In short – because they told you over and over.
If you’re going to be treated like number one, you need to act like number one and pound your chest about it. Announce your number one status on every last piece of sales and marketing collateral that you own. Get used to giving your elevator pitch with the opening line “we are the largest stainless steel provider in Central Ohio” at every chance you get. Live your number one status in every aspect of your business.
After all, if you don’t claim your number one status your competition will.
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