All posts by Skip Sanzeri

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Skip Sanzeri is a Silicon Valley entrepreneur who has helped a variety of startups launch, grow and exit. In addition he has funded and launched a few of his own companies. Skip started his entrepreneurial career at an early age buying a Gold’s Gym in the San Francisco Bay Area. Throughout his career, Skip has helped other startups, launch, grow and exit. He then expanded to a total of 6 clubs and converted the brand to California Athletic Clubs before exiting via a sale of the franchise to 24 hour fitness. He then helped grow the IAC division of Ziff-Davis publishing to $250 million, after which it was sold to Thomson Publishing.

Skip Sanzeri continued his entrepreneurial career with Sequoia Capital – backed Quote.com which was acquired by Lycos. Skip then founded and funded the first open source strategy firm – Open Source Group.  Skip earned his bachelor’s degree from Claremont McKenna College, and then followed on with a Master’s in Public Administration from the college of Notre Dame. He lives in Silicon Valley and is a native of San Francisco. In his spare time Skip enjoys baseball, yoga and studying quantum physics.

https://www.linkedin.com/in/sanzeri/

Skip Sanzeri has an entrepreneur since 1996 beginning with Quote.com (backed by Sequoia).

Skip Sanzeri Founded Myfamli – the world’s first comprehensive family information and preservation system –
myfamli.com

Founded AlerSense – The World’s First Smart Allergy, Asthma and COPD Air Quality Alert System.

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Exits:
Took MyDx, Inc. public
Merged InRange Technologies with CNT – Computer Network Technology Corp.
Merged Open Source Group with Olliance
Quote.com sold to Lycos
IAC (Ziff Davis Division) sold to Thompson Educational Publishing
Converted Gold’s Gyms to California Athletic Clubs and sold the chain to 24 Hour Fitness

Strategic Capabilities

CEO, Leadership all company functions
Investor Relations, PR and Marketing
Angel, Venture and Private Equity Funding Strategies
IPO/Reverse Merge Experience
Crowdfunding Expertise
Social Media Strategy
User Acquisition
Company Branding
Go To Market Strategies
Marketing Budget and Planning
Financial Modeling

Currently funding 6 different pre-IPO companies via private equity.
I have run projects and campaigns with over 100 different clients.
Company structure – legal, organizational, and information technology
Business models – Skip is an expert in determining viable business models including user acquisition, customer acquisition and revenue streams

Skip Sanzeri’s Past Companies:
MyDx
Ziff Davis
Lycos (via Quote.com purchase)
Gold’s Gym Franchises
Open Source Group, Inc.
Baytech Web Design
The Yerby Company
Cotelligent, Inc.
Inrange Technologies (bought by Brocade)

Recent Articles by Skip Sanzeri

Skip Sanzeri
Skip Sanzeri, Founder and CEO at AlerSense, Inc. (2015-present)

Generally angel investing and debt are not the same. However, debt is becoming more popular these days for companies and I have seen a little more “venture debt” happening. This is simply an early stage loan, versus equity.

Most angels will invest for percentage of equity in your company. There is a middle ground which are called convertible notes (debt), wherein you place a limit on the company valuation (Cap) and investors loan money that can be converted to equity, or will eventually need to be paid off as a loan if it is not converted.

I would not advise early-stage companies to take on straight debt if they are not cash flow positive. Debt service can become a killer to early-stage companies, that are not even post-revenue.

Convertible notes are fine as the full intent is that they will convert into equity, not be paid off as debt.

***

Skip Sanzeri – This was recently posted on Quora  – regarding a question about Whether or not it’s a good idea to contact venture capitalists when you have no prior relationship. You’ll see below that “cold emailing” or cold contact is really not the best way to go.

In answering your question about emailing or calling cold into VC firms, I would say practically, it is not the most optimum approach. It’s not to say that you couldn’t play the numbers game and reach out to 100 analysts or associates at VC firms, but your response would most likely be very slim.

You’re better off using something like LinkedIn and finding someone you know who can make an introduction for you to the right firm.In my experience, generally VC firms require a warm referral. Most venture firms see so many plans per week, that the companies which come to them through referrals will get a stronger look.

Be sure to study the firm first, then look for a partner or associate at the firm who has an interest in your space. I’ve also found that VC firms change focus direction from time to time. So if a given firm was interested in cloud-based technologies earlier, they may now have switched to AI etc. sometimes their portfolio will fill up with a certain type of company in a certain industry and therefore they will no longer look for similar companies.

Sometimes entrepreneurs make a rookie mistake by contacting a VC firm through a referral, without having done the initial research to understand if the firm is currently looking for companies like theirs to add to their portfolio.

So you want to go to the site, review their philosophy and their portfolio companies, look for some matches, then find the partner who is handling your area and who is most qualified to discuss your company with you. Then, find someone on LinkedIn who can make an introduction for you, (or use another network) and go from there.

Lastly be sure to watch out for competition. I’d say it in about 25% of the pitches I’ve made to VC they could not move forward due to the fact that they had an investment in a competitive company. I don’t believe that you should necessarily avoid a VC firm that has a company that could be competition, but if the other company they invested in is a straight up competitor, you might be wasting your time.

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What does Crowdfunding have in common with ‘Cats’?

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Skip Sanzeri on Retail Trends

Skip Sanzeri’s Rants and Raves

Hi Everyone – from Skip Sanzeri  –  here’s a good article on retail and how some are creating new strategies…

https://finance.yahoo.com/news/retail-apocalypse-causing-one-company-101500152.html

It didn’t take long for The Hershey Company to mention its push into e-commerce on Wednesday’s earnings call.

In prepared remarks at the beginning of the conference call, president and CEO Michele Buck listed online retail as a major focus and potential growth area for the company. She discussed collaboration with brick-and-mortar retailers as well as efforts to better accommodate the needs of online shoppers.

Her comments did not fall on deaf ears.

Credit Suisse analyst Robert Moskow circled back to them during the question-and-answer portion of the call, asking about what he interpreted as a “change of tone regarding the sense of urgency to get bigger in e-commerce.” He said that in his discussions with investors he had noticed concern over the dwindling number of cash registers — the epicenter of the confectionary impulse purchases so crucial to Hershey sales.

“I think it is fair to say that we are dialing up,” replied Buck, who also stressed that Hershey’s impulse and take-home business showed “pretty strong performance” during the period.

The CEO went on to discuss how Hershey’s was reinvesting additional resources in the e-commerce initiative and partnering with customers. She said there was major interest among the company’s brick-and-mortar partners to expand online offerings.

The exchange echoed many others occurring all over the retail industry as cash-rich and acquisition-happy online conglomerates like Amazon disrupt the landscape. Companies are scrambling to stay competitive as consumers increasingly shop online.

Hershey’s efforts also show that it’s not just traditional brick-and-mortar shops that are compelled to adjust. The sweeping changes are affecting companies across the retail pipeline, from suppliers to those that provide back-end services.

For a recent example of how quickly a retailer’s fortune can change, look no further than Blue Apron, the meal-prep delivery service that recently went public. Mere weeks before Blue Apron’s initial public offering was supposed to price, Amazon bought Whole Foods for a whopping $13.7 billion.

It was terrible timing for Blue Apron. Many potential investors quickly identified the possibility of more competition in the food-delivery industry and ran the other way. As a result, Blue Apron took a cleaver to its IPO range, cutting it to $10 to $11 a share, down from $15 to $17. The company ultimately priced at $10 a share — 40% below the maximum it had sought.

Blue Apron has since been on the receiving end of even more bad news, with its stock closing 32% below its IPO price on Wednesday.

At this point, there’s no way around it: The company got “Amazon’d” — the Business Insider-coined term used to describe when a company’s entire existence gets rocked by the Jeff Bezos-led tech titan.

The growing juggernaut remains a specter that still looms over just about everyone, and it’s clearly affecting corporate behavior across the market.

In the meantime, Hershey’s remains confident about its push into online retail, and says its in-store sales are holding up just fine.

“We have been able to win in-store even as e-commerce has accelerated,” the company’s president, Todd Tillemans, told Business Insider. “Right now, we’re focused on partnering with retailers and investing in capabilities to unlock growth for our brands online. I believe we are in a really good position to win in an omnichannel world.”

What does Crowdfunding have in common with ‘Cats’?

 

nd_0407_wed_cats_1

 

Most entrepreneurs I speak with do not really realize what it takes to run a successful crowdfunding campaign. This article is about rewards based Crowdfunding, really one of the more difficult Crowdfunding types to run (versus equity, cause, or debt based Crowdfunding).

80/20

At a high level, Crowdfunding, like developing and putting on a play such as ‘Cats’, requires 80% preparation and 20% execution. If you think of what it takes to develop and launch a Broadway show, there is an immense amount of preparation including developing the entire play, sets, musical scores, months of rehearsal, and then a launch or opening. Actors, musicians and other crew may rehearse 10 or 12 hours per day for months to get ready, and then execute the play each day or night.

Crowdfunding, done correctly, has similar 80/20 ratios (although much shorter in duration than a Broadway play). A successful crowdfunding campaign will have 30 days of planning, 45 days of outreach, and then about 35 days of actual Crowdfunding. Planning is key as all outreach, content development, strategies, and goals need to be set prior to any execution. Next, a solid crowdfunding campaign will have up to 45 days of outreach to constituents including building audiences on social media, connecting on email, talking with friends and family, and other partner outreach. Media outreach is essential as well letting the press know about your upcoming campaign. If you look at the most successful campaigns, you’ll find that there was a lot of outreach to the media and they secured articles with online publications, print media, and even interviews on TV and radio.

The Crowdfunding Platform is only the Venue (Theatre)

Most people I speak with have the false belief that there are thousands of people trolling Kickstarter and Indiegogo for interesting campaigns in which to invest. While there are some people that spend time looking through various companies and products… like a Broadway play, if you want people to buy tickets and attend, you need to reach out well before opening night with a ton of marketing to make sure that you fill the seats. You need to generate your own audience to attend your crowdfunding production.

Think about it. If you were going to develop and launch a Broadway play, would you spend years of time developing and preparing the play, months and months of rehearsal, hundreds of thousands of dollars to build sets, and then simply open the play at a given venue?

Of course not. You would make sure that you reached out to all of the important media, sites, and people to ensure they would attend your play. You would like to see pre-purchased tickets that would fill the venue for a year or more. This would give you confidence that on opening night and through the next year, you would have enough audience to support your efforts.

There Is No Audience Unless It’s Your Audience

Crowdfunding is very similar in that the platform (like Kickstarter) should be considered an empty venue where you will bring your own audience to attend your crowdfunding campaign. This is critical to know. Many crowdfunding sites want you to believe that they have tons of people looking for companies or products just like yours in which to invest. However most crowdfunding campaigns fail because they don’t know that they need to fill all of the ‘seats’ with people they bring to the venue via a ton of outreach prior to opening night. I see so many crowdfunding campaigns that raise zero, or very little, because the companies or individuals did not build their audiences prior to launch.

Broadway Critics Can Be Brutal – Crowdfunding Is Unforgiving

And since most rewards based Crowdfunding campaigns run about 35 days on average (best practices), once the campaign launches, it’s too late to make adjustments. And worst of all, like a Broadway play, you have one launch to get it right. On Broadway, if the critics tear up your play, it may be hard to recover. In crowdfunding, it’s nearly impossible to launch another campaign and make it a success if the first one failed.

Here’s what to do:

  1. Assess all of your lists and contacts before considering Crowdfunding. If you don’t have a lot of social media followers, or large email lists, you may have to acquire these in order to have a successful crowdfunding outcome. You may want to consider running Facebook ads in order to get people interested in your product or service while letting them know you launch a crowdfunding campaign soon.
  2. Study crowdfunding campaigns and look at the strategies they used. You can reverse engineer nearly any crowdfunding campaign by simply looking at all of the steps they took, the types of rewards they listed, the communications they executed and the press they achieved. If you believe that you can come close to hitting the types of communication numbers of a successful crowdfunding campaign, then you at least have an opportunity for success.
  3. Once you believe that you have a chance at crowdfunding success, put a plan together and outline all of your strategies, rewards, timing and communication first. Once you have a plan in place, then you can begin execution.
  4. 45 to 60 days prior to launch, you need to begin outreach to all of your constituents, and let them know that you are planning a crowdfunding campaign that will launch on a certain date. Note that you will need your website up and running so that people have a place to refer back to after they receive your note. Additionally, you want to contact all of the media who could be interested in writing about, are interviewing you on your product or company. You want as much press as possible prior to crowdfunding launch.
  5. If you executed the above, you might have a few thousand two even 10,000 followers, fans, friends and likes, ready to support your crowdfunding launch. You just filled your theater for your upcoming production. Congratulations. (note this article is high -level  – there are dozens of sub-tasks that need to be executed as well for a successful campaign).

Running a successful crowdfunding campaign, like a theater play, is not for the faint of heart. Do your homework, planning, preparation and massive outreach prior to launch. Then, if your product, service or company is interesting, your audience will show up and you should achieve crowdfunding success.

Startup Surprise! Crowdfunding is Not Free

NotFree

As Milton Friedman once said, “There is no such thing as a free lunch”… and this certainly applies to Crowdfunding.

Crowdfunding has come on at such a rapid pace, many are still trying to understand how to correctly crowd-fund. The allure is for good reason: Crowdfunding grew from $16 billion in 2014 to $35 billion estimated at the end of this year. So officially, if this trend keeps up, Crowdfunding will pass VC investment which is estimated at $30 billion. Some say that Crowdfunding will double over the next few years which would mean that Crowdfunding would surpass all other forms of venture or angel funding and approach north of $75 billion in 2016.

Now before we all declare this as easy money, we need to understand what goes into a crowdfunding campaign. In this article I’m going to talk only about rewards-based Crowdfunding (versus equity, or debt), but this could apply to donations based Crowdfunding as well.

I get a few calls a week from small companies that want to use Crowdfunding as a vehicle to get their company off of the ground. Sounds fine at the outset. What most do not realize is Crowdfunding is not a “list it and they will come”, no more than “build it and they will come” (referring to websites) back in the late 90’s was true. Most crowdfunding sites require no upfront investment and take their fees out of the capital raised. So many are fooled thinking that Crowdfunding is therefore free. This could not be farther from the truth. While it is certainly true that there is very little investment in listing a crowdfunding campaign, there are dozens of activities in addition to tools and paid services that need to be deployed for an optimal campaign.

Fact is that if you’re going to run a successful rewards-based Crowdfunding campaign, you need to deploy a massive marketing campaign. This article is not designed to go in depth into all aspects of running a crowdfunding campaign, but here are some of the things you need to think about that will take money and our resources:

Staff – you will need staff to reach out to all of your constituents across all possible mechanisms. This includes social media, email lists, friends of friends, and more. Additionally, staff will need to quickly address any and all incoming comments or questions to make sure that your crowdfunding campaign is successful. On average, successful Crowdfunding campaigns run 30 days to 45 days. So if there is any delay in your communications, you’re wasting valuable time while the project end date is coming. We recommend that you think in terms of having a minimum of 3 to 4 full-time staff members working all angles of constituent communication during Crowdfunding. While they’re not communicating, they will be posting articles and other interesting blog posts to keep the crowd engaged and active. You will need this team available for about 90 days.

Ads – when Crowdfunding, you should really prepare and launch your initial outreach 45 to 60 days before your campaign starts. Additionally, you should use advertising mechanisms to increase your reach. Statistics show that 50% of your crowdfunding constituents and dollars will come from Facebook. So running Facebook ads to find new fans, friends and likes is a smart move. You’ll probably want to have $2000-$5000 for Facebook ads to bring more people into the fold so that when your campaign starts you hit the ground running with maximum participation.

Tools – you should deploy some tools to help manage your crowdfunding campaign. These include email systems like Mailchimp, social media tools like Hootsuite, PR tools like InkyBee or PR Web (don’t forget that you will need money for press releases as well), communication tools like Aweber, and more. There are dozens of crowdfunding tools and picking the right tool for the right job is important. But nonetheless, you should budget at least $1000 for these tools and between $300-$400 per press release.

Website and Social Site Design and Build– you will need to budget for website development and social site development. You’ll need a good developer or a team to build out all of your online properties. These costs can range from under $1000 up to $10,000 depending upon the type of sites you have and the teams you use. Professional web and site development firms are more expensive than individuals but generally their more reliable.

Video Production -every great crowdfunding campaign requires a rock-solid video. It needs to be informative, interesting, and well produced. Depending upon your skill set, your staff and your associates, videos can cost a few hundred dollars all the way up to $10,000 plus. It just depends on the quality.

Contests and Sweepstakes – I was speaking with a few crowdfunding experts who recommend running contests or sweepstakes prior to launching a crowdfunding campaign. These are designed to generate more traffic and engage users beyond all of your existing constituents. If you choose to do this, you will need money for prizes that could include things like an Apple Watch, and iPhone, and/or prizes like free products. So you will need money to buy these in order to give them away.

Crowdfunding can be an amazing way to generate capital. But realize that if you’re going to run a crowdfunding campaign, you should probably budget about $10,000 to start. If your staff are all volunteers, or working for equity only, you can probably look at a smaller budget of between $5000 and $7500. Without this investment, you campaign could be suboptimal and unfortunately it is difficult to circle back and run another campaign after you’ve gone through communications with all of your constituents. So this is, for the most part, a one-time chance, and you will need to get it right the first time. When done right, Crowdfunding can generate hundreds of thousands and even millions of dollars. Think of crowdfunding like an intense marketing investment.

And as Henry Ford once said, “A man who stops advertising to save money is like a man who stops a clock to save time.”

What can be Crowdfunded?

We get asked a lot about the types of businesses that can be crowd-funded. It seems these days that nearly anything is crowd-fundable with the right set of campaigns and on the right platform.

For instance, Kickstarter, one of the most popular crowdfunding campaigns has a list of items or companies that cannot be Crowdfunding on their platform.

Of course illegal or illicit businesses cannot be Crowdfunding. Pornography, drugs, cannabis paraphernalia, weapons, and even financial or money processing businesses are usually not crowd-fundable.

Here are a list of Crowdfunding categories:

  • Art
  • Comics
  • Crafts
  • Dance
  • Design
  • Fashion
  • Film and Video
  • Food
  • Games
  • Journalism
  • Music
  • Photography
  • Publishing
  • Technology
  • Theater

If your business falls in the above, then you have a chance at Crowdfunding. Make no mistake that Crowdfunding takes an enormous amount of work as well as a little bit of capital. For instance, we recommend that you spend some money on Facebook ads to help generate more audience. Additionally you want to hit all of your social media very hard to make sure that everyone you know can help your cause.

We offer Crowdfunding consulting and execution. If you’re interested please contact us.

 

 

 

Startup Hack – Go Best of Breed

 

American-Pharoah-5-4 Best of breed

 

What is best-of-breed?

In business, best-of-breed is a term used mostly to describe high quality firms and relationships. For instance a best-of-breed law firm would be a larger, more established company with a brand of which many people are aware. Best-of-breed is a very important concept to consider because it will give your startup credibility. And by definition since startups are early-stage, credibility is unbelievably important as you move your company forward. However there are a trade-offs (below), which must be considered when you are deciding to go best-of-breed or not. Generally best-of-breed firms are more expensive, so you’re trading dollars for credibility.

Examples of startup best-of-breed relationships:

  • Law firms
  • Accounting firms
  • Venture capital firms or angel investors
  • PR firms
  • Office locations (City or area within a City)
  • Suppliers/Vendors
  • Partners

To provide some real world examples, I will illustrate how a software company in Silicon Valley might look for best-of-breed relationships. This list is used just to provide some examples and is by no means complete or exhaustive. There are plenty of best-of-breed firms across every industry so the best-of-breed list below is only a small percentage of great companies out there:

Law firms

Accounting firms

Venture capital firm or Angel Investors

Investment Banks

PR firms

Office locations (City or area within a City)

  • In Silicon Valley, an early stage best of breed location could be anywhere from Morgan Hill to San Francisco. Even some East Bay locations like Fremont can work. The key is if you want to go best-of-breed, you need to have an address in an area where people believe you will be able to succeed. A suggestion might be to take an office either in an area known for early-stage culture, or if there is not one available nearby, taken office in one of the larger cities. It will help for credibility. A best-of-breed example is Sand Hill Road. Most people know that the top-tier venture firms are located on that street in Menlo Park.

Suppliers/Vendors

  • This is completely industry-specific. However, if you’re choosing a supplier, if they have a brand name and are known to be the best at supplying that service or product, it will be helpful. As an example, I was working with a company that manufactured a consumer product. We chose a medium-sized manufacturing partner that had enough of a brand, people believed that the partner would be able to produce the number of units, and at the right quality and price we needed. Also the partner was in the United States so our argument was that we could go and visit the manufacturing plant to make sure that everything was on track. The choice was to stay in the US and then look at possibly off-shoring manufacturing at a later date. Investors like this strategy because they felt that we would have more control initially, even if the costs were slightly higher. We’ve all heard horror stories for startups and larger companies, where products were delayed in shipping or at the port. For an early stage company this could be a fundamental problem (see my article on “hard times” which describes how to handle fundamental problems).

Partners

  • Partners are also industry-specific. For instance if you’re going to have a database partner, you might want to think about going with Oracle or SAP. If you’re going to use cloud services, obviously Amazon is a good choice. I think you get the idea.

Best-Of-Breed Tradeoffs

Negatives

Higher Cost

As mentioned above, by choosing best-of-breed partners, you are making trade-offs. First, usually best-of-breed partners charge more. The reason is they are trying to protect their brand. So in the event that you are not satisfied, they realize that negative sentiment social media can harm the brand so they will work harder to ensure that they meet the agreed upon expectations. Therefore, theoretically best-of-breed partners should provide higher levels of service and be very responsive in the event of problem crops up. It is assumed that best-of-breed partners are larger and have grown to be that size due to the fact that they were able to provide high value and quality to a lot of other companies prior to yours.

Slower Speed

Second, sometimes best-of-breed partners may operate at a slower pace. Generally they are busy with more customers, and therefore you may or may not get the speed and attention that you may really want. However, if the relationship is “good enough”, then it’s worth staying best-of-breed. I found that working with larger best-of-breed partners sometimes can be slow, but if you work with the partner and let them know your concerns, sometimes you can speed things up. As an example, one of the larger law firms used by a startup I was advising, seem to be slow. So we brought on an additional attorney from a single office to help speed some of the work that needed to be done so that the larger firm could focus on more strategic issues (and continue to provide brand, via best-of-breed). To give you some metrics, when trying to set calls or meetings with the larger firm it would take from 3 to 5 days to accomplish the call or meeting. The smaller firm would simply pick up the phone and usually we could get the same meeting within a few hours. You will have to decide how to manage the situation to make sure you can keep your startup moving at the appropriate pace.

Delegation/Abdication

Another problem going best-of-breed is usually that you will sign with one of the brand name partners or company leaders, and then you could get delegated, relegated or abdicated to a junior. This happens a lot and you need to be very aware of it. I had a company that was going public recently and we hired a PR firm. We hired the firm specifically for the capabilities of the practice leader who was well known in the industry. It wasn’t long when the practice leader no longer joined the weekly conference calls and we were relegated to his underling. Due to our own mismanagement, we then found that over 50% of the weekly calls were then further delegated further so that we only had the junior associate participating. So we went from the practice leader through one of the directors, down to the least experienced person. Again this was our fault for not managing the situation and demanding that we stay in touch with people at the right level. Realize that any best-of-breed service firms are there to optimize their own margin while providing the highest quality service. Optimizing margin means if you can put a junior associate on an account without requiring hours from your top leaders (at higher costs), you will drive more to the bottom line. As a startup, you need to be aware of this practice and manage the situation closely to ensure that you get all of the attention you deserve.

Positives

Investors like It

By choosing a best-of-breed partner, you are establishing credibility for your company. First, investors will like the fact that you have chosen name brands assuming the costs are affordable. For example, I use Wilson Sonsini in a lot of deals because they provide top intellectual property and corporate guidance, but additionally investors really like the fact that Wilson is involved. Of course you could use some of the other firms above which are best-of-breed just the same. I use BayTech Web design for my digital properties as they are best of breed in Silicon Valley.

Realize that investors are looking to reduce risk. In any early stage company there are a variety of risks including market risk, technical risk, management risk, legal risk and more. As an investor looks towards a company, the first and foremost question is “will I lose my money?” This is a fundamental question that needs to be answered. We have all seen the scams that seem to continually occur.

Investors want to know that their risks are mitigated (as much as possible)  and for example, legal risk is significantly reduced by a firm like Wilson Sonsini. Wilson will ensure all of the investment paperwork, intellectual property, and corporate structure is locked down and in place. Now, you could choose a small firm, or maybe an individual attorney who could be excellent. Their work might be outstanding, fast and less expensive. However they don’t carry the brand. I have also used strategies where I have used specific individual attorneys in combination with larger best-of-breed firms. This way you can offload a lot of the more inexpensive, more mundane legal work to the individual attorney, and save the more important strategic legal work (such as intellectual property), for the brand based firm.

Best-Of-Breed – Breeds Best-Of-Breed (sorry, I just had to say that)

In many cases it’s hard for an early stage company to attract best-of-breed firms. Just because you are willing to pay a best-of-breed firm, does not mean they will take on your case. I recently had an experience with an enterprise software firm that was white hot as a startup. In other words they were becoming a “Silicon Valley darling.” However, when we approached some of the top Silicon Valley or San Francisco offices of a variety of PR firms, four out of the five of them either said they were too busy or not interested in taking on the project based on the company’s early stage status. I’m sure they questioned whether or not the startup was willing to pay their fees, and whether or not the startup would eventually succeed. So, startups are risky so in some cases best-of-breed firms may be less interested in associating with the firm in that early stage and would be happy to jump on the opportunity once the company has seen more success.

The point here is that if you have a best-of-breed partner, the other partners will realize and also believe that you must have something good or important if the other best-of-breed firm signed on. For example, if you sign a top law firm, and you let your potential venture investors know about it, they will be more comfortable that you have made some initial, right moves. Also, if you sign top venture, then the PR firms might be more interested in working with your firm. I think you get the point here. The more best-of-breed partners you attract, the more credibility you have, and thus it’s easier to attract the best-of-breed outliers that may not otherwise have been interested in you at that moment.

High Cost Should Generally Equal High Quality

When you go best-of-breed, you expect the highest quality and you also expect to pay for it. Now, there are plenty of exceptions where this does not occur, however if you manage the relationship correctly you should get the results you deserve. Note that just because a firm is best-of-breed, it’s not “automatic”. With any good relationship, it requires solid management and expectation setting on both sides.

Best-Of-Breed Has Your Back

Again, if you manage the situation correctly, and you’re utilizing all of the right people, processes and systems from your best-of-breed partner, the cost-benefit trade-off should be positive. You may find that best-of-breed partners actually begin to think strategically for you. They bring you solutions and strategies that you may not have thought of, or they may improve your existing solutions and strategies. A top partner should be an expert in their area and therefore you are getting the best advice possible. They should be able to predict landmines ahead, and optimize your resources for the best result. Startups are by definition, resource constrained. Therefore any partner that can help you ensure that your resources and assets are deployed correctly and optimally is valuable.

Startup Validation – Ignore This at Your Own Peril

Plan A better

I see this mistake all the time… Build your product and automatically customers buy it at the exact price you originally intended.

Wrong.

Many entrepreneurs make a fatal mistake of believing that just because they see the vision and value for a given product, the rest of the world, or at least enough market share to support their company, will see the same. This could not be further from the truth. Now in some cases, people and companies get lucky, but we may as well not deal with luck here, rather solid market insight which should provide a more predictable outcome.

Test Test Test

When you are thinking of launching a product, and you’re in the visionary state, begin to discuss the idea with some trusted, confidential advisers. Find smart business people who can give you their opinion on whether or not it’s a good idea, or will suggest changes that might make it a great idea (I have a whole section on advisers and advisory boards here). I find entrepreneurs are very protective of their intellectual property, which is justified in many cases, but when you’re thinking about whether or not a product will work in the market and sell at the price you need to justify your margin, you need to figure out if this is feasible ahead of time. Entrepreneurs that go about it backwards, launching, taking capital, hiring (and thus taking on liability), and find that their product could flop in the market.

Once you have run your ideas by your initial advisers, and you’ve received enough positive feedback  to proceed, the next  and immediate step should be to reach out to prospects and ask them if they would have a confidential, early-stage conversation with you. Talk with your would-be customers to understand if your product is going to add value, and even better, what changes or enhancements should be made, and what price is acceptable?

Don’t Fool Yourself

One of the biggest mistakes I see with entrepreneurs is even if they get the product right, they don’t have any indication of what the customer will pay. It’s easy to fool yourself when customers say they would love to have it. It’s harder to fool yourself when after customers say they want it, you then ask them if they’re really willing to pay the price you want to charge. Everybody wants the Ferrari, but most don’t want to pay the cost. So you have to be careful here. When asking for feedback from your prospects, be sure to discuss pricing. Tell them that it will be X amount to purchase the product, or per month or per year, and really understand if they are willing to pay that price for that value. Many entrepreneurs don’t want to have this conversation because they aren’t sure how to do it.

Make It Hypothetical.

Ask them in a manner that allows them the ability to creatively imagine how they would use the product and subsequently ascertain the value, and then compare that to the cost. Something like this might work, “suppose I could bring this widget to you that would change your life in this way. It would make it much easier and less expensive for you to do business, and it would have a return on investment estimated at this. Would you pay $1200 a year for that?” By using a supposition, the customer feels relieved that they don’t have to commit to anything because it is all imaginary. However the insight you gain is valuable.

Ask Enough People

Be sure that you take the above scenario to enough customers and advisers to gain the feedback you need. Using social networking or business networks like LinkedIn, reach out to people and ask for a phone call or presentation. Don’t rely on email to gain your insight as it’s impersonal and asynchronous. But rather talk on the phone or meet in person because you might learn more through the customers intonation and tone, than you will from their words.

Competitive Information Avoids Competitive Decimation

Or, we find that we have a great idea for product but we didn’t know that a company like Google might be developing the same just to launch it for free. Look at what happened with digital maps and mapping. Google Earth, and Google maps essentially put many companies out of business. By giving away mapping for free and then integrating it everywhere, mapping companies got blindsided. I’m going to guess, and I don’t have proof, that there may have been some mapping companies that were thinking about launching right around the time that Google gave maps away for free. I’m hoping that those companies sought advice, and made the appropriate changes so that there wasn’t significant loss.

By testing in the market, and speaking with your advisers, you may gain competitive information which would lead you to a new approach for your product, or may have you scrapping the product altogether. You’d be amazed at what your customers or potential customers might know about other solutions. Your advisers may have insight on potential competitive products.

 

Be a Marketing Madwoman

By aggressively reaching out to dozens of potential customers far before your product is ready, you accomplish all of the above but additionally, you are seeding your market and you can re-approach the same prospects when your product is in beta or ready for market. You might want to try rewards-based Crowdfunding for your product. I worked for the company that successfully launched a crowdfunding campaign prior to raising their series a round of capital. They pre-sold the product and then shut the campaign down once they hit the numbers they needed and this proved there was demand for the product at specific prices. Again, you’re reducing market risk if you have prepaid orders. For more on Crowdfunding click this link.

Investors Love This

I recently I spoke with the company who successfully deployed the above strategies. They went out to over 100 customers, gained enough positive feedback and validation that when they went to investors, they actually had prospects who would give them hypothetical testimonials. In other words the prospects were so excited about what was coming, they were willing to let an investor know via phone that they would buy it when it was ready if it delivered on the product marketing promises, and was at the discussed price. Of course the investors found this extremely valuable and investment capital flowed easily to this company. Generally investors look to reduce risk and increase upside. When you can reduce market risk, then you’re left with technical risk management risk and a few other types of risk. By using the above strategies, you’re making it easy for investors to invest, customers to buy, and most importantly you’re justifying that you should launch.

Negative News Can Be the Best News
You might also find that you cannot get customers to care about your product. Or they care but they’re not willing to pay the amount you plan on charging. Better to know this early so that you don’t waste an enormous amount of time and effort, along with investor capital. It’s critical to understand your customer traction and the earlier the better. Again my suggestion is to got your customers before you even start building your product to understand whether or not you should launch the company. The fact is that 90% of businesses fail. By deploying early market validation strategies, you can be part of the 10% that succeed.

How to Run an Equity Crowdfunding Campaign

Crowdfunding

While it seems easy and simple, running an equity crowdfunding campaign requires a company to be very well organized and articulated. These days, online sites seem to reduce the amount of preparation necessary, but don’t be fooled by the appearance of simply filling in online forms.

In order to run a successful equity crowdfunding campaign, you must have a strong grasp on how much money you need to raise, what the money will be used for, and its associated milestones you intend to hit with the capital raised.

Note – equity crowdfunding is different from rewards based crowdfunding. With a quick search I found over 60 different equity crowdfunding sites. Here are some examples:

https://www.crowdfunder.com/

https://www.equitynet.com/

https://angel.co/

https://www.earlyshares.com/

Raising equity crowdfunding capital is really no different than raising standard equity capital. We recommend that you start with the following:

A five-year financial model that details revenue, expenses, cash flow and a balance sheet. Again, you need to know how much money is necessary to fuel your company, and if you will need further rounds of capital. The last thing any investor wants is to under-fund the company only to find it short of capital when it needs to grow. The last thing any entrepreneur or board wants is to give up too much equity via dilution early on by raising more than is necessary to hit the next milestone.

Executive summary – has 10 to 15 sections on the company including the problem you are solving, your business model, your management team, market size, competition, financials in the form of an income statement and more.

PowerPoint deck – a 10 to 15 slide PowerPoint deck that has bullet points outlining the executive summary above.

Once all of this articulation is complete, you will need need to make some choices as to which equity crowdfunding site you will use. Just because one is the most popular, or has raised the most money, does not necessarily make it the best for your company. There are crowdfunding sites for many industries, and some have investor types that are different than others. If you need help choosing a crowdfunding site, please contact us.

Additionally you will need to be very well organized legally. When raising capital, generally companies have a private placement memorandum (PPM), subscription documents, and term sheets. Having good securities and/or corporate counsel is essential.

After you have chosen the correct equity crowdfunding site, then you will need to sign up for an account and begin to enter your information. If you did your work above, with the five-year financial model, PowerPoint deck, and executive summary, you will probably be in good shape. Note that additionally you will need to come up with the company valuation that is reasonable. Investors want to know if they give you $5000, or $50,000, how much of the company they expect to get in equity.

Each equity crowdfunding site has different terms, conditions and rules and fees. Be sure you understand how much the crowdfunding site will get from your capital raise, and the associated rules to be on their platform.

Once you have chosen your equity crowdfunding site, and have entered in all of your information, you then need to know how to promote your company to investors. Each crowdfunding site has different methods of doing this so you’ll need to familiarize yourself with the rules and regulations. There are many different marketing and investor relations methods to promote your company and maximize your return.

Note that it is important to promote your company in every way possible. Just because you put your company up on an equity crowdfunding site does not mean that money will flow your direction and flocks of investors will find you. It is much different than that. You need to actively promote your company and provide aggressive outreach to dozens of investors. This is no small task but then again, raising capital is never easy anyway.

If you need help with an equity crowdfunding campaign please contact us. We have our own online funding site called Venture Deal and have strategies and tactics that can help.

Equity Crowdfunding

Equity-based crowdfunding  is a new way to raise capital from unaccredited and accredited investors. This type of capital raise was approved in the US through the JOBS act in 2012. Since equity crowdfunding is the offering of private company securities, it is subject to security and finance regulation.

Currently there are over 60 equity-based crowdfunding sites with a variety of opportunities and focus. Equity crowdfunding allows companies to raise capital from a variety of individuals with denominations that can go as low as a few hundred dollars per investor. Each investor will gain an appropriate share of the company based on the company valuation in reference to the amount invested.

Sometimes equity crowdfunding is called crowd fund investing, hyper funding and crowd investing. None the less, is an extremely viable way of raising capital allowing companies to access thousands of individual investors quickly and easily.

Note that equity crowdfunding still requires a company to be well organized and articulated. Many make the mistake of shortcutting traditional business plans and articulation thinking that crowdfunding does not require such diligence. The fact is that even an investor that puts $3000 into your company, still wants to see that the company has thought through its financial projections, has articulation in the form of a PowerPoint deck and an executive summary. Most equity crowdfunding sites require significant business articulation and this takes a reasonable amount of work.

Please read this article on how to run an equity crowdfunding campaign.

If you would like help with an equity crowdfunding campaign please contact us.

Live and Die by Your Assumptions – Financial Modeling for Startups

Whenever I speak with entrepreneurs, I can clearly tell the visionaries from those who can execute. Many entrepreneurs possess powerful vision and passion, 2 elements to get a company started. However execution is quickly required behind this vision and passion. We all know that strategy is important but execution is vital.

The 1st thing I recommend in starting a company is to build a 3 to 5 year financial model. The model is designed to provide a guiding light to the company and proof points to investors. A good financial model will contain all of the company assumptions and therefore make an entrepreneur think through all of the challenges. The financial model should be developed even prior to the PowerPoint deck or executive summary. The reason is that a financial model, if done correctly, will provide the entrepreneur, board and executives with the practicality of the business. In other words, is it a business that has a chance to reach the position of being cash flow positive or profitable within a reasonable period of time? How much money do you need to raise to get there?  What revenue assumptions and what expenses are expected? At the end of the exercise, the entrepreneur or company should possess a multi-tab spreadsheet with all of the information necessary to evaluate if the business idea can be executed. And, if done right, the model will have sensitivity analysis – so a best case, average case and worst case set of scenarios  – so you can plan for any and all contingencies. When building a financial model – my rule is: “everything takes twice as long and costs twice as much as you expect.”

Note that, not all business ideas should be executed. A financial model may determine that the business is not practical, and therefore should not be launched at all. It’s great to have a vision and passion, but without practical execution, the dream becomes a nightmare. Many businesses have failed due to bad planning and either should not have even started, or should have raised much more capital along the way. For example I just finished a conversation last week with an entrepreneur and team that were going to build a national brand with what they thought would be enough money. They told me they wanted to raise $2,000,000 and that would be plenty. Unfortunately, I had to break the bad news to them that to build a national brand for their online company, it would take more along the lines of $40,000,000-$50,000,000. This would be raised over a series of tranches. They are sort of a competitor to Groupon, and if you read the history of Groupon you will find that they raised $950,000,000. So far cry away from the $2,000,000 these guys thought would be enough.

Anyway, here are the elements of a good financial model:

Assumptions – you’ll need assumptions on every area of your business. Remember that your assumptions will be challenged so be sure that you can back them up, or have enough detail to prove that you know what you’re doing. I recommend building assumptions at the unit level versus the high level. For example, you might think that you’re going to sell 1000 units in month 13. How do you know? What did you sell in the prior 12 months? How are you going to get customers to buy these? What is your distribution strategy and plan? Exactly how many phone calls, ads, members, fans or viewers will it take to hit 1000 sales in month 13? What is your customer acquisition cost?

By being able to answer, denominator, unit level questions from investors, they will give you an opportunity to move forward. I have seen early-stage companies fail when they simply state that they will make 1000 unit sales in month 13 but have no idea how it’s going to get done. In good modeling, if you stay at the unit level, you will know how much it will cost to acquire those customers and therefore, that will all feed into how much capital you need to raise.

Cash flow – you definitely need a cash flow analysis by month over the 1st year, quarter by quarter over years 2 and 3, and annually in years 4 and 5. Cash flow is critical to show when you will reach a point where you no longer need investment capital. Investors will always want to know your assumptions on how quickly you get to being cash flow positive and how quickly you then reach profitability. Note that cash flow and profitability are not the same. Being cash flow positive means that you have reached the point where the incoming revenues exceed your monthly expenses. Being profitable means that your net income is greater than all expenses, costs such as cost of goods (COGS), and sales general and administrative (SG&A).

Income Statement – your projections should include income statements by month for the 1st year, by quarters for years 2 and 3 and annually if you choose to build out years 4 and 5. I like to use the 3 or 5 year income statement for the PowerPoint deck or executive summary. The income statement will show which year you will reach profitability.

Balance sheet – a balance sheet is not as critical in the beginning since most early-stage companies don’t have a lot of assets. However after capital is raised, and expenditures begin, it will be important to keep a balance sheet.

Funding sources and uses -this is a requirement to gain investment capital. You need to be able to show investors how much money you need to raise and over what period of time, in addition to showing how you intend on spending that capital to build the business. A good financial model will back into, or show you how much money you need to raise. Rather than starting with, “I want to raise $1,000,000”, you need to be able to show that through your financial model you require $1,000,000 to cover you for the 1st 6 months and then you’re going to go for a 2nd round of $3,000,000-$4,000,000 etc. A good financial model that is well-built will dictate how much cash is necessary before the next round, or to bring you to cash flow positive or profitability.

A list of revenue and expense categories you will need to consider:

  • revenues by product or service over time
  • staffing requirements
  • gross margin via cost of goods sold (COGS)
  • marketing costs – including all marketing and product marketing
  • sales commissions or distribution and channel costs
  • web properties and online costs
  • hosting and IT infrastructure costs
  • travel
  • events
  • insurance
  • payroll taxes and benefits
  • licenses and permits
  • office expenses
  • office rental and utilities
  • outsourced and consulting projects
  • legal costs
  • telephone/Internet/wireless costs
  • capital equipment purchases including computers, furniture’s, fixtures etc.
  • working capital assumptions including Accounts Receivable, Accounts Payable, and inventory
  • Gross profit calculations
  • breakeven analysis
  • working capital assumptions

If you’d like more information on financial models, or how to build them feel free to contact us.