Category Archives: Leadership

Why won’t investors get back with me after I pitch? by Skip Sanzeri

Having worked with a lot of angel investors, and venture firms over the years, there are a few key reasons why you don’t get timely follow-up (if not a complete lack of follow-up).

The first and foremost reason is that your deal is just not that interesting. Whether it’s your team, your product or service, or your market, an investor portfolio, criteria or focus fit (or something else), if an investor of any type does not get back with you, you can take that as a signal that they’re just not interested.

Of course there are occasions where something may have happened outside of your control such as an Angel investor really likes your deal but had to move a different direction or stop investing for the moment etc., but generally by not getting back with you they are showing you they are not interested.

Working with investors is like selling a product or service. You’re calling on your prospects (investors) pitching your product or service (company) and doing your best to have them buy (invest). However we all know that when we are selling a product or service, many of our prospects never get back with us. Think of people that have sold to you over the years. Most of us, honestly, simply do not answer emails or phone calls if we are not interested. So the behavior is the same whether it’s an investor or a sales prospect. As a result you will probably find that a few will follow up and let you know your status with them, but some will not.

The second reason you may not get a (timely) response is that they don’t want to tell you “no”.

Here’s why. It’s obvious that when betting on startups, the odds are against a startup getting to exit and monetizing for the investors, so at times, even the top-tier VC get it wrong. So if we assume that the bets they place are sometimes wrong (in some cases the numbers show that 9 out of 10 investments fail) then we have to assume that the deals they turned down could sometimes be wrong decisions as well. Let me restate: if the top-tier firms can be wrong regarding their investments, then they could be wrong about turning you down as well.

This is why they don’t want to tell you “no”. What if you got funded by one of their competitors and all of a sudden your company caught on and scaled? Nobody wants to miss out on the next best thing even if they turned it down initially. So by telling you “no”, they may close the door, or certainly limit future opportunities to work with you.

But, by not replying, the door is always open as the investor can circle back if and when you get traction.

In my experience I found some investors will tell you what you need to do to gain their investment (as long as it’s not fundamentally against their portfolio focus). “Go out and get 1 million users and then circle back”, “get to 10,000 daily active users, send me the metrics and we will talk”, “sign-up 10 customers, let me talk with them and we can take a look at that time”. These are just some of the responses I’ve had over the years.

The two words that will attract just about any investor are ‘traction’ and ‘scalability’. If you have both of these, you can bet that you’ll have great audiences and many investors will get back with you.

Now there are still some other reasons why investors won’t circle back but they are certainly less important than the reasons above. Of course investors are seeing enormous deal flow these days. So you can expect that top-tier investors may see over 1000 deals per month and even angels may see dozens of deals per month. There is simply not enough time to get back with everybody. But you can bet if you have scalability and traction, and they are interested, they will get back. So the rules still apply.

Here’s the best advice I can give when investors don’t get back with you. First, always keep things positive and keep sending them information about the company. Assume that they are a fan of yours even if they didn’t respond. Let them know about positive updates and traction. Again everybody wants in on the best deals so by keeping all of your potential investors updated, you have a great chance of them circling back later.

Don’t take it personally if they don’t respond. Again, if you’ve ever tried to sell something to someone, and they didn’t respond you know as well as I do that taking it personally is just the wrong thing to do.

Another thing you can do is ask the investor what you need to do to become more interesting. So let’s say you pitch, and the investor says that you will get back with you but they don’t. Instead of pinging them to ask their interest, just already assume they’re not interested because they didn’t get back with you. So why not call them or send them a note and ask how you can improve or progress to gain their interest. What do you need to do? In many cases they will let you know then why they did not invest and what you need to do to become interesting to them.

Make investors your friends. You never know when you may have a company they are interested in or they may have contacts which they can refer. Just because investors not interested at this time doesn’t mean that they won’t be interested in something you have later. I found in life all negotiations are circular, meaning there is a good chance you will come back around later, and sometimes you’re very surprised at how close you were to a deal.




Startup Hack – Go 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

  • Cooley –

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.


  • 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 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


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.


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.


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.


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.

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.



Startups – When Things Go Wrong…..



There are plenty of people that will help you build a company but sometimes you need help when things go drastically wrong. This post is designed to help entrepreneurs get through some of the rough times.

Decide If the Problem Is Fundamental or Not

First, determine if your problem is fundamental or not. By fundamental, we mean that it could significantly harm or kill the business. Fundamental problems come disguised a variety of ways but some are financial, others are legal, and some are product/service related. Problems that are not fundamental do not require drastic approaches but usually can be solved simply, or at a relatively small cost.

Examples of fundamental financial problems include untenable debt, cap table problems, a high burn rate without offsetting income (or access to new capital), and more. Fundamental legal problems range the gamut from product liability issues to any disclose-able or large lawsuit where your company has liability, and will most likely lose the case, have to settle for a large amount, or will take on significant legal fees that are not affordable by the business. Legal problems can also be employee related.

Examples of fundamental product related problems have to do with products that don’t work as intended, or are not satisfying customer expectations. The fact is that some of the best laid product plans sometimes do not come to fruition. Additionally, with the rapid development environments that exist today, a competitor can decimate a product in what seems like a few weeks or months. Witness what happened to MySpace once Facebook came onto the scene.

If your problem is not fundamental, then there should be easier ways to solve the situation and we won’t address those types of issues here.

Stay Calm

Regardless of the fundamental issue, the 1st order of business is to keep calm. The worst thing to do is begin rash decision-making and get crazy with your constituents in and around the company. So by remaining calm, you can make logical business decisions which could range from putting the company into bankruptcy or insolvency, all the way to selling the company in a “fire-sale” or drastically changing strategic direction.

Surround Yourself with, and Listen to, Your Advisers (You can find more on Advisers and Boards Here)

In a time of crisis, it’s very important to surround yourself with solid advisers, and to listen to your board of directors. We suggesting that you reach out to your best advisers who may have been through something like this before. You may have a variety of advisers willing to help including your existing Board of Directors, advisory board members, your investors, friends and family with strong business acumen, legal counsel, your CPA and more. Or, any of these advisors could lead you to somebody who has faced the same issue. Crisis usually demands new thinking. By bringing in more opinions, you should be able to generate more choices. Many have gone before you, and there is a 90% chance that if you talk to an advisory who has worked with more than a few businesses, they will have been through a situation like this before.

Look in the Mirror

Be realistic about your own participation in the problem. In my experience, entrepreneurs well visionary, can also be stubborn and continue supporting a problem until it becomes fundamental. The hardest thing for auditors to admit is their role in a fundamental problem. We all make mistakes, but the biggest issue is how quickly you can address the issue, not the fact that the mistake was made. In the case of a fundamental mistake, the entrepreneur may look to advisors and possibly even step aside and bring new leadership in. I have seen on more than a few occasions where new leadership comes in and gives the company another chance. Sometimes by being the sacrificial lamb, creditors, upset investors, or even customers might be patient enough for you to turn the company around These are all very hard decisions for the board and the entrepreneur. Listen to your advisers.

Don’t Be Stubborn

Even if entrepreneurs did not cause a problem, sometimes they are stubborn to bring about the necessary change. If a product isn’t working, it needs to change as soon as possible. I have witnessed situations where all of the advisers were suggesting that the best route was to file bankruptcy, but the entrepreneur would have no part of that. Instead of just reorganizing to get back in the playing field, the entrepreneur tried to complete the project but really had no chance, and the situation ended up much worse. As we know with entrepreneurs sometimes they are blinded by their own vision, and cannot let go of an idea or a certain direction on which they have decided. This is one of the biggest failing points we have seen with entrepreneurs. Some of their greatest assets, which include their vision, enthusiasm and work ethic, ends up being their greatest liability when times get hard. The fact is that 90% of businesses fail. A percentage of this failure is due to entrepreneurs not willing to change direction, or restructure a company as needed.

Solutions to Fundamental Problems (a Partial List):

  • bankruptcy or insolvency – seek financial and legal counsel
  • new investment capital at a lower valuation or down–round
  • new strategic direction for the company – go to your board of directors for advice
  • new product direction – utilizing product assets in a new way to develop a product the market needs – think of other uses for the product or the assets that make up the product. Perfect example is Twitter. Designed for an internal communication mechanism, Jack Dorsey then discovered that it could be used as a major communications platform. Now it’s a multi-billion dollar company.
  • merger or acquisition -selling the company or merge it with another synergistic company – this could be a competitor or a complementary company
  • shutter the company, and sell off the assets – try to return some percentage of investment
  • significantly downsize – reducing headcount and/or salaries – possibly ask employees to work for equity until you can turn things around
  • renegotiate debt
  • use equity anywhere you can instead of cash

As a final note, and we cannot stress this enough, do everything possible to keep the entity alive. I have seen companies that have been decimated but have gone on to survive and even thrive because the corporate entity was able to continue. This is of key importance in many businesses since the entity may have an established brand but not be operationally sound. We personally sold a company that was failing to another group that purchased the entity for a very low rate but then turned it into a viable business. While not the original outcome we intended, certainly better than some of the draconian choices we faced at the time.

If we can be of assistance please contact us.









Funding – Choosing the Right Sources of Capital

Funding early-stage companies is one of the most important and complex tasks facing entrepreneurs. Most entrepreneurs I speak with do not know all of the funding options available, and very few entrepreneurs are well connected with enough funding sources to tackle a successful capital raise. Most entrepreneurs seem to know of venture capitalists and Angel investors as well as friends and family. However there are many other forms of funding to consider depending upon the status of your company. If you would like to discuss funding options and get advice, feel free to contact us.

Funding sources for you to consider:

Venture Capital -this well-known source of company funding provides capital for companies ranging from the seed stage all the way through later rounds. I’ve heard people describe venture capitalists as tier 1, tier 2, and tier 3, however definitions of tiers vary. Most venture capitalists invest between $3 million and $15 million but you will need to check the website of each venture company to see their preferences.  Some venture groups are getting involved in earlier stage companies now and have even created funds for seed round and series A investments.

Angel investors and Angel groups – Angels provide capital for seed stage and Series A investments and are usually a predecessor to venture capitalists. In some cases venture capitalists will refer you to local Angel investors in the event that you are to early-stage for venture. Angels can invest as little as $25,000 and as much as $ 1 million.

Angel groups are formal or informal groups of Angel investors that get together and invest either individually or as a group.  Most major cities have Angel groups that you can find by searching on the web. These are very viable sources of funding and usually have a due diligence and presentation process that can take 2 to 3 months.

Friends and family – this self descriptive group is usually the 1st group to approach aside from funding an early-stage company with your own capital. It is important that you use your own capital and friends and family for early funding. This is important because subsequent funding sources will wonder why you did not fund your self, or approach friends and family for capital if you truly believe in your idea. So be sure to take your plan to all of the people you know before approaching outside investors.

Family offices – this group usually is a professional organization that manages a family’s wealth. Like venture capitalists, they have processes and deal types that make sense for them. They are a little harder to find than venture capitalists because they don’t tend to fall into easy categories on the web. But I have increasingly seen family offices investing in early-stage companies.

Hedge Funds and Private Equity – these 2 groups usually invest in later stages and in greater amounts. I wouldn’t recommend approaching hedge funds and private equity groups for the 1st few rounds of capital, but when you are raising above $10 million, these companies are worth consideration.

Accredited investors – thanks to the Obama J.O.B.S. act, early-stage companies can now approach and take investment from an accredited investors without having a pre-existing relationship. There are requirements for investors to be considered “accredited” and it usually has to do with income of at least $250,000 annually, as well as a net worth of over $1 million not including the accredited investors private home.

Crowdfunding – crowdfunding has come on as a very powerful mechanism to raise capital for products, services or to fund your company  (Equity or Debt Crowdfunding.  I have been involved in a few crowdfunding campaigns for products, and generally these campaigns can bring in anywhere from a few thousand dollars to over a million dollars. I have an entire section on crowdfunding here.

Incubators and other service providers – these are some companies that provide startup services such as space, internet, admin, networking and other services that startups need. These can be effective in the very early stages of the company because they allow entrepreneurs to work out of an office and house their company in a startup environment with many other early-stage companies, creating a fertile startup culture. Sometimes these incubators provide capital in addition to other services. Look in your local area for startup incubators. For a humorous take on incubators, watch HBO’s “Silicon Valley”. Very funny and unbelievably realistic in many ways.

Investor portals (as opposed to Crowdfunding) – this class of sites places business plans and summaries in front of large groups of investors. The idea is that you put your plan on a website so hundreds or thousands of investors can view your plan. Investors and companies that have the opportunity to review your plan will then contact you if interested.

I’m not a fan of these types of sites as I believe they spam your business plan out to a lot of people which can be viewed as desperation. Also, it shows that you may not have worked very hard to put your plan in front of the right targeted investors, and possibly tried to take the easy way out. These matchmaking sites promise to make it easier, but I have seen more companies get funded by using a hands-on, targeted approach. If you would like advice or access to capital through a direct approach, please contact us and we would be happy to refer you to sources that could make sense.

Broker-dealers – broker-dealers are registered companies that provide a variety of services for investors and entrepreneurs. You’ve heard of the big ones like Morgan Stanley, Goldman Sachs and others, but did you know that there are 4100 FINRA registered broker-dealers in the United States?

There are certain types of broker-dealers that are specifically registered for investment banking and M&A. These groups are available for raising capital, mergers and acquisitions, and other special projects. However, my experience with broker-dealers shows that most of them will not get involved with early-stage companies until those companies reach about $5 million in EBITDA. However – there are some that will look at earlier stage deals. We recently had the experience to help a company raise $7.6 million via an investment bank. The company was pre-revenue and fairly unique. So there is some opportunity here depending upon your company stage.

Banks, the Small Business Administration (SBA), and other lenders  – These providers of debt capital are worth approaching under the following conditions:

  1. You have assets or collateral to back the loan
  2. You have credit scores that will help you secure the loan
  3. Your business is the type that will cash flow early so you can support servicing the debt
  4. You are willing to sign a personal guarantee. While it may not always be required, many lenders want your personal assets on the line.

Generally without the above, it would be pretty hard to get a loan. And startups don’t usually have a lot of assets so, in my opinion, it’s better to think in terms of equity capital, or rewards crowdfunding.




Choosing the correct team members at the appropriate time is the most important set of tasks you will ever take on with your startup. We can tell you from experience that over 80% of the issues that we have seen with early-stage companies have to do with expectation problems between team members. When your startup is operating on limited resources and time is against you, you cannot afford to run into too many personnel and staffing issues (although you can never fully avoid people problems).

Unfortunately, this is probably the hardest thing to get right in a startup.

We recommend adding team members slowly. What we mean by this is you need to really know your team members or partners so that there is no doubt as to how they will perform and react under pressure. Many of the problems we see occur because team members are hired to quickly and the appropriate time is not taken to understand cultural fit and performance capabilities. We suggest that you interview all team members multiple times under different circumstances to really get to know them. For senior members, you should spend time with them in the office, at lunch or dinner, and even in a 3rd scenario. We have had personal experiences in hiring team members to quickly and have had everything from unmitigated disasters to slight problems that could’ve been avoided.

Strengthen your weaknesses – The best advice we can give you is to bolster your own capabilities when hiring other team members. In other words, if you are weak at finance, hire somebody that understands finance, raising capital, accounting and more. If your’e weak in technology, be sure to bring on a good chief technology officer. We think you get the idea.

What will you do? – First decide what role you are going to play in the organization. Generally, you will take on a roll of “founder”, and in most cases CEO. We suggest that you run your company until it is determined that you need to bring on somebody with more talent across the organization. In some cases you may want your company with a partner and you will each have to take on C-level roles.

Team members you will need in order to successfully launch and initially run your startup:

CEO – has complete operational responsibility for the organization

CFO – your chief financial officer plays a critical role not only in finance but sometimes also running other administrative tasks possibly including human resources

CTO – the chief technology officer deals with both outward facing technology and internal systems. This would include your website and apps, hosting infrastructure and enterprise software and cloud-based systems.

CMO – the chief marketing officer has responsibility for all marketing mechanisms, communications, and in some cases sales and revenue. Additionally, the CMO usually handles product marketing and is integrally involved with product development.

CRO – a relatively new title, the chief revenue officer as complete responsibility for all revenue from customers, partners and affiliates. You’ll need to contrast this with the CMO position above to optimally execute your strategy

Product or service development – this position is critical to developing and delivering the best product or service. Generally most businesses fall into other products or services, although some can be categorized as knowledge. No matter what, you’re going to need somebody who heads up a very focused and driven team. In many cases the founders start out with this role because it was their idea to begin with

Board of Directors – your board should be a combination of C- level members, people familiar with you in your organization, and outsiders. You can see more on our thoughts about Boards here.

Advisory boards – advisory boards are very interesting ways of bringing more people into your organization to support any and all aspects. You can create multiple advisory boards which give you the ability to tap into greater resources. See our advisory board article here.

When should I hire or bring on the above staff members? There is no standard way to determine when staff members should be added. Generally you add based on need, and capability to pay. In other words, you may want a chief marketing officer but if you are not yet funded, you may have a hard time finding the ideal candidate. However some cases you can trade equity in the company for dollars and thereby hire more quickly. You will have to prioritize what you need 1st and figure out a way to bring that person on.