Start Up Blog

A week ago I wrote about the Precipice Theorem. Here’s an example.

Heard of these bands?

• Nirvana
• Pearl Jam
• Sound Garden
• Stone Temple Pilots
• Alice in chains
• Foo Fighters
• Red Hot Chilli Peppers

Indy music, Seattle Sound, Grunge call it what you please. They’re all very main stream now. But how many of you bought the first Red Hot Chili Peppers album in 1984? I’m mixing genres slightly, but the principle remains. They started a new genre, because they started on the precipice. At a time when the late 1980’s was filled with Cock Rock, Power Ballads and Electro Wank, these bands were pumping out power chords on the precipice. They migrated naturally from there. All good concepts do.

Sure they leveraged a rebellion, but aren’t all new brands, products and concepts a form of rebellion? Isn’t that why they’re on the precipice? You are rebelling against some form of establishment.

Maybe the arts and business aren’t that far removed. First it was independent music, then the entire fabric of this mass produced industry and distribution system fell over.

It is often the artisans of society who first understand the changing values of a populous. In my view we are about to enter the business world equivalent of the Indy Music scene circa early 1990’s.  - A time where little known precipice players start to ‘rock the world’ financially.

Albert Einstein said compound interest is the greatest discovery of all time. There is no question about it’s power. Don’t believe me? $10K invested in the all ordinaries index in Australia in 1970, would today be worth $808K.  

The tough thing that entrepreneurs face is life without a wage. Money makes life better. A wage can buy nice things. Shirts, shoes, dinners at fancy restaurants, weekend trips away and mortgages in gentrified suburbs. Yes, these are nice.

The interesting thing about ‘compounding’, is that it is not limited to financial instruments. It also applies to effort.  

COMPOUND EFFORT

Definition: The ability to generate significant & tangible returns through long term continuous effort via the use of human capital. 

It applies to all things. Start ups, even exercise regimes. If you stay the course, the rewards are there. Can you tell I am trying to convince myself?

We meet with an investor today and took a totally different approach. We didn’t present anything. No charts, no Powerpoint. We just sent a 1 page executive summary before hand.

When he arrived we started talking and answering his questions. Occasionally we turned to the PC to explain something and examined prototypes.

It was genuinely and simply, a conversation. It showed we know our stuff inside out. It was by far our most effective meeting to date.  

Can you hold a 4 hour conversation and answer session about your business plans?

Investors only enter a marriage with divorce in mind, and there is always a prenuptial agreement!

What is a realistic exit strategy?

• IPO?

• Private sale to industry incumbent?

• Bank refinancing?

• 2^nd stage equity financing to VC’s?

Investors will want options for the final payout and at least a rough timing on the divorce.

Not the type left by a Range Rover. A physical product, example of service, a flagship customer or sales revenue. Serious investors need to see these. In our initial investor presentations everything was theoretical. We didn’t bomb strategically, but failed to get traction. Are you sensing a theme yet?

We had exceptionally well developed plans. Costs, bottom up sales forecasts, 3 years of financials, customer agreements to sell, but nothing physical. Not much has changed in business since the first markets appeared 3000 years ago. People need to see, touch, smell and feel what you are doing. They believe what they see. There world view is shaped by personal and often physical experiences. So to in business investing and capital raising. Put simply, the further you are down the development the track the more serious you seem.

• If you have thorough business plans: Ok

• If you have a prototype product: Good

• If you have a commercial grade sample: Great

• If you have sales revenue from your widget: Excellent 

The message a plan sends is: “Were serious only if you give us money”.

The message a prototype sends is: “We have put some money on the line to show you it works”

The message sales revenue sends is: “We believe in this. We have invested substantial funds to get to this stage. So far it’s working, and we are serious” 

We are at protoype stage, so it is a much harder task to raise capital. We need to move up the food chain to get our Angel and we know it. What message are you sending your investors?

You are regarded as ‘young’ at 30-ish when an entrepreneur. In marketing you are ready for the retirement village.

If you want to stay forever young, don’t work for someone. They will judge you by your age especially in marketing circles. There is a black hole for Brand Managers. After the age of 30 they all start to disappear. Sure, one or two make it to be Marketing Directors, but where do the others go? The smart ones leverage their skills in their own business. Very few careers develop such a diverse skill base. It is naturally geared to leverage in a business. You are sitting on a gold mine if you have enough courage.

I assume it is not too different with young architects, lawyers or any qualified profession.

The reason people become old in the corporate world is repetition. Your brain dies when it is not exercised, just as your body does. When you are put into a role and regarded as a “human resource” you are really just a change part now aren’t you? Taylorism is not lost on knowledge workers, just hidden better.

You will learn more in three months getting your own startup off the ground, than you will in 3 years as a Marketing Manager. As a bonus you will be regarded as a fresh graduate! The other day a VC said to me. “We need young people like you who are close to the action”.

On a previous blog entry ‘Who Funds Who’ I mentioned the Angel Investor. What does (a good) one look like? In my experience as follows:

• High net worth individual ($10m plus AUD)

• Experienced in starting a firm. Not just running a company

• They are not an employee

• Fingers not in too many pies

• Well connected

• Can give you at least an hour a week

Most of all, they must want to mentor. You will sense if they have this capacity in your first meeting. Some clues include sharing information which seems confidential, they will disclose personal financials, stories of failures and provide deep insightful advice, for no self benefit. They may also say something like… “I want to put something pack into the world.  I have made my money, you remind me a lot of myself at your age.”  They should be altruistic because the reality is you have a good chance of losing their money and they know it.

When people have had financial success they understand depth beyond money. It is this knowledge that assists in its accumulation.

One potential VC partner is the person described above. We hope he chooses to take us on. For a start up, getting the cash is the second most important thing.

What categories and industries have disappeared?

How can you bring it back?

What spin would you put on it?

How do you make it relevant today?

Why did it die?

Maybe they should have charged customers what it cost?

Maybe the customers would have been prepared to pay for it?

Maybe the old profits are waiting for you?

What’s the most valuable business tool today? The notepad. The really small type you can fit in your back pocket. When you have an idea, jot it down. On page 1, you have a list of things to do. You cross them off when they are done. Easy.

On an airplane you don’t need to wait until cruising altitude to use it. You never run out of batteries. Light and compact. No compatibility issues. Everything is automatically in chronological order. It’s the ultimate in user friendly.

Great technology should reduce complexity. Entrepreneurs must be frugal.

Once upon a time in a land called “the Western World” a beast called Mass Production was born. Many wealthy industrialists earned some lovely little profits by making widgets for the masses. The people loved their western widgets and proudly consumed them and showed all their friends.

They all grew richer and consumed more and more. Everyone lived happily ever after… for about 200 years. Then the Wicked Witch called ‘Dichotomy of incomes” arrived. She placed an evil spell on the mass market conglomerates and ruined it for all the wealthy Industrialists. The profits fell out of the mass market and she turned the world on its head.

Enter; Precipice Theorem (p) Only on the extreme edge do highly profitable entrepreneurial opportunites exist.

If you want to have a successful start up, then make sure your “Idea” is on the precipice. A product for everyone is a product for no one. Besides, all this space is already taken by the biggest companies on the planet.