funding

The Benjamin Button Startup

baby startup

Guest post by Suhail Kassim

A new startup is like a baby

A startup needs to be cradled and nourished. Even so, there is no certainty that the baby will grow up to be a lean mean fighting machine. In this post, I begin to investigate the phenomenon of some exciting startups which then refuse to grow up — the “Benjamin Button” startups.

Introducing the Benjamin Button startup

A very small minority of entrepreneurs seem to be amazing at finding the right sort of help in their early days. They join rock-solid incubators, find top-notch mentors, maneuver their way into active university forums, win famed business plan contests, know where the hungry angel investors sit. These entrepreneurs are obviously off to an awesome start. Destined for greatness, right?

Not necessarily. Many (if not most) of these startups struggle to fulfil their potential. They stubbornly refuse to scale-up, linger on until they lose relevance, then meet a slow yet inevitable demise. The internet is littered with outdated websites of nascent ventures that never monetized. The chrysalis never transforms into a butterfly. 

I call such ventures “Benjamin Button Startups”, named after Benjamin Button children who refuse to show signs of growing up.

Startups fail all the time, what’s the big deal?

In my personal experience, there is a growing trend of highly promising startups running into the ground. This trend is disturbing for at least two reasons. 

Firstly, this sends a hugely discouraging signal to all other startups: if these poster children fail, despite everything going in their favor, what hope is there for the rest of us?

Secondly, outside startup hotbeds like the Valley, the early stage ecosystem is typically not vibrant. It often has limited resources that can only support a few chosen entrepreneurs at a time. Hence their imperative to succeed — and thereby to return more to the ecosystem than they took out of it — is higher. When they do not, it causes a small ripple. Just a few such ripples could shake up the already fragile ecosystem. The already wary seed investor will turn away, LP funding will ruthlessly re-route to greener pastures, incubators will be left with tarnished reputations, the Fortune 500 executive will politely decline to mentor the university business plan winner. 

What makes a startup a Benjamin Button?

Sometimes it seems to me such startups are victims of their own early success. The founder confuses the “first big win” with the ultimate destination. He/she gets caught up in all the attention, the award ceremonies, the media buzz, the blogosphere hype. Some entrepreneurs succumb to the heady temptation to become celebrities today instead of business moguls tomorrow. They end up doing a ton of calorie-burning activities like giving guest lectures, mentoring other startups, speaking at jazzy forums. As a result, they stay stuck in the “successful-student-startup” mode instead of growing up. And if the founder does not grow up, the startup won’t either.

There is also an element of hubris. Entrepreneurs sometimes think the same skills needed for early wins will carry them through scale-up. This is almost invariably not the case. Early stage success can happen through blue sky thinking, strong personal and professional networks, hyperactive multitasking, good mentors, and a couple of passionate co-founders. There is adrenaline rush after adrenaline rush. Scaling up, on the other hand, needs grit, patience and the ability to fight boredom. It needs long nights out working on a particularly stubborn piece of code while dining on ramen noodles. It needs the founder to hyper-delegate and decentralize or risk falling into the “Founder’s Trap”. It needs a different kind of mentor and adviser — not someone who can ideate but someone who has actually implemented. 

Also, for VC-stage companies, the VC is always more demanding — and less polite — than the angel investor. Unlike a basement startup with three high school friends who are bootstrapping off their pocket money savings, here the money runs out quicker: the VC-stage venture needs to pay its “employees” (it’s no longer just the co-founders) market-pegged salaries (and, gosh, benefits!) — and I’m not even including joining bonuses and annual bonuses and small stock options to the first 100 employees… . In some ways, starting a venture is akin to a part-time Masters program, while scaling up is like a full-time PhD program. Not every MBA gold medalist is suited to do a doctorate in business administration.

Finally, there is the culture of failure. Some ecosystems reward failure — the Valley places a premium on “fail fast, fail early, fail often” — which reduces the tolerance level needed to slowly but surely cultivate a fledgling startup, leading to premature demise of ventures that should have succeeded. Other cultures punish failure — and in such places, the founder is tempted to grab whatever minor victories he/she can — whether it be to speak at a forum or give a newspaper interview — at the cost of focusing on the core business itself.

See also Time To Start a Business – or Not. Illustration: covenant-harvest.org

Have you witnessed instances of Benjamin Button startups? If yes, do you agree with the reasoning above? What are the other explanations as to why this happens? Leave us a comment and let us know your thoughts!

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Not All Angel Investors Are From Heaven

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On Angel Investors

As entrepreneurs, in the initial stages of the startup, we often think that the answers to our problems will come in the form of an angel investor. By definition, angels are high-net-worth individuals who get involved early in the company’s life, bringing capital, sector knowledge and network, and relevant expertise.

Angel investors usually invest anywhere between $20k-$300k and take on 10-30% ownership. They spend some of their time coaching entrepreneurs, opening doors, helping the company build the team and product, participating in strategic decisions.

Not all angel investors are the same

However, not all angel investors are the same. Reality has “expanded” the definition of an angel and many times what we see is well-off folks with no particular value-add (beyond the dough) playing the angel role almost as hobby. This is particularly true in less developed markets, such as Brazil (which I know from experience) and the rest of LatAm. Being rich and successful doesn’t necessarily make someone a good angel.

As an example, a retired C-level executive from a large pharmaceutical company may easily have a couple of hundred thousand dollars to spare and decide to invest in a startup. Why not help a couple of smart kids with a brilliant idea for a new technology or web business? What better way to stay busy and motivated!

The problem is that often these investors often have no idea what they are getting into. They just don’t know the real challenges and risks of starting a company. As time goes by, the product doesn’t launch as planned, the bank account gets thinner, and the investor gets nervous.

Entrepreneurs also get frustrated because they had expected miracles from this angel. After all, he is the older, successful mentor, who’s been there, done it all.

But it turns out the guy you looked up to actually doesn’t know much more than you when it comes to building a tech company from the ground. His rolodex only has contacts of retired people from irrelevant sectors. And as he sees his investment going down the drain, he doesn’t think you’re that cute and inspiring anymore.

Of course, I’m painting a pretty extreme scenario here. But the point is that you shouldn’t necessarily accept the first person who’s willing to invest in you. If the angel investor is not a good fit, it’s better to hold your horses, bootstrap the business a bit further, until you find someone who can actually add value to the company.

Originally posted on the Entrepreneur Academy (NEN). Image: nenonline.tv. See also Time To Start a Company – or Not.

What’s your experience with angel investors? Leave us a comment!

In Seed Capital Fundraising, You Gotta Choose Your Pizza

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Seed capital and ownership

A common mistake entrepreneurs make, especially in the startup’s early stage, is to worry too much about valuation and dilution. The business, after all, is their “baby” and they can’t give away too much too soon – every share is worth fighting for! Well, guess what, the business is almost as much of a baby to those who are willing to back you up so early. Overvaluing the company from the get-go generates problems on several fronts.

Seed capital must be priced with care

First, very often the early investors are “3Fs” (friends, family and fools) or an angel who is only within one or two degrees of separation. Selling an overpriced product, even if you didn’t do it with bad intentions, may leave everyone with a bad taste in their mouths; especially if an institutional investor comes in a year later and values the company at half the first round. It’s hard to explain that to your uncle.

Also, overpricing makes it more difficult to raise new rounds. It sends the wrong message to more sophisticated investors. The impression is that you either don’t know how to value a company, purposely overpriced it, or the company simply lost some of its value. Neither is a good story to tell when you are sitting across the table from a VC.

Obviously, at the same time it isn’t good for anyone that the first couple of investors grab more than say 30-40% of the company. The entrepreneur needs to remain motivated, ideally also vesting some of the equity (more about that in a future post). But getting obsessed with dilution is bad for your startup. The more deep-pockets have their skin in the game the better and greater the chances the business will grow for everyone. After all, which would you prefer: 90% of a pizza or 10% of Pizza Hut?

See also Not All Angel Investors Are From HeavenImage: generalstorecafenj.com

Have you raised seed capital with 3Fs or angel investors? Leave us a comment!

Time to Start a Business – or Not

new venture new business startup

What to ask yourself before starting a company

Before launching a startup, an entrepreneur must ask him or herself the following question: Can I support myself for the next 18-24 months? This is specially important if you’re in your late twenties or early thirties.

It doesn’t matter where support comes from. It could be your parents, your own savings, your partner’s job, or a liquid asset you’re willing to sell at some point. It could even come from your first investor, such as an angel, although very rarely outside investors are willing to pay you a (decent) salary, especially in the early days of a startup. The important thing to remember is that it will take longer than you think before your company is making money to pay you, or an institutional investor joins in with a paycheck.

Don’t expect short-term returns when starting a company

Drawn into the excitement of launching their ventures, entrepreneurs usually underestimate the sacrifices to come. Optimists by nature, they assume that something great is going to happen within a year: a successful pilot or beta launch, an investor, even a first client. Not gonna happen. Success stories about entrepreneurs who dropped out of college or left a job to support themselves on credit card debts are very sexy but incredibly rare. They do however get all the media attention. You won’t read a piece on TechCrunch about the entrepreneur who ran out of steam, shut down his company, broke up with his girlfriend in the process, and had to go back to his parents house.

The concept of time is very different for bootstrapping entrepreneurs and… well, the rest of the world! While you’re bleeding and resources are drying up, potential investors and clients will tell you comfortably: “Come back in six months or when you have more clients”. It’s a brutal catch-22 and it will drive you crazy unless you can’t support yourself and get into real world’s time.

If you’re in the early twenties or otherwise can afford it, screw it, take all risks! Starting a company – successfully or not – will be a great school anyways. If that’s not you, by all means, do also go ahead and pursue your dreams. But make sure you first do some planning on the personal front, soldier.

See also MBA For Entrepreneurs Can Still MatterImage: fotolia.com

Have you ever launched a new venture? How did you support yourself? leave us a comment!