Bootstrapper.com - Confessions of Serial Entrepreneurs

I am currently working with a company on a sales strategy. One thing I am trying to push is (especially in this economy) is figuring out ways to demonstrate need. One thing,really works well–showing your client hard data on how they can financially benefit by using your product. I’m not talking about speculation or wishy washy statements like “you will get more exposure!,” but real hard quantifiable data. For example showing “here is what it costs to do X now. With our product it will cost this much less, which will pad your bottom line with those dollars.” In an economy where more cash flow means more likelihood of survival, I can almost guarantee you will get attention with this approach.  And I’m not alone in my thinking. Check out Startup CFO for the same solid advice.

So a little while ago, I was hanging out with a friend of mine and he asked me a seemingly simple question - but one that I didn’t have a good answer to. “What’s my model?”

In theory, I am entrepreneur, i am launching companies into the community and also a non profit but i do a lot of “community organizing” activity that I lose money on. I would say 15-20% of my time is being spent helping people in the community through events, blogging, media, consulting and almost all stuff that I don’t get paid anything for and often times put my own money into and a lot of my time. It’s something to think about whenever we do something - always ask - “What’s my model?” There doesn’t need to always be an answer - some things are done for goodwill or kindness but it still is important to ask to make sure you aren’t wasting your time and money.

So again, what’s my model? Well, as my friend Mark D. said last time we talked “Pay It Forward” I hope all my community building will eventually help me back!

So this is my public apology to the world for my part in the financial mess. You see, I used to run a mortgage lead generation company, generating internet and telemarketing leads for financial companies. In fact, we almost acquired a bank and started banking our own loans. (thankfully we didn’t). If you look at where a lot of these subprime loans came from - a lot of them came from lead generation done over the internet and through telemarketing, which is where I played. We built a big company up happily fueling the mortgage frenzy. I was proud of it once. I was twice called the “Father of Mortgage Lead Generation in India” for bringing to the call centers over there so much outbound telemarketing business and for building training programs that got copied (stolen) throughout the land. (The first lead deal I ever did, we gave 5 leads to a mortgage broker in WA state and they closed a loan and made $6,000 on it - those leads had cost only $75 to generate)

I remember when we were looking into acquiring a bank, I read a pile of books on Mortgage Backed Securities (Yes, I used to read arcane finance books for fun) and taking a course at NYU on MBS. And you know what, hard as I tried, I couldn’t understand the math. The Spreads between MBS and Treasuries were too small to account for defaults. I didn’t understand the business and we ended up not buying the bank but it was a very interesting experience. And I apologize for anyone whose ended up into a bad loan because of my leads. 

So one of my friends was supposed to attend my BootStrapper Venture Summit and he wasn’t able to make it because as he was crossing the street to make it to the event, he was checking his crackberry and walked into an oncoming cab - which ran over his foot. He ended up in the hospital.

Now this proves an important point - SMART phones are the devil. Yes, you heard me, Blackberries, Gphones, Iphones, Treos’s and other such toys are the devil.

I, myself am a recovering TREO addict. It’s sad to say and I’m ashamed to admit it but I too was once addicted to those horrid devices. Just thank the lord and the great people at Our Lady of of GSM Church for being my strength. I just went through the steps and am proud to say I’ve been clean for over a year.

I pray to the almighty that all of you out there have the inner strength to break your addictions … and save your feet!

PS. This friend of mine all of you know well as he is a writer on Bootstrapper…

It’s funny / nostalgic to see all these negative comments about Richie. When I first met him, I had the exact same negative reaction to him as well (I even wrote a mean email to [newtech] about Richie, haha). I had never seen someone who was so unafraid of / unabashed by self-promotion, free-expression, community participation, whatever you want to call it. Having said that, over the past year, as I have had a chance to interact with Richie more closely, and maybe Richie started to grow on me, and I have begun to see how valuable of an asset Richie is to the community. He does reach out to everyone, and he does (at least attempts to) talk to everyone, he makes himself available to anyone that may have an idea for a company, who may lack the technical, logistics knowledge around how to bring the ideas to life. He does have some credible connections into senior investment professionals at local VC firms and angel groups. And he has introduced me to some incredible entrepreneurs, that I brought to our firm to meet with a couple of general partners. He may not have started a Digg or a DoubleClick, but he does know how to launch web businesses that are useful to the communities, and has very valuable industry contacts. I have gone to a few very informative events where Richie helped put together a very knowledgeable group of industry insiders as panel. Some people complain about the lack of ecosystem in NYC that nurtures and provides collaboration for tech community.. I think what Richie has tried to do, is exactly what we need to do (we need more of that), in order to bring collaboration and communication here.. Honestly, some of the things Richie does, still bother me, but I really appreciate all the things he has done and respect him as a valuable member of the NY tech community.
So please don’t be so quick in judging Richie.. Try to have an open mind, and invite him out for a drink. If you still hate him after that, I’d be surprised..

Now I’m not an expert in economics but here is my layman’s fix for the economy. First off, the solution is not to bail out banks. Banks paid out their earnings in bonuses to the idiots who got us into this mess. We shouldn’t be giving the same dollars paid out in bonuses back to the banks because they fucked up. It is to support the system but not give away free money to banks.

So what is it? Now there the problem is that the biggest problem is trust - which has led to the credit freeze and i have no idea how to bring back trust. The best i think we can do is try enough tweaks to the system to keep it afloat. But here are some ideas …

1) Provide Credit to Main Street: Right now big companies don’t have access to credit. This doesn’t sound scary until you realize that most companies rely on something called Commercial Paper to finance day to day operations. Basically they borrow money every day in order to make sure they can pay their bills since companies rarely get money in smoothly. (BTW: Goldman Sachs was originally built as a Commercial Paper Brokerage!). Banks right now are taking money offered from the government and keeping it and not lending it out so they can keep their reserve requirements if their asset value drops. The money being lent to banks is not being lent to companies. So what should the government do? Lend it to companies directly. The government should use the GEICO model and lend commercial paper directly to companies. This is VERY VERY low risk lending and they can make it show up as some form of government lien so that they get paid back first in the case of a bankruptcy.

2) Transparent Reporting & Clearinghouse: Require any bank or publicly traded company to report ALL derivatives including who the counter party is to a clearinghouse supported by the government (initially but later turned into a non profit entity like the original NYSE or privatized etc…) for all derivative transactions. Companies should need to report any transaction over $100,000 that involved leverage. That simple. If you borrow, you report. If it’s a derivative, it gets reported like any other borrowing. It should be easy to see what would happen if a big player is unravelled. It should just be a matter of checking a database and printing out a report. If someone is buying something, i suppose there should be an electronic signature of the purpose somewhere. Dig them up and make it reporting in the future.

3) Get rid of Mark to Market for illiquid securities: The requirements for marking to market securities for banks need to be changed so that if there is no LIQUID market, security should be valued at fair value (value of cash flows) instead of based on the market. Marking to Market was the reason that Morgan Stanley sold billions of dollars in mortgage securities to a PE fund for pennies on the dollar and FINANCED it themselves. Think about this - they sold something to someone and financed the transaction. DId they shift the risk? NO! They just got it off their books. There is no reason anyone should ever do this accounting chicanery. It is just BS. If a security isn’t liquid, it should be valued based on cash flows that come in from it. That simple. (if it’s not possible to check what cash flow is coming in from it - then you’re just fucked - see above on need for a clearinghouse).

4) Buy Securities & Get Preferred Shares: The current bailout needs to have adequate preferred share coverage for every mortgage security the government buys so if they overpay for securities now (short term) they can benefit in the upside of the company they are bailing out (long term equity). I have no idea what the ratio should be, but it should be balance. Then the government needs to restructure the loans they buy and unwind the securities (very tough) because even if housing stock falls 25%, it is still worth 75% of what it’s worth today. That value needs to be extracted out of teh houses and hopefully restructure houses because it still should be cheaper than dealing with foreclosing.

5) Unlimited FDIC Guarantees of Savings We need to insure 100% of bank deposits. We already did it for money markets, we need to do it for everyone else.

6) Recapitalizing the banking system - I have no idea how to do this but i’ve heared ideas ranging from forced conversion of unsecured debt to common stock to the government directly investing along with PE funds in financial institutions. The government should invest alongside distressed investor PE funds in the institutions. Or perhaps just give Warren Buffet $100BN of government money to manage.

That’s it. Nothing fancy. No need to buy anything from banks or waste any billions of dollars. Simply change the rules, make everybody report everything and provide direct credit into the market. Banks already have access to this credit, allow non banks to get access to credit directly but on terms where the government will get paid back. The economy will slowly recover and no big companies besides for banks will fail - though Banks shouldn’t be allowed to fail but the very weak ones should be sold such as what happened to WAMU. WAMU was a horribly run company (check out WAMU Fraud) but there are a number of other banks that simply wrote too many OPTION ARM Loans to Subprime borrowers that shouldn’t be bailed out. But they shouldn’t fail because the FDIC can’t afford it and it would kill the country with a super bank run. However, since there will be access to credit big companies will survive and main street will be saved.

If I wanted to go further, I would enable unlimited money market and bank account coverage at a higher insurance cost) and in order to have full coverage, the bank would need to abide by the clearinghouse/reporting and a higher reserve requirement. I would also make it stupid simple for average folks to buy government securities and would make it easier for businesses with VERY GOOD credit to borrow money through the SBA. Make lending simpler and cheaper for the time being but only for people with solid credit.

Anyway, this will never get done but its my 2 cents, being an observer with no investment banking experience and just a simple degree in finance.

So a big killer to a lot of deals is dilution. Dilution is simply how much equity you are willing to give up. I recently moderated a panel where one prominent VC remarked “don’t worry about dilution, if you’re building a good company, you’ll still get rich”. While there is merit to this, it is also bullshit. I know lots of entrepreneurs that took lots of money and bad terms and lost control and got screwed and ended up with no control over their own destiny. Make sure you have a great lawyer and review the options. However, ask yourself a more important question: What other options do you have? It’s a shitty economy now, if you can get money faster, take it, don’t worry about dilution and build your company. Raising money is a bitch. It is not fun. It is a waste of time. Get money and get out if you can.

Patience is very important. Even if you think a deal is perfect, coming off too strong too quickly can easily scare people away. This isn’t a good thing. Make sure you craft the timing of your pitch to the way your counter party works. Don’t scare them away. Feel it out. Give bits at a time. Building business relationships is like getting a date. Sure you can ask a girl out and get her into bed fast - but the odds are if you try that, it won’t work and you’ll look like a jerk. A couple of dates are usually pretty standard. Next time you’re doing a business deal, ask yourself how fast and loose your counter party is and craft your approach accordingly. Don’t be a sleazy jerk!

So a lot of companies have interns - but most CRM’s and B2B apps don’t have a login for interns. Why? Because every organization uses interns differently.  This is an important lesson if you are building products for an organization. Set up user types as entities, not pre-set labels. Allow users to essentially create titles, alerts & preferences for each user so that they can use your system the way their organization works instead of how you want them to work. So next time you build software, ask yourself, where is the interns’ login?

One of the most important things you will ever do is hire people. These could be partners, employers, consultants or even investors but essentially you are hiring people. Sometimes such as investors, you can’t fire, so you better do your job the first time. 

Here’s a few tips for getting good information out of people: 

1) Ask people to put themselves in the shoes of the entrepreneur and pitch you like you are the investor. Do this to your investors and have them pretend you are the investor. This will show you how well the person understands and can synthesize your business. This works for the Janitor or the CTO. The company should have a single message and culture. Everyone needs to understand it. Microsofts first secretary is a multi-millionaire. Would you want someone you made millions for not to understand what they were working on? 

2) Give people scenarios and ask people what they would do. Throw out some of the questions, you’re asking internally and see what they come up with. 

3) Ask them who the first 5 people they would talk to about X. Now, X should be something related to their job. If its a salesperson, who are their first 5 contacts they will hit up, if they are an investor, what 5 introductions would they make for you. This will force people to reveal their network and will allow you to understand how they will approach the market. 

4) Ask them to highlight the biggest flaws and have them convince you why “YOU” shouldn’t continue further. Get them to think critically and dig into the concept. If they really love the idea, they will help fix the flaws in the concept and you can see how serious they are about the idea - not just the paycheck.

So everyone who has hung out with me, knows how much I love rapid fire brainstorming. Someone pitches me an idea and I’ll cycle through a whole pile of ideas and opportunities based on that idea on the spot. I don’t need much time to think or dwell on it, it’s just what comes to mind. Now this isn’t because i’m smart, it’s because i instantly digest the information and spit out my first impressions. 

Often times, our first impressions are pretty spot on. Sure, ideas trickle in afterwards but those first 15 minutes are the most important. I’d recommend hosting 15 minute brainstorming sessions around a subject for your company. Have everyone go into a room, toss out the topic, then let people write down and send in ideas or call them out and go back and forth. Cut the session off at 15 minutes and review it. 

This can be benchmarked by trying it in 2 offices. One have a 15 minute brainstorming meeting and in the other spend 5 hours. See where the better ideas came from. 

So i’ve come to hate virtual teams. You lose so much when you aren’t physically next to people and spending time with them. Now my first 2 companies started virtually and my second company was based in India so I was very virtual. It was really tough to do. Today in this web 2.0 world people tend to think its good to work with people all over the place. While there are benefits to tapping people all over the place, you lose a lot of context and a lot of the personal touch. I would much rather be able to sit down and talk to someone than have to deal with a phone call. My simple advice, is work with people close to you that you can really interact with and you’ll be a happier person and probably more successful. 

One thing that really gets to me is when you are trying to work with someone and they are intentionally ignoring your calls and you know it. It’s not that hard to return a call and say you’re busy or not interested but ignoring peoples’ calls is just not professional, especially when you’re in the middle of trying to work with someone. It’s not respectful of the other persons’ time. I had this happen to be recently and was really insulted. 

If someone is taking forever to get back to you or delaying meetings, the odds are they either don’t take you seriously, too busy to have time for you or are not interested. Don’t waste your life waiting on others. Go elsewhere.

So those of you that know me, know how much i talk about “Entrepreneurial Burn Out”. What that is - is the equivalent of post traumatic stress for entrepreneurs. After a major blow out or being fucked by partners or investors etc… an entrepreneur rarely does anything successful for a year. More often than not, the entrepreneur will experience one of the following (if not all) symptons: 

1. Insane ADD - attempting to “spread risk” by doing too many things. Both end up done half ass and go no where. 

2. Scared of the world - inability to partner or give up equity in situations where it makes sense. Often times, the entrepreneur will go into hoarding mode with their ideas for the fear of giving up too much and getting screwed again. 

3. Total Burnout - depression & a day job