Bootstrapper.com - Confessions of Serial Entrepreneurs

Hey everyone,

So tonight was another great night of NYC Entrepreneur Week and we had a great panel moderated by the very bright Maureen Farrell at Forbes and featuring Gil Beyda at Genacast, Chris Fralic at First Round, Amish Jani at First Mark, Mark Davis at DFJ & Matt Turck at Bloomberg Ventures . It was probably the best venture panel i’ve ever been to as everyone on it was open, refreshing and sharing tips, tricks and real information about pitching for money and your chances of success. Also our panel was primarily entrepreneurs who turned into VC’s (went over to the dark side!) and shared perspective from both sides. Very rarely do you get more than canned answers from investors, usually its polished company line, this was real information.

I also happen to be friends with a bunch of the guys on the panel and figured I would do something different so i did something that i think was a first. I got up and introduced myself as a co-founder of Nycent and related to the audience my real world experience with the panel.

First, I said how I met everyone. Chris I had met through a friend of the founder of a portfolio company, Gil i met through a bunch of different ways at once, Matt I actually met on www.asmallworld.net, Mark I met by reaching out to him through his blog and Amish I met because i pitched him (at an event I both marketing and was unprepared for!).

Out of 5 panelists, 2 of them i had met through non personal sources (social network and blog) so there is hope out there for the unconnected!

I then went even further and shared that 2 out of the 5 panelists passed on funding my startup (actually 4/5 passed on it but I forgot i pitched 2 of them). Yes, that’s right 4/5 of the panelists passed on my venture and i still am on great terms with them. Mark actually was the inspiration for starting the company (and his firm passed!).

In fact that only 1 of them i didn’t pitch was Matt (Matt took the position at Bloomberg as I was getting underway - we had lost touch and if we had reconnected a few weeks prior to that, i probably would have offered to make him a partner in the venture - as we had tried to do a startup together before but had to drop it due to a lack of time)

In my defense, I never seriously tried pitching it hard because the product wasn’t ready for prime time and I don’t want to take on money until i know it works but still!

Also, Gil had interviewed a potential hire for me as a favor last week and in the middle of the panel, he actually said “i’m going to back him now at a higher valuation”, which was pretty cool, I don’t think i’ve ever heard anyone offer to back someone publicly before. Now, I’m not sure if he was serious or if I would even want to raise money at this point but it was interesting.

The point of all this is that you need to keep on networking and build real relationships that transcend a no - if you want to be successful in the long run.

So here’s something to chew on…the average fund charges 2% management fee and 20% of profits of the fund. Then the fund makes an investment in a company and last i checked the average founding team (on a good day) ends up seeing around 20% of the sales price of the company upon exit (assuming all went well and good) and saw an average salary of 100k a year. Let’s say the company raised $20MM over the life and that the core management team is 3 people, 2% of that would be around $400,000 a year or $133,000 per founder. (these are hypothetical) but if you look at the numbers the entrepreneur ends up seeing equivalent return that the VC sees (management fees = salary, carry = equity value) so it actually works out. I’m an entrepreneur (though i’ve self financed most of what i’ve done to date) and you know what, when you think about it, the model makes sense.

Hey everyone,

Just an FYI BootstrapperSummit II is Wednesday. Check out the agenda and guess what? The City of New York is sponsoring it

I would like to officially announce that the Early Stage Summit will be on October 2^nd 2008.  The Early Stage Summit aims to fill the gap in NYC in the venture community by providing a forum for great companies to show off their products to the top investors from around town and also from around the world.

The Early Stage Summit is being produced by Bootstrapper.com with the help of Richmond Events, Susan Hahn & Associates, Pillsbury Withrop, Mashable, Seedingit.com, StartupHappy.com, SquareSpace and the Connectors Fund.

The goal is simple, allow 15 great companies to present in front of investors who will give live diligence feedback to help the companies understand themselves better. The event will be broken down into Tracks along industries and each will feature a keynote, a panel of investors, 3-4 pitches followed by live diligence from our investors followed by a chance to meet with the companies of your liking in our breakout rooms.

The event is by application only and I urge anyone, investors, entrepreneurs or press that is interested in attending to apply at EarlystageSummit.com. I’m also available for questions if you want. 

So a buddy of mine just started working as a full time Associate at DFJ Gotham Ventures though he’s really been working there for months. Every time I run an idea by him or introduce him to someone his first question is “what’s your addressable market?” with complementary probing such as “it’ll be tough to figure out but well worth it”.

So in honor of his starting his new gig, I got him a present. I custom made a tshirt with his mug on it and the saying “Whose your addressable Mark(et)?” on one side and a DFJ logo on the back. He got it and said he was laughing his ass off and wants to frame it. I’m attaching a picture of the shirt to share with everyone out there.

Now a few comments on Addressable Market.

1) First off, what does it mean? It is NOT the size of your entire industry. It is the size of the niche in your industry that your product can go after and what you can justify that you can tackle. So if you are a tech guy and doing computer repair work. Your addressable market is now $10BN. It is maybe the 300 customers you can service in a year. It is a mixture of target niche size and what you can handle / achieve.

2) Second its useful data for your own internal thinking.

3) Sometimes it is irrelevant. If you are creating a new type of business and someone bugs you what you’re market is and they don’t believe you are creating a new market - well, then they are probably wrong since some things don’t have an existing market. However, those things are inherently riskier. It’s important to understand what market you are going after and even if you don’t have an actual addressable market - to have some kind of guidance as to how people will use your product, what you will charge and potential customer numbers. Then add them all together for a hacked out addressable market.

So just to put something on the table - at a lot of firms, Associates get bonuses when they fund deals, not even on the performance of the deal so next time you bitch about how a young VC treated you, remember they are in the same game as you and get a bonus if they give you money. They have every reason to want to fund you. If you don’t get funded, it’s probably because you weren’t a fit so don’t take it personally.

So I’m a member of TheFunded, who as you can tell by the ad on this site, I am a big fan of. However, there’s something interesting I noticed that i would like to share with all of you. The same nuances of pitching VC’s in the valley doesn’t hold true here. In the valley, there are multiple tiers of VC’s and distinctions at least in theory between a Tier 1,2 or 3. However, in NYC there are really only like 20 VC’s before the very late stages. The general advice in the valley is refine your pitch by pitching the tier 3 guys then go after the tier 1. In NYC, everyone (well almost everyone) is in the same game. There just ain’t that much selection. Just wanted to point out that distinction in mentality between both markets.

I wanted to give my friends out there, a little follow up on a great quote from Scott Rewick. When I asked Scott why he’s doing his current roll-up he said he can summarize the last 8 years of his life, wherein he built 2 big companies and managed a 3rd as saying “It’s Hard Getting Paid”.

Simple right? When you build a startup, you dream big and think big. You may even grow big, however that doesn’t mean you make big money. This is especially true if Venture Capital is involved. Why? Because don’t think you’re getting any dividends while the company is still private. Your only chance of getting paid is upon exit or public offering. This is not an easy feat. Very few companies including very few venture backed companies and even very few successful companies ever get bought and even fewer go public.

So you’ve built a company that does $30,000,000 in revenue and generated $10,000,000 in cash flow. You even own 40% of it. Think you’re taking home $4,000,000 this year? Think again. You’re not. Maybe you’ll make a few hundred grand in salary but there’s no liquidity for you my friend. The cash will most likely stay in the company. With that said, some (very few) progressive funds such as Peter Thiel’s Founders Fund that allows founders to sell a bit of stock with each progressing financing round. But that’s about it. It’s tough getting paid. You may have a million shares of a company worth $10 a share - in private stock but that doesn’t mean you can get the value out.

Scott’s new company is publicly traded and thus in theory if its liquid any shareholder can sell stock (after restricted periods where applicable of course) and thus capture the true value of the shares or at least liquidate some holdings.

Most people think being an entrepreneur is illustrious and that we all make a fortune. Well the truth is, even when we hit it big and are running big powerful cash flowing companies, often time so much of our net worth is tied up into our company that we are fairly illiquid. I’ve wrote about this in the past on how most founders, even after an exit do not recoup the opportunity cost of being an entrepreneur but do it anyway. Well, sometimes if we’re lucky but usually it’s hard getting paid!

So there are people who spend thousands of dollars and weeks of their time creating powerpoint decks to pitch investors or for their own internal pitching desires. I never understood that. What’s the point of fancy slides, fades, transparencies and cool effects? I could have sworn I learned somewhere that the point of a deck is to be a guide for a conversation. I could be wrong.

All I know is I hate decks with fancy functionality - because I can’t do it myself! and because i don’t see the point. Personally, I follow a modified version of Guy Kawasaki’s deck rules. I even use the same template for every deck (because I don’t know how to change it!) and I rarely will spend more than 30 minutes creating one.

Here’s the reason: My feeling is a deck should follow the logical chain of selling your idea - and be just that selling your idea - giving you the ammo to sell yourself and the company. No one wants to reach a 43 slide deck with a 6 windings font. At least I don’t. I’d rather read a 43 page business plan with a 6 windings font than a 43 slide deck. It defeats the friggin purpose of a deck!

So what’s in my average deck look like?

Slide 1) Name of company and slogan. Slogan must clearly state value prop that your customer will appreciate. I don’t care if it’s not a pun, it’s not a good slogan if it doesn’t clearly state your value prop to your target customer.

Slide 2) Problem - either ask a question or state the problem - 1-3 sentances

Slide 3) Solution - state your solution, 4 bullets MAX

Slide 4) Use Case or Example of how it works - 1-3 short examples

Slide 5) Research data - pretty (useless) chart

Slide 6) Business Model - 5 bullets MAX

Slide 7) IP or competitive advantage

Slide Team - name of key 3 people + 1 line on each = show why you’re people are the shit in 7 words or less for each.

Slide 9) Marketing - 5 bullets

Slide 10) Contact Info

The end.

The whole idea is to talk through each slide and explain what’s going on. You have to remember, if you’ve managed to get an in person meeting, that means they want to speak to you - not to your deck - they talk to their own decks every day - they don’t need to talk to yours.

So what’s the real purpose of a deck then? A visual guideline to your sales pitch. That’s it.

Adios.

So I was invited to the DFJGotham.com dinner tonight. DFJ is a great VC firm with some of the nicest people I know running it (not just nicest investors). Genuinely good people. Besides for the good food and wine and getting to catch up with friends and hobnobbing with some of the great people of our little community, Danny the cofounder (and a fellow Yeshivah of Flatbush grad) went out of his way to talk about TakesAllTypes.org (TAT) my non profit with Ben Bergman. It’s really gratifying (and awesome) to see someone take time out of their speech at a capitalist affair to talk about a non profit cause (and even better when it’s mine). I wanted to thank Danny and the team at DFJ (Ross, Jed, Thatcher, Mark, Peter etc…) for the mention and the invite. I had a great time and I highly recommend DFJ.   Also congrats to Thatcher & Mark on your promotions.PS. I was not paid for this post. Go IZEA!  

So I was on facebook today and noticed a new feature - chat. Yes, it seems facebook is building needed apps into their platform finally. Facebook is coming close to turning themselves into a true portal. First off, chat in facebook is tied to an existing addiction - facebook so see facebook chat numbers eventually overpowering AIM. It will - just give it some time. FCBK did chat in such a simple way that it will kick ass. Look for video chat in the future.

Now, facebook needs to retool their message system to allow users to host their REAL email and build a REAL search engine or at least do a proper google partnership and they will be able to almost maybe somday justify their valuation. At least I would say great work so far.

A couple of things about their valuation. First off, they are profitable so will never go under so what that means is that they have a $240,000,000 investment fund to invest in themselves over the next few years. They need to turn $240MM in $15MM which is possible. It’s only a 7X return. Your every day average VC is looking for at least 10X in a successful investment. Just some food for thought …

This is why you’re friend whose company just sold for $50MM to Cisco is asking you for a loan.

The average company takes 5 years concept to exit.

The average company has 3 founders.
By the time a company gets past its Series C round, the average founders group has a total of 15% of the stock or 5% per founder.

The company sells for $50MM.

The founder has never taken a penny out besides his $100,000 salary. Meanwhile he gave up a $250,000 a year cushy job to start the company.

The founders take is only $2.5MM.

After Capital Gains Tax say he has $1.9MM left.

Now let’s take out $700,000 for paying off the mortgage he couldn’t afford. He’s left with $1.2MM. Still not bad.

Now let’s pay off the Ferrari and the Wifes S500. Down to a cool million.

Now let’s put $200k in the kids college fund: $800,000

Now he probably owes a lot of favors - so lets write off $250,000 in bad investments (I’m being generous) $550,000.

Now there’s vacations and spending: Down to $450,000

Now he’s bored and has ADD. None of his initial ideas will be successful because their done for the wrong reasons. Now we’re down to $200,000

Now he pays off his student loans (finally - the Ferrari of course was more important before), down to $100,000

$100,000 = that is all your friend the dot com millionaire has in the bank for 5 years of work.

You make $250,000. Sock away $100,000. You know tech and have the time to invest, you earn 25% a year, You sock away $125,000 - in 5 years you’ve put away $600,000, paid off your house and cars, worked half as many hours and had 1/1000 the stress of your friend the founder.

Whose worth more? You are and you’re at the same cushy job he walked away from 5 years ago.

This is why serial entrepreneurs never have enough cash. They’ve been nickeled and dime’d to death.

The only people that cash in are people that have taken companies public or people that have been smart enough to sell shit for gold (Mark Cuban, Geocities guys, linkexchange guy etc….)

But i leave with one final question: Whose happier? The nearly broke founder or you, who has 5X as much cash in the bank as the founder?

The Founder because he loves it and is living the dream.

Most first time entrepreneurs don’t know the difference between founders equity and normal equity. Founders equity sounds like a great thing - piggy back on the founders. It is a great thing if your company doesn’t take on many rounds of stock and goes public. However if you take a down round or get stuck with an unexitable comany - who do you think gets fucked first?

There is one major difference between founders equity (granted) and common stock (bought) and it has to do with taxes but since I hate accounting, I’ll leave it to your accountant.

Founders equity tends to end up in common stock add fully dilutable. Afterall, if the company doesn’t succeed it is the founders fault (though VC’s can also fuck up a company big time by being what I like to call “Herd VC’s” - or the type that hear something in the market and see other companies do it, therefore you must. Remember buy advertising, sell pet food at a loss, lose enough money to buy an island.

I would trade an island for pet food any day.

If anyone out there wants me to waste $50MM to start a pet food company, I will suggest buy an island and retire!

Anyway back to founders equity. All equity is good equity. However, The promise of founders equity is like the promise to be the first one in and the last one out. Not always so good. I’ll take my restricted shares with an anti-dilution clause any day! (anyone want to offer me a few?)

If you are in the start-up world, I’d bet you’ve heard that you’re fair share of times. VC’s hear it all the time, execs hear other execs wine about it all the time and I’ve even been guilty of it. I mean c’mon, everyones had at least one cash crunch in their life, usually more than one.

What does it mean? — That it’s time to be creative. As soon as you utter those magical words, that should be a wake up call to stand erect and get to work because it’s time to bootstrap. Don’t wine, win! If you think you need a million dollar, earn it, go out and sell more widgets. Take a second job as a mortgage broker and convince all your friends in the valley that it’s time to cash in on their million dollar mansions. Whatever you do, don’t just sit around and wine and hopefully to find an investor cause unless you’re in the been there done that crowd, don’t bet on it. Bootstrap on it.

So I just had a discussion with a friend of mine who runs an ATM company. What’s an ATM company? He owns and manages several hundred bodega ATM machines. They earn a fortune but he hasn’t had any luck recruiting people to outsource some of his work. Now the person he’s looking for doesn’t need to have a college degree, doesn’t need to be all that intelligent and could easily earn $75k a year, which is great for not having a college degree. What does the job require? Being diligent, work nights and weekends and be a people person. For one thing he was looking in the wrong place, he was looking for a college grad and the average college grad will think this job is below him. So i crunched it down and this is who i determined would be the ideal candidate:
- someone who is naturally likable and a good talker
- someone who wants a degree some day
- someone who isn’t earning more than 40k a year currently
- a few college credits but dropped out for personal reasons (had a kid, take care of family, out of money etc…)
- offer to pay for college for the person (city college is cheap anyway)

of course, you can’t legally write that in an employment post but thats the candidate your looking for because thats the kind of person who will appreciate the job and take it seriously.

Now the second issue is that i think it is MUCH harder to find a skilled People Person than an MBA. You can find thousands of MBA’s for every truly good people person. I know very few people that are great people people but plenty of MBAs. Its just a lot harder i think to find people that understand the human psyche then it is people with a fancy degree. That’s also why i would take a psych major over any other major for most business positions any day of the week. You can learn to be a quant a lot easier than you can learn to be a people person.