Bootstrapper.com - Confessions of Serial Entrepreneurs

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.

Let me know if I can help you in any way. I find that I have the most rewarding experiences with neurotic and obsessive entrepreneurs who also have a sophistication about venture capital.

- Allan Young, University Venture Fund

So I’ve been pitch on a pile of “new” incubator type models for building companies lately. This led me to think through the venture process and my conclusion, though i may very well be wrong and I just thought of this so it’s not fully fleshed out, but i think that the general structure of venture funds today is wrong - at least for web tech. I mean the costs of building these companies are very low and the values to get from selling them are pretty low so I think it needs a new approach.

Yes, people are doing this now but it should be formalized.

I think the following are the stages of a company life cycle:

1) Choose the flower (plan the idea) = Limited to no cash required
2) Plant the seeds (get a product launched) = under 50k
3) Water The Plants (supporting cash for marketing, tweaking, 1 full time employee)
4) Sprouting (founders come on board full time and it takes the shape of a real company) = 250-750k
5) Flowers Grow (growth phase) = 500k - 2MM
6) Bloom (combination of Series A/B/C leading to an exit) = $X

There really isn’t a need for Series A, B & C anymore. Yes you can do it but there isn’t a need. The Bloom phase is essentially when you build a real sales force and get bit with the giant hosting bill but what more do you really need cash for in most internet plays today? Not much.

If I was starting a fund I would be in one of two places

1) Incubation Phase: Help people build a business model and get live. Up to 50k investments.

2) Development Phase: 50-500k - building the official team = you are a company now

3) Secondary Financing: 500k+ = most money goes to marketing and strategic deals

That’s my new 3 phases of VC.

Curious what everyone thinks…

There a number of ways to finance ventures. Here is my quick and dirty analysis of each funding mechanism.

Self Funded - you are in control and own it but unless you are discplined and have experience, entrepreneurs tend to lose their head in the clouds. This is great if you are an expert and experienced already - if not get to the point where you can sustain professional help fast - or you too will need professional help.

Partners - Partners are great as they can counter each other but two partners with no experience does not equal one with experience. Partners where one is at a higher level or more dedicated is bad. Most partnerships break up. They are only good with two experienced people on the same level.

Dumb Money Angel: This is the guy that runs the carwash. This is great if you know what you are doing. If you too are clueless - besides for being lucky at finding financing - you are going to waste his money. So the question is if you have a conscience or not? Many a fund managers can’t sleep when they lose OPM.

Smart Money Angels: This is generally the best way to start a company, esp. if smart money is from the industry you are targeting. Usually you’ll get a fair valuation and validation on your concept and expert help achieving your goals and be able to leverage their network. It’s a win-win all around.

Tier 1 VC: This is good if you need a LOT of cash and is second best to smart money angels. Names like Softbank, Seq, DFJ etc… are great. These leads will take a lot of equity, rip you to shreds on due diligence but be fair and add value. If you can get them to invest that means something.

Tier 3 VC / Vulture Capital: Tier 2/3 VC = people playing VC’s that aren’t in it for building real value. Vulture Capital is selfish money that screws entrepreneurs (short term approach since our industry is small and word gets around). If you take on this capital, have a great friggin lawyer and make sure you are protected. Always ask for references of successful exits and failures from your investor and see what happened. Do your research. These guys will take 95% of your company if you are not careful.

Debt Financing: Take it if you can get it. It can be free. Mortgaging your house is self financing and not debt financing. Debt is actual real debt. Debt can kill a company as fast as it can help though so watch your ass. Sometimes you can get a mix of debt & equity. If you are careful this is great - if you are not careful you will give away your whole company. Why? Equity/Debt hybrids usually have a convertible clause where if you don’t pay it back in X debt converts to equity - you lose control and your equity is worthless. Then again if you can’t pay it back - your equity probably is worthless anyway.

Reverse Merger Financing: This can great (access to debt, liquidity, stock to acquire companies and incentivize employees) or horrible (work with shady people who stick you with nasty convertible debt and consulting fees and then convert the debt into equity, take control and kick you out. This is shady finance though can be extremely productive if you are careful - or it will destroy your business and make mortal enemies of the people pulling the strings.

As for me - I’m a serial entrepreneur, run BootStrapper.com, have self funded a couple ventures, taken on partners and broken up hard, run a seed capital group and am involved in some interesting ventures now.