Context is Everything

Its the context stupid. A play on James Carville’s famous advice to Presidential candidate Bill Clinton in 1992. When marketing something complex like big data, economic policies, semantic computing, trade policy, etc.; best to keep it stupid simple. Customers don’t much care how a solution is delivered so long as the get the result they are looking for. How the solution is delivered matters, but principally in how it makes the customer feel about how they have achieved the desired result. Nobody likes feeling like they overpaid, killed kittens, or bulldozed a rainforest, but ultimately customers just want the result. Carville’s message to Clinton and ultimately to the American Electorate, is that the Clinton Administration will ‘fix’ the economy (implying the Bush Administration broke it), which will ‘create’ jobs, ‘raise’ wages, and ‘grow’ the economy. Clinton’s ‘customers’ (the electorate), did not really care how a Clinton admin would achieve these broad promises, they only needed to ‘feel’ that he could. You could fill a room with nobel prize PhD economists and political scientist and none of them could provide you a clear answer as to whether or not any of Clinton admin’s policies lead to the economic boom that coincided with his presidency, but none can argue that he can claim delivery of the promised result.

Complex business solution selling is not a whole lot different. Sure there are entire teams on the customer side and in many cases outside consultants assigned to understanding and influencing exactly how a solution is delivered in order to achieve contracted results, but in the end decision makers care little of the how, they are focused on the why. The Why is the context of buying and selling.

Ontario Startup Funding Roadmap

Over the last three and half years I have directly deployed over $1.4m in $30k private grants to about 50 of the earliest stage software companies in Ontario. We did this through an agreement with the Ontario Government’s Ministry of Research & Innovation (MRI). As our customer, MRI expected we place this capital with Ontario based software companies with growth potential. MRI’s objective for the program was job creation and economic output; we added measures of exits (M&A) and follow-on investment capital (Angel, VC, etc.). Over 250 Jobs (25% overachieved target), $12m (34% overachieved) of economic output through the projects, 5 exits, and $30m+ of follow-on capital were the results. Exits include; AlogAnywhere to 500px, Openera to LiveQoS, Liberate Health to NexJ, Health Media Today to VerticalScope, Pilot.me to Shopify. Growth companies that have raised funding and are continuing to perform are; Viafoura, The OMX, Vantage Analytics, Nudge Rewards, Thought Wire, Symanta, Cozumo, and Memex (TSX-V OEE). A number of other companies not highlighted are building sustainable businesses or are on the path to growth.

 

I am proud of our performance at Coral CEA and I am proud of the companies I had the opportunity to help get further down the road on their startup journey. I am grateful that the role also allowed me to help number of entrepreneurs outside the grant, providing guidance, a helping hand, and connections whenever I had the chance. I have learned so much from the experience.

 

One of the most valuable things I have learned through this process is an understanding of the funding environment for early stage tech companies in Ontario. I spent the last five years of my professional life helping the earliest stage companies figure out how to navigate this terrain. This post is my attempt to open source what I have discovered, I hope it helps.  I encourage feedback and contributions to fill gaps.

 

I will start with the Low Hanging Fruit; government tax credits. These are typically recouped after you spend the money, but do not leave this money on the table, it is cheap, and your business is entitled. Capture the credits and use them to grow.

 

TAX CREDITS

 

CRA Listing of Provincial R&D Credits: http://www.cra-arc.gc.ca/txcrdt/sred-rsde/prv-crdts-eng.html

Ontario Specific: http://www.cra-arc.gc.ca/txcrdt/sred-rsde/prv-crdts-eng.html#ntr

 

Most well-known is SR&ED: http://www.cra-arc.gc.ca/txcrdt/sred-rsde/menu-eng.html

 

Less well-known but related to SR&ED are OITC: http://www.fin.gov.on.ca/en/credit/oitc/ & ORDTC http://www.fin.gov.on.ca/en/credit/ordtc/ do not let your accountants miss these eligibilities.

 

If you are or can partner with an NFP / Academic Institution checkout  OBRITC: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/prv/on/bsnssrsrch-eng.html is a large pool (up to $4m).

 

If any of your employees are under 30 years old, dig into the Youth Employment Programs. The Government, both Provincial and Federal, are aggressively deploying money to support youth employeement https://www.ontario.ca/jobs-and-employment/youth-jobs-strategy. The program to attack for startups is the Youth Employeement Fund that will provide up to $6800 per team member under 30: http://www.tcu.gov.on.ca/eng/employmentontario/youthfund/. You can also capture $2/hour for interns, please pay your interns;) https://www.ontario.ca/jobs-and-employment/employer-incentives-hiring-students. Co-Op placements can generate a rebate of up to 30% http://www.fin.gov.on.ca/en/bulletins/ct/4014.html#qlfyg.

 

When it comes to Tax Credits, I would always assume there are more. A good accountant who is specialized in innovation companies is highly recommended. My go to person is Dale Wilson of Collins Barrow http://www.collinsbarrow.com/en/cbn/professionals/toronto-ontario/dale-wilson. My default recommendation is to use a big 4 firm PWC, Deloitte, KPMG, E&Y. Tax credits are found money, do not get risky with capturing them.

 

Funding Source Aggregators

 

Good accountants will help identify other sources of funds in addition to Tax Credits. However, these following services are explicitly setup to provide guidance and assistance accessing public funding.

 

The place to start is the service provided by the government its self: http://concierge.portal.gc.ca/ . The service is relatively new, so the feedback has been positive as the agents have ample time to provide help. It is free, try it.

 

The two services that I have some experience with, and are freemium models are: http://www.mentorworks.ca/ and http://thefundingportal.com/. The Funding Portal has more scale and is partnering with organizations like MaRS http://www.marsdd.com/funding/search/. In this case I would tag that as an advantage. Mentorworks has the best website, an excellent shortcut to understanding government programs.

 

As a Founder I would do the following: Checkout Mentor Works to get an understanding of what is out there that I think we might be eligible for, then contact the Government Concierge to get feedback and more ideas. At that point I would engage a specialized Accountant, with a roster of clients that look like my venture, and send him/her to work preparing documentation etc..

 

Government Funded Programs

 

Do not under or overestimate publically funded programs. Yes most are bureaucratic, slow, and do not ‘get it’, but the capital is inexpensive. If you work the system the system will work for you. These programs should never be core to your funding or business strategy, any dependency here is a recipe for a problem. The programs are extra leverage that should be invested in as far as the capital and leveraged returned provides solid ROI. Simple rule of thumb, revenue dollars are worth 10x public funding dollars. If you are spending more time chasing government money than customers you have a problem.

 

Here are the key interchanges on the Ontario funding highway:

 

The Ontario Network of Entrepreneurs

 

The Ontario Network of Entrepreneurs http://www.onebusiness.ca/ is the umbrella for all the Regional Innovation Centres (MaRS, Communitech, etc). The RICs are intended and designed to be hubs to access resources. The large centres service a large volume of people from crackpots to Elon Musk. To access the resources you need to acquire attention from the Advisors. Like any other customer, sell high and have a clear value proposition. This institutions want to generate positive PR for their programs. Rounds of funding, customer wins, awards, patents, job growth are the basics they are looking for, sell them your success story. As a success story for a ONE program you have good leverage to make the programs work for you.

 

The RICs

 

MaRS, fill out the form http://www.marsdd.com/venture-services/apply/, seriosely. I have a number of connections to the key people and I am happy to make referrals, but you will still need to fill out the form. Within MaRS there is the MaRS Investment Accelerator Fund (IAF) http://iaf.marsdd.com/ & Youth IAF http://iaf.marsdd.com/youth-iaf/. Each require private capital lead investors. IAF caps at $500k, the Youth fund at $250k. Also, if you are trying to hire a leader into your Startup you need to consider the Embedded Exec program to fund up to $60k of the hirs: http://www.marsdd.com/funding/embedded-executive/. Within MaRS and the other RICs the staff has different points of value, be targeted, know what you want from the organization and focus on extracting it.

 

http://www.communitech.ca/steps-to-engaging-with-startup-services/, I am not as well connected in KW, but I can still help. Communitech has a number of programs under its umbrella as well, which can add capital and value. Its accelerator http://hyperdrive.communitech.ca/, like MaRS’ Jolt (think its out of money) is an interesting option for very early teams. Google for Entrepreneurs is an interesting program with very little cost and access to a lot of upside if leveraged properly http://www.communitech.ca/programs/google-for-entrepreneurs/. For more mature businesses the CDMN soft-landing program has been successful for several companies I have worked with and carries a positive reputation, if going out of market to build the business tap in this http://www.cdmn.ca/soft-landing-program/overview/.

 

http://www.venturelab.ca/ has a couple unique programs that are valuable, checkout http://www.venturelab.ca/healthcare-ecosphere for ventures targeting Hospitals, led by Dan Wasserman. For Seed ventures tap into Mike Betts and http://www.venturelab.ca/genesis.

 

Futurepreneur (formally CYBF) http://www.futurpreneur.ca/en/get-started/ – provides services along with a $30-45K 5% BDC Loan. People get hung up on the personal guarantee of the loan. If you are that unwilling to invest in yourself its a very strong signal to investors. If you think a government backed program designed to encourage the risk of entrepreneurship is going to ship you to the Gulag for your debt, again you might not be cut out for this game. Lastly, you are going to leverage your personal finances. This is cheaper than your savings, line of credit, and credit card; take the loan.

 

The Ontario Centres of Excellence http://www.oce-ontario.org/ provides the Market Readiness program is targeted to exract IP from Academic environments and commercialize it: http://www.oce-ontario.org/programs/commercialization-programs/market-readiness.

 

The OCE Smart Start program is for Startup Founders under 30 and is very accessible http://www.oce-ontario.org/programs/entrepreneurship-programs/smartstart-seed-fund. All you need is someone on the cap table under 30, and / or be believably youthful;).

 

OCE also has programs to promote Industry to Academic partnerships worth exploring if you have R&D projects http://www.oce-ontario.org/programs/industry-academic-collaboration. See more on OCE programs to attached MA-PhDs to your venture here: http://www.mentorworks.ca/what-we-offer/government-funding/human-resources-and-training/oce-talentedge/.

 

National Research Council of Canada Programs

 

My general impression is that these programs are perceived as slow / expensive; however, venture companies with legit R&D activity report good results once the first project is secured.

 

IRAP http://www.nrc-cnrc.gc.ca/eng/irap/index.html

IRAP ARP program $50k to optimize digital products.

http://www.mentorworks.ca/what-we-offer/government-funding/business-expansion/irap-arp/

 

BIAP is under utilized, to my knowledge. If you are Selling into the Public Sector (Hospitals,Universities, Research Facilities, etc.) this should be explored as a way to help customers find or augment budget http://www.nrc-cnrc.gc.ca/eng/irap/biap/index.html

 

CAIP is funding for Accelerators & Incubators, if you are one, check it out: http://www.nrc-cnrc.gc.ca/eng/irap/caip/index.html.

 

NSERC http://www.nserc-crsng.gc.ca/index_eng.asp

Academic to Industry partnership programs are a great way to add bench to drive R&D. http://www.nsercpartnerships.ca/FundingPrograms-ProgrammeDeSubventions/index-eng.asp

 

National Research Youth Employment initiative to onboard post-secondary grads in SMEs is an attractive program http://www.nrc-cnrc.gc.ca/eng/irap/services/youth_initiatives.html.

 

FedDev

Is a very large pool of capital that is currently behind on deploying capital. This is an opportunity for entrepreneurs to take advantage of the organizations ‘Use it or Lose it’ mindset.

 

Investing in Business Growth and Productivity IBGP should be considered by any established SME working to make a substantial investment to grow the business, program is orientated to help small companies go global or expand facilities: http://www.feddevontario.gc.ca/eic/site/723.nsf/eng/h_01905.html.

 

Investing in Business Innovation IBI is the most well known program that acts in partnership with NAO-O registered Angel Groups to add $0.50 on the $1 of private money: http://www.feddevontario.gc.ca/eic/site/723.nsf/eng/h_00324.html. If you are raising Angel Capital you and your investors are leaving money on the table if you are not exploiting this program. As soon as you have an Angel term sheet contact NAO-O or an Angel Group (list later).

 

OMDC

The Ontario Digital Media Fund http://www.omdc.on.ca/interactive/Funding/IDM_Fund.htm, if you are building a digital interactive product or digital content OMDC should be engaged.

 

I am sure there are more programs out there, the three places I recommend starting are the Government Concierge, Mentor Works, and your Accountant.

 

On to the hard stuff, that is happily much more straightforward to access. If it is not straightforward, I suggest trying to find customers and not sources of funding. If you are not getting traction with government backed programs you most likely have one of two problems; one you are not eligible, move on; two you do not have a compelling story. If your story is not getting people paid by the government to deploy public money, at zero risk to themselves, interested I recommend you checkout http://www.applybetter.com/ (I funded them;).

 

Angels

 

General rules of thumb for Ontario Angels, have traction, preferably financial traction. I would highly recommend having a lead Angel before engaging with a group. Be prepared for diligence, every group will have players that are governance geeks, have your board book, etc. in order. These are good ideas in general, but I emphasis to support the common perception that Canadian Angels are conservative.

 

The best Canadian Angels are typically not members of the Angel Groups, at least not active members. They may, and in my opinion should, leverage the groups for the FedDev IBI benefit. The best Angels IMHO are exited entrepreneurs, if someone has a decent list of Canadian Startup exits over the last couple of decades that would be an awesome place to start. Here are my quick examples: Workbrain, Radian6, Eloqua, 724 Solutions, upcoming Shopify, Hootsuite, Vision Critical, etc.. Build relationships with the leadership groups of the companies that have gone all the way. Ask them great questions about how to get there yourself and the just might help you out with more than advise.

 

 

There are others (see NAO-O site) listed are the ones I can provide feedback on and make referrals to.

 

 

Seed Venture Capital

 

Seed capital is the least defined asset class, I have tried to focus on General Partnership with a specific Seed mandate from their Limited Partners. Qualified with the notion that there are VCs not listed here that will write Seed checks, and that some that are listed are super angels. I am qualifying Seed Investors as professional investors that will enter with a Seed Round deal, typically as the lead, from $250 – $1.5m. Rounds are above $250k and less than $2m, generally.

 

 

 

 

The three bolded firms behave the most like Silicon Valley based Seed Funds the rest all have variants on their approach. MaRS IAF is by far the most active Seed Fund.

 

Series A Venture Capital

 

Most Seed Investors will scale up to A rounds so I will not relist them. I am going to include some B round investors to save me making more lists. I am qualify Series A as rounds of $2m – $12m of funding.

 

 

I bet you are surprised how long the list is. To my knowledge these funds are active. I have tried to exclude funds like Summerhill Ventures that are inactive. I have tried to just highlight tech investors, though the investment thesis vary broadly. Agnostic of any particular scenario, I would most want to work with Real Ventures or Version One, or Extreme VP. I listed both Real & V1 as Seed Investors, but both have Series A capacity, EVP will be an active Seed Investor. I am drawn to those three because the partners have operated, have great reputations, solid track records, cred in the Valley, and are early in their fund cycles.

 

Choosing your funding partner is mission critical, not all money is the same, and cost of capital (valuation) should not be your prime concern. As a Founder know what gaps your VC will fill in your board / leadership and what operational leverage they will provide. Some situations will warrant patient, relatively passive investors (key word is relative) that let you and your team run the company. Other scenarios require your investors to bring leverage the table, helping you execute core pieces of the roadmap. Generally, the best VCs land in the middle, giving the leadership team lots of room to operate and create the vision of the company, while actively executing to generate leverage. Especially around Corporate Development, Business Development, Talent Acquisition, and Finance Strategy.

 

I am of the opinion that you can never be over capitalized, maybe over diluted, but hard to see having too much money in the bank as a problem. As always the best capitalization strategy is REVENUE. If you solve the revenue challenge, attracting investors will not be a challenge. Another rule of thumb, you are ready for investment when investors start asking you if you are looking for investment.


I hope this post is helpful and allows you to spend less time trying to figure out where to find funding so you can spend more time building your Revenue Development Engine.  

Thoughts on being a Startup Guy

I started this post over 2 years ago.
I spent July 13-15 2011 in Montreal participating in the first International Startup Festival, and found myself dreaming big. I love that I have chosen Startups as my industry. The energy of entrepreneurs building businesses is infectious, something only a tiny few of established businesses have. That said, the post (Darkside) that I had started before going to Montreal aligns with the narrative of the early presenters at StartupFest, Dave MacClure and Chris Shipley. Both took different routes to emphasize being an entrepreneur and specifically a tech startup entrepreneur is intensely hard and not for most people (Presentations here & here).

What I love most about startups

The challenge, the knowledge in the back of your head that success is so unlikely, and the fact that you will be fully tested by the process. The experience validated my working assumption that Startup success is about a great many things, but it is firstly and most principally about heart, and the power of perseverance.  As Chris Shipley postulated, the best entrepreneurs over time are typically proven to be a lot more talented/hardworking versus lucky. This fed my theory that luck is an outcome of being good and persevering. A successful entrepreneur needs to be successful at creating the conditions for their luck to happen. So many Startups are dependent on the confluence of market timing, market conditions, and having the right people working together to recognize the opportunity (even if it isn’t obvious to them) that success cannot simply be chalked up to luck. I am not going to take your time with case studies, there are plenty out there.

Let me plant this theory…

You need to be good to be lucky; to stack the odds of luck happening in your favor you need to be persistently good. I will leave my thoughts on the core essence of entrepreneurship being perseverance for my previous post. I want to turn back to Startup Fest.

The Canadian Ecosystem

Canada’s innovation centers, Montreal, Toronto, Waterloo, and Vancouver are doing the right things to build community and the ecosystem required to foster interesting-successful ventures.   None of these places will ever be the Valley. They are, however, doing a good job of learning from the DNA of the Valley and transplanting the key attributes into our environments in Canada. The key next step for them is to begin working on a culture shift within the Canadian ecosystem.

The Startup industry is fundamentally about innovation; success in innovation is about experimentation and being rigorous about the process of failure. FAILURE is the magic sauce of innovation. The core difference between the Valley and the rest of the business world is its cultural attitude towards failure, being good at failing is a desirable attribute for an entrepreneur in the Valley. See this interview with Steve Blank for more.

The Valley ecosystem trains the ability to fail in a way that drives innovation. So long as you ‘fail well’ the ecosystem has the ability to support you in that failure and keep you moving forward in the industry. Failure in other business ecosystems is a scarlet letter, few entrepreneurs outside the Valley have the chance to pick themselves back up after a being proven wrong by the market. It usually becomes time to put your tie back on and get a ‘real job’. So much innovation is lost in this leakage, the odds dictate that a lot of at-bats are required to hit a home run and experienced hitters have much better averages than rookies, I will link up a presentation from Startup Fest made by Jeff Clavier on this.

We need to figure out how to develop more veteran hitters. The take-away, more like validation, I took from the festival is that a strong community, an ecosystem, is critical to creating a sustainable startup/innovation industry, we need to give talented people room to fail.

An ecosystem is an evolutionary process.

The Valley was not a big bang event, the emergence of New York in the Startup industry did not happen overnight. The emergence of anchor companies like 37Signals and Groupon in Chicago is not luck. Austin is not a hub in the startup industry because of SXSWi. These communities were built and fostered over long periods of time. PEOPLE stepped up and led the creation of these communities, which then evolved into ecosystems.

Charlie O’Donnell of First Round Capital closed the Festival with this talk (link when available) about the long term view and personal engagement required to build an ecosystem that will sustain your career path in startups over time. He worked all three of the core components of a healthy startup ecosystem: he founded and worked for solid startup teams that produced economic value (Path 101), he put personal effort into supporting the community launchingnextNY, and he has provided capital (Union Square & First Round) to amplify break through teams and provide the economic fuel that sustains the cycle.

This ties to the evolutionary nature of the startup ecosystems. Too often I hear Canadians bemoan the lack of risk capital in our startup industry. The ‘Catch22’ paradox is what it is to be an entrepreneur, solving this problem is a big component of what it is to be successful.

I see a six phase process to developing a robust startup ecosystem:

  1. Community, people & teams rally around one another to support the creation of new companies
  2. Solid Companies emerge
  3. Companies generate exits
  4. Anchor companies emerge
  5. Risk Capital becomes local & more available
  6. People & Capital begin to cycle through the phases consistently.

A couple basic rules I have discovered to frame this, Investors invest in what they know, and Risk Capital flows to Innovation & and proven operators. These two rules beget a conclusion that I believe important to the successful development of an ecosystem; it is up to entrepreneurs to own all six phases of the process.

We need to…

  • Build our community, not the government (etc.).
  • Create solid teams by any means necessary (overcome the catch22!).
  • Produce shareholder value.
  • Build disruptive companies.
  • Bring back exited entrepreneurs & successful VC’s to re-invest returns back into the process.
  • Find people to choose Startups as a career and continually add value in the ecosystem over 10 – 20 years.

Final Thoughts

I will address Toronto, where I live and spend my time. We are generally in phase 2 of this process, we have some exceptions like Workbrain in phase 3, but for the most part, Toronto is still searching for startups to exit in 9 figures or build anchor companies like RIM in Waterloo (current issues set aside). Workbrain has driven the creation of several phase 2 companies like Dayforce, I Love Rewards and Rypple that are re-investing money, knowledge, and most importantly people from that successful exit back into the startup ecosystem. Companies like Freshbooks seem on a trajectory to build a Toronto Anchor company that will provide the critical mass of highly skilled entrepreneurs to fuel the growth of earlier phase startups.  Montreal is providing an excellent example on the capital side with Year One LabsReal Ventures and iNova who are driving capital into their local ecosystem.  In short, we still have a long way to go, and key work still is needed to solidify the foundation of phase 1 our community.

I think we need to put community effort into slowly shifting the Toronto attitude towards failure, to one that is productive and encourages innovation. I think the strength and growth of the Lean Startup Movement through groups like LeanCoffeeTO is a key starting point for this shift. Lean is a great way to learn how to ‘fail well’ and the meetup group provides a supportive environment to share experience both good and bad. So many businesses fail at failing, let’s get better at it.

I invite you to share your thoughts.

Its the DATA Stupid

Image

Customer Experiences generally SUCK. I am running out of patience for the number of poor to awful customer experiences I have had over the last quarter. All over the market, $3 retail transactions up to tens of thousands of dollars on the personal front, to business transactions with free services up to multimillion dollar RFPs. The transactions have been garbage. Some of this is pure human circumstance and error; however, the majority can be tracked back to companies not using the Data.

The area where this drives me most crazy is the inability of major service providers: health care, banking, telco, travel being top of mind, to leverage Identity. You know who I am! More correctly your data knows who I am, likely in some depth. Organizations put intense friction and barriers between them and my money, and more concerning (should be) to their future growth, my satisfaction. Sunnybrook Hospital / OHIP, Scotia iTrade, Telus, Porter (yes, you are the best, but that doesn’t make you good) I will FIRE YOU at the first opportunity. Your only defense is that you operate in Oligotrophic markets, and your competitors suck equally.

The solution to this challenge or where I believe the disruptors of these players will be anchored is in Identity. Know who the customer is and create an experience around the context of that individual. In the data held within the organization or very easily gathered from the customer directly or through 3rd parties they authorize, it is possible to know everything needed to very precisely know the Identity of the customer / prospect on the other side of the transaction. For the most part all this data is volunteered with effort (friction) required by the customer; I don’t know my OHIP, Drivers License, Account #, do you? If I tell you as a provider, and you need that info to transact, YOU better remember it! It is in your data now. I can two factor verify my identity (name, birth date, etc.), it is now on the provider to associate and leverage my hard to remember data. My Account # isn’t my Account # its YOURS! Compliance & Privacy are much more the institution’s problem than the customers, but they are consistently making it the customer issue.

This is not Big Data, this is customer service old school style; just remember who I am and use it to make intelligent interactions. The small town grocer knew his local customers and customized his interactions to enhance the customer experience. The proper use of CRM, Transactional, Segmentation, and Predictive data will allow organizations to deliver 1:1 customer experiences at scale. Big Data will only increase the fidelity of digital identity and the amount of data available to providers to generate ever more customized 1:1 experiences with customers and prospects.

Start simple, unified data models and unified experiences. Your employees, like your customers, do not care about the federation of your service and data silos. They just want to open the damn account and move on to the next task in their day’s.

Early Stage B2C Valuation Challenge

I have recently met with a variety of startups that have business models that are entirely dependant on hyper user acquisition, activation, and retention. Dave Mcclure’s Pirate Math (AARRR) remains the text book to follow http://500hats.typepad.com/500blogs/2007/09/startup-metrics.html. In these discussions I was drawn into a discussion about valuation, which turned into an email I have paraphrased below for your feedback.

First a qualifier, I don’t imagine I am the best person to discuss valuation from any angle. In my role making funding decisions, I am lucky to not have to price rounds, so valuation isn’t something I have done professionally. Similar on the pricing (revenue) side (solution value) to the market, my experience is all value (ROI) or market based (competitive) pricing in enterprise B2B, so not well aligned to the B2C startups.

To give you my 2cents, my view is that all the companies I encounter that work on user dependant models are way to early to have any concern about valuation. On the pricing front, most are not even ready to start testing, as they need to build a value proposition that is coherent. Note a problem – solution statement and a value proposition are very different though related things. Those that have a value prop and a MVP should be running pricing experiments at as high a volume as possible; inability to do so illuminates other issues (CAC & Value).

My experience with companies that are pre-funding and typically pre-revenue is that there is nothing to price in order to derive a valuation. In the seed round my view is to do a convertible note. The only logical pricing mechanism at this early phase is the value of the team’s time. Two founders who could reasonably earn $100k/ year each working for the man have a company that is worth no more than $200k pre-traction (NPV). Generally speaking investors set the price, the only say the entrepreneur has is their ability to create a market for the equity and negotiate a deal. Your company, in the early stages, is only worth what someone is willing to pay.

Most teams do not have anywhere near enough evidence to establish comps for their valuation. This makes hunting for investment a very dangerous use of time. Money goes to teams with traction, spend nearly all your energy on activity that demonstrates traction (signups, downloads, revenue, etc). Investors will not make your business work, customers will.

Here is an easy example to think about B2C valuation. A Facebook user is worth $100 (roughly) and provides the peak market comparable for every other Ad driven social consumer platform in the market. Every other company with a similar business model has a user value less than $100 per account and the drop of is extremely steep. FB has dominant market position, continued up and to the right growth, proven revenue, extreme stickiness etc. Tomorrow’s hot startup only has user acquisition on its side with no sustained track record of activating, retaining and converting those users to VALUE. Pre-value users occur at a negative run-rate (basic costs of the business, dev ops, and user acquisition costs). The amount of traction to overcome the disadvantage is huge, and to my knowledge no one in Canada has pulled anything like that off (Wattpad is working on it).

This is driving 10m users as the benchmark for a startup to become a candidate for a priced round (see http://cdixon.org/2012/08/03/ten-million-is-the-new-one-million/). If you can get that many users without spending a tonne of money you likely have some foundational value to build on. Before that you are pissing in the wind trying to raise money IMHO. Metrics change based on models but the mountain is just as daunting if you are SaaS b2b etc. The reason i dislike user models so much is that I don’t believe Canada has any sherpas that have been up that mountain, we have plenty of folks who have climbed b2b peaks.

This rant has come out of on going discussions about Canada’s accelerators and their propensity towards B2C startups. Generally speaking; asking for investment is a waste of time on Demo Day. The only route to funding is through traction. I want to see these companies make asks that drive against traction milestones, ie help the startup get on a growth curve to 10 million users. Make asks against milestones ❤ months out from demo day, ones that generate momentum and move the needle on the key performance metrics of the model. “SIGN UP for the APP now! please;) but seriously the bar will not open until you have downloaded the app”. Boom 300 users at zero hard cost, not a bad 30 minutes.

Part of the challenge is the accelerators are serving a segment of entrepreneurs that are drawn to b2c, but that is another post. What I want to see is better understanding & demonstration of growth hacking and better asks from b2c founders, because cash ain’t it.

The Enterprise Pilot Chasm

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Much time is spent bemoaning the lack of aggression from early stage capital sources. Most of this energy is misplaced in my opinion. The real chasm companies struggle to leap, is to Enterprise Scale Solutions. Solutions that solve problems the Executive Suite of Blue Chip (F2000) companies truly care about and therefore will purchase. Many of the technology products and services consumed by Enterprise clients from SME (including startups) providers are isolated in what I will call Pilots or Islands.

These pilots or islands can be relatively large and long lasting, several millions dollars, run over several years, and touch thousands of users. I term these projects or deployments as pilots/islands because they do not register as strategic to the overall organization. Few if any other systems or processes depend on them and the relative switching (including straight deletion of the process) costs are low. Your core users inside the enterprise may scream bloody murder when you are displaced or turned off, but the overall strategy from the true decision makers will move forward with change regardless in order to achieve the broader more core goals of the company. Microsoft, Oracle, SAP, etc. are entrenched and scaled because their solutions deliver core value to the overall organization, replacing their solutions will have cascading effects that override the potential benefits of switching.

Winning Pilots is often a Series A funding trigger for enterprise software ventures. When it is not, its typically as reflection of a few things: the pilot customer does not reflect the ideal target, it is not a scalable implementation of the solution, the pilot is, has, or will not generate enough evidence to represent sufficient traction, etc.. This process, in my experience, is very similar within F500 organizations as they explore new offers and markets (funding from HQ vs. VC). The next major challenge, and often the project companies get stuck in, is post a successful pilot.

Transitioning from successful pilot to a repeatable and sustainable growth process is a Chasm a large number of companies find themselves trapped in. This chasm is not just trafficked by startups, I would wager the majority of teams in this stalled growth phase are SMEs. $5 – 50m annual revenue 10 – 300 employees, 10 – 100 customers, mix of professional services and product based revenue, 5 – 35% EBITDA.   In other words, a lifestyle business. Lifestyle businesses are awesome, if that is you and your stakeholders’ desired outcome. If you took outside money that has any notion of your business being a venture company, being a lifestyle business is painful. Wanting to grow the business for the sake of growth while in this phase is also fraught with risk for the owners personally and the business.

This chasm is the ideal conditions for Founderitis to run rampant and symptoms to metastasize. Startup founders focus on the positive evidence, ‘we have customers, revenue, etc.’; SME CEOs focus on the risk, ‘we are making money, we are comfortable’. Anyone who dares label themselves an entrepreneur has a dose of Founderitis. The question is how you harness the syndrome to the best benefit of the company.  In the Successful Pilot / Isolated Solution to Scalable Growth transition Founderitis constricts the vision of the key leaders limiting their ability to absorb and act on opportunity or required change. Optionality becomes so constrained that the business loses its momentum and dynamism, stagnating into the ‘lifestyle’ chasm.

If your company is not activating new revenue in a consistent, predictable process you are in the Chasm. If you sell a solution to a decent size market that drives a top or bottom line outcome for you customers; you should be able to forecast revenue growth with decent accuracy. A software startup that has exited the Pilot Chasm and has hit the Growth Curve should be generating better than 100% CARGR. The tactical ins and outs of individual sales cycles should only impact the velocity and amplitude of the growth curve, no individual deal should be able to knock it off the up and to the right shape. SME growth companies should be able to account for churn in the sales team and maintain predictable revenue results. Sales have become an engineered process, the sequence of inputs and outputs are known.

Yikes, we are in a Chasm; what the heck do we do? Confession, our Startup is in the Pilot Chasm, right now, scarier we maybe on an Island. I don’t have enough evidence on whether or not we are on island or not yet, so I am going to focus on the ‘known’ that we are in a Pilot Chasm. Like all problems, acknowledgement is the first step, take stock of the current state. Focus on evidence, categorizing Known Facts, Known Unknowns, Solid Assumptions, Weak Assumptions that require data, and your Current Progress Against Targets. Second step, given the evidence what trajectory are we on, does that trajectory and our current velocity propel us out of the chasm?

You need to run diagnostics on the state and severity of your Founderitis, right here, right now, especially if the evidence is showing you are not going to make it over the crest. If you are not on the roadmap you set to get out of the chasm, the leadership team has hard decisions to make. Founderitis is triggered by hard decisions. 

Our Startup is on course, we have mapped out rocks and potholes between us and the crest of the chasm. We have a partner at the top that we are roped to adding traction, we have enough capital to provide fuel, we have added talent to increase force, we have stripped off some unnecessary components to reduce drag, there are enough pilots & pipeline in process to absorb some bumps, focusing on keeping the engine turning is the core focus. Execution will keep the engine running. Three months closing on current opportunities and active pilots and we are up and out of the chasm.

There are still lots of risk. We have burned lots of fuel and have stripped off a number of the safety features; if our partner cuts the rope we will overheat the engine and stall.  The roadmap we have drawn is working, we need to keep our heads up for unknown unknowns and execute on keeping the engine running.

The question I worry about is what we will look like on the plateau above us? Will we come over the top and find ourselves on an island? For us this would be total dependency on our partner for revenue. There is also a good chance we will drive right into another Pilot Chasm in order to prove our engine is a standalone solution and not just a feature or our partners’. Good news is that we have a solid assumption that we will earn another round of funding once we exit the Chasm, thus giving us the ability to prepare a boat (to get off the island) or for another uphill climb (out of the chasm).

The key outcome of the process will be that we will have proven our revenue engine works. From there we will need to engineer a repeatable revenue generation process based on the proven use case. If we cannot repeatedly generate revenue on the product, we will have to take stock and iterate the vehicle for another rough and tumble ride through the Pilot Chasm.

The key takeaways:

1. Know where you are and where you are going, they call it a roadmap for a reason

2. Pilots are experiments to determine how your revenue engine should operate; they are not your business model

3. If you are not predictably generating new revenue you are stuck, Assess, Analyze, Act

 

Being an Entrepreneur, the Darkside

“Real glory is being knocked to your knees and then coming back. That’s real glory.” Vince Lombardi

First, pursue your dream, your passion, your goals no matter what. The advise given to all, which usually generates focus and conversation on the potential positive outcomes, the ‘I gonna build an amazing product, and awesome company’ moment. This post is not about that. This post is about the near soul destroying assault that being an entrepreneur is going to launch on your self-worth.

The best startup mentors, advisers, gurus, typically at least acknowledge that building a business is ‘wicked hard’; however, I think there is little attention to the sources and nature of the hard. Yes raising capital, hiring talent, building culture, selling your solution, etc are really, really hard, but there is no lack of good insight and direction on those Rational, Tacit, Process problems. I believe the real hard, the real barrier to success, the stuff that keeps entrepreneurs up at night, is the emotional challenges that happen in the dips in your startup roller-coaster ride. I don’t think we spend enough time as a community helping each other cope with the unique life event that building a company is.

Starting, building, and growing a business is an immersive experience, it becomes the core of your life. When the business is not going well, you are not going well. This affects every other aspect of your life. We (the Startup Community) readily endorse, training, coaching, mentorship, etc to assist each other with the rigors of the day to day of a startup, including taking care of your health through, diet, exercise, family time, down time, etc. I don’t think we talk enough about the emotional work that it takes to empower the success of you and your business.

Here is some stark reality for aspiring entrepreneur. Getting money, whether it be revenue, investment, grants, etc, into your startup will take twice as long as your conservative estimate. Unless you have serious credentials (you had a SR Exec job at a big time company, you did something amazing at an amazing company, you were a key player in a previous successful startup, you achieved an exit as a founder) no one other than friends, family, and fools (the FFF round) will fund your business plan. First timers and the unproven must achieve traction prior to getting investment, traction should first be interpreted as steady MoM revenue growth, second MoM user growth, third you have built an AMAZING prototype. Please do not plan on being the exception to these rules. Yes this produces a catch22, this is the dip, the chasm, the obstacle between you and success.

These periods are IMHO what it really is to be an entrepreneur, and the difference between success and failure here is intensely dependent on your emotional talents. How do you stay confident, fully engaged, calm, cool, and collected in the 1 step forward 2 steps backwards loop? You are 30 days from bankrupt, your friends & family are anxious, your life-partner is stressed, your co-founder is off the rails, your team are looking for jobs, the ship is sinking. Successful entrepreneurs find a way to survive.

Breaking through to the next phase doesn’t happen because the anchor client finally signed, your user acquisition hit a tipping point, you got featured on TechCrunch; it happened because you persevered the emotional turmoil of the period prior to those outcomes enough to do the work that allow those things to happen. Failure to execute is rarely due to a lack of know how (plenty of blogs, books, and people), or skills (possible, but where there is a will there is a way), the failure happens inside you, the Will gives out. You need to train, plan, and actively manage your emotional well being as well as be engaged helping your team do so as well; that my friends is HARD.

Watch http://thisweekin.com/thisweekin-startups/ episode #161 at the very end, after an amazing chat about the block and tackle of startup success, both Jason Calcanis and Fred Wilson finish with the statement “it really is just about perseverance isn’t it.” Two of the biggest icons in the industry truly connect on the pain of their failures and the ability to overcome them that has produced their successes. Gary V and Kevin Rose hit it even harder, its sacrifice, ‘its always hard’, and ‘working your faceoff!’ here. What Gary V hits particularly well and consistently in most of is his content, is the raw straight at you position that building a business is going to absolutely everything you have; your success will be achieved by your passion, guts, and relentless hard work. This is beautifully simple truth. I want to outline a few ways that might help you activate, build and maintain those attributes of passion, guts, and hard work, because I know I struggle nearly every day to so.

I will start with some hard, non-emotional things that will help pave the rocky road out of or away from the hard times that will come in a startup.

  1. Save One Year’s worth of living expenses (at least six months) if you can. Money pressure is visceral and very hard to ignore; its hard to focus on building your business if you are not sure how you are going to pay the bills. Remember revenue and investment capital always take longer than planned and rarely happen in a startup in a sustainable way in year 1.
  2. Align those closest to you, specifically your life partner. No matter, how strong and positive your relationship, a startup is going to put it to the test. Never take your private relationship for granted, for good or ill it is going to impact your business life. Your partner is a part of your team, communicate your needs open and honestly and reciprocate. Two front wars are really hard to win, keep your war at work.
  3. You and your co-founder(s) are married, all the same rules apply. This is an unique business relationship, normal rules do not apply. You need to support each other emotionally not just professionally. Your co-founder’s issues at home are going to affect your business, they will resent not getting sympathy / support when the server crashes at 2am, losing a deal hurts bad talk about how it feels and wait to talk about why you lost. Your startup is your baby, you better have alignment on how you are going to parent it.

In my experience and observation, the truly critical takeaway entrepreneurs have from their failures are the emotional scars. Failure tests your resolve, it trains your reaction to adversity, it exposes you character. Failure informs you mental and emotional models for the next startup. From them you learn how to position yourself, your venture, and your team for better outcomes. I have failed twice in companies that I have founded. Those lessons inform my entrepreneurship everyday, and I am much stronger, effective, and valuable for those failures.