Steve Huey’s Blog

I believe that traditional Venture Firms are competing more and more with Angel Investors and that Angels are helping start-ups receive investmentswith better terms.  Why is this?  Below I list my top XX reasons:

1. Organization & Resources: Angels are better organized and have access to resources previously only available to VC firms.  They have tools like Angel Soft and information more publically available on the internet.
2. Deal Flow:  Because Angels are better organized they share deals and see more deal flow than in the past.  They are also known to have less preditory terms – does “Full Rachet” ring any bells.  Also there is a sense (neither right or wrong) on the part of the entrepreneur that Angels like their name are more trust worthy.  These factors add up to deal flow.
3. Lower Capital Requirements: Let’s face it many businesses need less money to get started and once they are started the same businesses become breakeven or cash neutral quicker.  A recent review of my company’s budget reveiled such a low capital budget that I almost dismissed the whole as inconsequential.  Smart start ups are using shared resources (Amazon for bandwidth, work from home (Starbucks) employees and outsourced everything to get started and only bring things or people on board as they have the cash to pay for them.
4. Sophistication of Angels:  Angels are smarter (for the most part) about how to get a deal done.  There are real professionals who have made their money and are now operating their “mini-funds” instead of buying into a fund so that they can have more control over their investments.  I call them retired Angels and I know several.  They are sharp people who could easily work in a venture fund but instead have “fun” doing their own deals.  To these people I say, “Bravo!”

If you are looking for money – even if it is three to five million try the Angel side of the tracks first.  There are a lot of Angels out there looking for you.  Remember – Good Deals always get funded!

The best saying when it comes to “Cannibalization” is “Cannibalize yourself before someone cannibalizes you!  If I had to some up the single argument which has caused me the most personal anguish cannibalization is it!

Just so we are on the same page – Cannibalization in this case does not mean eating people it has to do with the introduction of a product or service that eats in to a company’s primary revenue stream. 

Many companies have faced this issue in the past – some famously have clung to their antiquated business model or product and rode it into the ground. A few examples: The Recording Industry for not embracing digital downloading; The Movie Industry in resisting but ultimately embracing the VCR; and even in my own career as EarthLink did not want to offer an Email only subscription for fear it would increase the cancellation of people paying $21.95 per month for dial up when they currently had high speed access and were keeping their dial up account only to maintain their email address.  Hey people figure this stuff out!

So what is the problem here?  Why should you embrace new products that could ultimately cost you sales in your primary business?  Single answer is that if a new product comes along or business model that greatly lowers the value proposition of your current product or if the new “thing” adds more value to a certain segment of your current customers, then someone will offer the service to your customer and your customer (at least a portion) will buy it from them and leave you.  Bottom line is that a portion of your clients are gone as soon as the new option becomes available.  The big questions are how many and how soon?

As a leader of a start-up you it is rare indeed that your new business will face the challenge of cannibalization – but if you are selling into a market where your product risks cannibalizing your potential client’s primary revenue stream you need to consider these issues and combat them.

Here are my three steps to confronting/battling those who bring up cannibalization as a reason NOT to adopt your new product, service, or business model:

1. Show that the change will happen and what effect it will ultimately have on the business if adopted by competitors (The Doom Case).  Make no mistake it is not a question of “if” but “when”.
2. Create the financial models to show the impact of new product adoption allowing for cannibalization to occur.
3. Demonstrate or provide a plan on how the business can be changed where by the new product if adopted could boost the business without destroying the entire revenue stream (This is the action plan behind the business case in step two).
4. Give anecdotal examples of how cannibalization issues have affected similar businesses.

A word of warning – this is BIG risk stuff – Do your homework!  In my experience the change usually does not happen as quickly as you think (so you have more time to milk the old model or products) and there is not perfect information (so your customers will not immediately change to the new model or product). 

Also, pray that you are not working for the Encyclopedia Britannica as Microsoft rolls out Encarta where a $1,300 set of books are replaced with a $50 and then free online version offering greater quality.  That spells GAME OVER!

Now that you have your key business driver whether it is subscribers, page views, boxes stored, clients served or product listings, focus on driving that metric.  How do you focus well may I suggest the following five ways:

1. Communicate the key driver and the goal to each and every person in your company.  Every person should know what the key metric is what your goal is and what you attained in the past.
2. Post the goal around your shop – write it out so each team member is constantly reminded of the goal.
3. Repeat the goal and the current status at every function, meeting, or gathering.
4. Ask for the teams help in reaching the goal – they have great ideas ask them to think.
5. Become the walking embodiment of the goal by discussing the goal each day with someone on your team.
6. Reflect on the goal and your plans to achieve it everyday (do this alone in a quiet place and do so by thinking about what you are doing and what could be done).  (Bonus method – 6 not 5 as previously indicated)

You will find that soon the goal will be achieved and you will be setting a new higher goal.  Look you have heard this before so why am I telling you this again?  You are busy – being pushed to your limit with the needs of your company.  You are being pulled in the direction others want to take you.  Stop!  Dig in your heals and pay attention to what drives your company.  Focus and you will reap the rewards of that focus.

What one key metric drives your business?  Every business has one.  A few of mine have been; listings, enrollments, downloads, subscribers.  Notice I did not say; sales, revenue, profits, EBITDA.  Yes I track these too but the underlying metrics move the business forward.

Identify these key metrics and focus on them – set a goal for them make them come alive in the minds of your team.  Make sure that the key driver creates the value for your clients and your business.

One of my mentors tells me that his key metric is subscribers.  No care for revenue as he is building a “Tribe” (if you do not know what I am talking about run out and buy Seth Godin’s book Tribe).  You see he has identified what creates enterprise value for his shareholders (I think he is the only shareholder).

Once you have identified the key value driver focus on it relentlessly  no matter what it is.  Yes you have to watch your cash and your sales and etc etc.  Many people only watch those things and then end up focusing on the wrong value drivers or too many “Key Metrics” and end up creating nothing remarkable.  Google originally wanted to be the best search engine period.  Amazon in the begining wanted to focus on expanding the books it had the ability to sell you.  Jack Daniels focused on distilling whiskey.

Find your value driver and focus on it!

Are you still doing business like you did yesterday?  If so you should stop and think a minute.  Most businesses do not evolve.  How many times do you hear of the little garage business killing the giants?  I will answer for you – all the time. 

It has been said that the sum of all technical knowledge doubles every two years (2006 stat) and will double every 72 hours by the end of 2010.  It has also been said that the sum of all human knowledge doubles every five years (2001 stat) who knows what that time frame is now.  The fact of the matter is that business as part of the human experience is changing so quickly that it is hard for us working adults to remember life before email, the Internet, texting, and social networking.

The only way to address the changing environment is to take a pause from your daily routines – even if you are a start-up and think about how you are doing business and try to understand how your clients are shifting and responding to the change taking place.  Are they changing as fast?  Are they being left behind?  Can you help them change faster?  To help them move faster do you need to change.

One fact is that by doing business the way you did it yesterday will not help you address the needs of tomorrow.

So I hear from time to time that the funding has dried up!  I hear that people can’t raise money for their business – that investors are stingey or that no one understands the potential of a company or an idea.

I think – that is wrong.  I have never seen a good idea or business not receive funding.  In fact the best deals always get money in fact some get more pledged than what they need (which causes different problems). 

If you don’t receive funding it is for one of three reasons:

1. You did not present your idea or business to an investor group that has the right risk profile.  An example would be presenting a life sciences opportunity to me.  I know nothing about life sciences and so I do not invest in them.
2. You did not sell your idea.  Hard to hear but often is the case.  That is why you need a friend – a sponsor or someone that can help coach you on your pitch.
3. Your idea just is not good enough.

So what should you do?  Try to determine which of the three reasons caused you not to receive funding and correct it.  Don’t just hang your head and lay blame at the potential investors feet.  Also don’t go back to that same investor pool unless you have totally overhalled your idea.  It is a waste of time.  Fix It.  Change It.  Practice it.

Good ideas always get funded!

In today’s world Transparency is essential.  Why?  Because transparency builds trust.  Trust is absolutely important in building relationships and relationships are the cornerstone of a solid business. 

Who needs to know?  Your employees – that is easy.  Your investors – that is important.  Your clients – that may be controversial.  It is easy to understand that your employees need to know because you rely on them to help the company grow and reach its goals.  It is important that your investors know what is going on or they will not continue to back your company.  Your clients?  I would put forth that if you keep your clients informed and they really understand how you are doing, they will support you and help you be successful as well. 

You gain transparency by sharing information.  You gain transparency by communicating to your stakeholders.  Communication is the key to transparency!  Try sharing information with all these stakeholders and see how your transparency will build trust, deepen relationships, and help your business grow.

Add more value than you take!

That is it – the secret to all living.  If you can create more value you will get more value.  Think about it – if you give more love you will be loved.  If you are friendly more often – more often people will be friendly to you.

In business you should seek to add value to your clients and partners – if you create a lot of value you can charge a lot of money (capture a lot of value) for your services.  If you run a business that has pricing pressure and you can barely pay your bills then you are not creating value.  EBay created value by creating the world’s largest garage sale.  Sears created value by bringing goods to the American farm families and captured much value fifty years ago only to be replaced by Wal-Mart who created economies of scale value.  Microsoft created value by placing software infrastructure in the hands of programmers and later by placing productivity software in the hands of “Office” workers.

Create more value than you consume and your life, and that of your business endeavor will be easy!

In order for ANY business to take place there has to be some level of trust.  Trust must be established for a vendor to sell anything to a customer, for an accountant to prepare the taxes of a client, for an entrepreneur to raise $1 from an investor.

If you cannot establish TRUST then any business relationship is doomed.  If you lose trust you need to stop everything and repair the situation and once trust is fully lost then the chance of a go forward relationship is largely lost as well.

Work to build it – work to keep it – if you do you will be able to maintain the relationships necessary to be successful.

I recently attended a pitch – the company was looking to raise $2,000,000 from a group of angel investors.  Sounds like a lot for angels to pony up but that is the source of another story.  Any way the company represented by two people in suits looking to be in their mid-fifties or early forties gave their pitch.  They did a good job addressing my five questions but they slipped up one item.

They printed out their presentation on high quality, glossy paper stock and in color.  The presentation was OK and it was given slide by slide in a monotonous way (bad Power Points always exist so let’s look past that part) but what stuck out to me was the print outs of their presentation.  The print outs – which were not really needed ( a good thing sense there were not enough copies for everyone in the room).  Each print out was at least $5.00. 

If you are trying to make a good impression in a room full of angel investors think about the message you are sending by printing out presentations that are not needed in color on expensive paper stock.  Don’t print them out at all.  If you must print, then print them on normal paper and in black and white.  Show your potential investors that you watch your pennies and consequently – if they invest in your company show them that you will watch theirs as well.