starting and growing a successful business

From Gringuito:

Here are a few thoughts about starting a growing business along with a bit of life-advice from someone that's been there.

  • Look for a market that is too small for the VCs (venture capitalists) to be interested in. You don't want to be competing against the kind of money and expertise they can bring to your competitors. Once they notice that you are starting to succeed they will fund a startup to crush you. This would limit the market size of your new startup to somewhere less than $200M. VCs need large markets to make their business model work.

  • Smaller boring markets can be some of the best opportunities. The guy that invented the little plastic dental floss holders, you know what he’s worth? Before he made it big I’m sure it sounded silly at parties saying what company he was starting. Sexy markets mean lots of competitors.

  • Make sure you’re doing something you would do without being paid. If you don’t have a passion for your company, if you don’t believe that you’re making a real difference in the world, you will burn out.

  • Don’t take any money from VCs. They have a business plan to invest in 10 companies, have 8 fail, and have the other 2 be outrageous successes. This is great from them, not so much for you. They want to push you to either fail or to grow to a billion dollar company. Once you take VC money you've sold your company whether you know it or not.

  • Look for a market that is served by one main company and a few smaller competitors. Markets that have an entrenched number 1 and 2 are much harder to break into than a market that has no defined number 2 company. Your job is to become that number 2 company and make life hard for the number 1 until they either buy you out or make a mistake and you become the number 1 in that market.

  • Give your employees skin in the game. This means giving them an ownership stake in the company. This does NOT mean giving them voting shares in the company. The more they feel they have a large payout at the end the harder and smarter they will work for you. Don’t be cheap! They will help you make your millions, as long as they get 7 figures as well. And they will be breaking down your door after you sell to start another company with you.

  • Keep a majority voting block of the company for yourself. You can issue different types of shares in the company, voting and non-voting. Make sure you have 51% of the voting shares. You don’t want to create a company that is paralyzed by a few partners that cannot agree with each other. You need to be the final word.

  • Even though you have the final control it’s important to learn how to delegate. None of your employees will ever be as good or dedicated as you will be at your company. But they will outnumber you and as a group will be able to do more than you ever could. I've seen many entrepreneurs fail at this stage as their companies grow. They try to maintain too much control and become a large bottleneck in the company. Learn to let other people do a worse job than you at the same task.

  • You need to be aware that every entrepreneur has a company size that’s right for them. Some of the people I've mentored love being in the 10-20 employee “like a family” business. Others love the challenge of a larger company like I do. If you outgrow your comfort zone you will be miserable. That’s when it’s time to either hire a management team for your company and stay on the Board of Directors/consultant or just outright sell. You don’t want to be the owner that holds all the employees/shareholders back.

  • Don’t get married. I just had to throw this one in here. You’ll be living and breathing your business for years. Unless you've found a unicorn you’ll be distracted from your business by your home obligations. You don’t need any distractions.

  • Know when it's time to sell. This is an art form but one of the more important aspects of owning a business. You can either run it as a life style business and pocket the profits or sell the company and pocket X years of future profits all at once. So when you sell you get the future profits and the free time to start a new business and repeat the process. This is how you really grow your net worth. Be sure to use a large law firm to handle M & A work, it can get really tricky and people try to screw you often. Don’t agree to a long (more than 2 year) non-compete agreement.

  • Learn investing early. I've seen too many entrepreneurs that are great businessmen but seem to think that they are just as good at other areas. This is a costly mistake. I've seen so many go into dodgy investments after they sell their business and end up broke. Remember that just because you've made money by running a business you are still likely inexperienced in all other areas of life. You never had the time to practice other skills.

  • Don't listen to all the naysayers. You'll be inundated by people telling you how impossible it is. Use that as fuel to keep going forward.

WestCoast Wrote: 1. How do you personally go about finding these fragmented markets?

That's the magic isn't it. I have a knack for seeing markets that way. I know the markets that I sell into like the back of my hand. I know the decision makers in the large companies. That's where the passion comes in. You should already be interested in the market and know who the players are. Have you never been frustrated being forced to use a product that doesn't fit your needs?

(02-24-2014 10:16 AM)WestCoast Wrote: 2. When you are hiring a sales team/call center how are you able to distinguish between good ones/bad ones. Ie: how do you track the right one down for your product/market?

I've had mixed luck with finding good sales managers. A sales director can cost you 5% of your company if they have a good track record in addition to base salary. Often the best indicator is if they've sold into your target market and have a thick Rolodex of previous clients with good relationships. They should be providing you quite a few sales leads as good personal references before you hire them. As you're developing your product you should be in contact with a couple of the companies that you would sell it to. You need to talk to your contact inside the company about the sales people that are selling other products to them. They will let you know who the good sales people are. And they are a good first personal reference.

(02-24-2014 10:16 AM)WestCoast Wrote: 3. Do you recommend selling a service or product first?

A product first, the services should ideally come from the product itself. That helps you charge more for your services since the client is locked in. Services are easier to start with but much harder to scale up since they are very labor intensive. You should always be thinking about how to scale your products/services.

Bad Hussar Wrote: In your experience how much would a competent lawyer charge to look over a VC agreement and advise the start-up's founders?

Keep in mind that I don't use VCs, I'm on the other side of the deal now. But good lawyers cost $450-600 per hour. Depending on where you're located I can PM you a good law firm that I've used with good success. When working with lawyers don't let them control the process or costs will get out of hand. Also, make sure you tell them to use a paralegal for all of the boiler plate preparation. It's an easy way to save money but not affect the quality of the work.

Hef Wrote: What do you know about how tech startups at various levels or progress are valued by angel investors or VCs?

I'm an angel investor so I can't speak about how VCs do it. I really like what WestCoast said about value is important not valuation. When I'm valuing a company I look at it as an investment. What that means is that I'm considering how much money will I tie up for how long with what kind of return and at what risk. For example, say I have to invest $5M into a company and the possible exit is 4 years away. I look at the comparable companies in the market and any recent M&A activity. I look at the total market size and how much of it they want to grab. I really look hard at the management team. Have they raised money before and sold a company before. I like to ask them for references and at least one person they had to fire. By talking to someone they let go you get a more honest feeling for who they are. I don't believe what a fired employee says, it's more about the temperament of the CEO doing the firing. I take all that into consideration and I determine the risk of losing my money or it being stuck in the company for much longer than I would like. I use this to back into what kind of return I need to get from the $5M to justify the investment. From that I get what percentage of the company I need to get that return. This is an overly simplified case just to explain the process. In reality there are normally existing investors by the time the company gets to me and there are other angels as well. We all jockey for position and for our best interests. It's a fun game.

(02-27-2014 11:51 PM)Hef Wrote: What goes on in the room during the negotiations? Are people from both sides friendly or are they cussing at each other?

As WestCoast said it's formal and a bit tense but never openly angry. You both have your group of lawyers and accountants in a large conference room. Sometimes I sit there thinking about how much money I'm spending each minute while all the lawyers argue about some minute wording of an obscure section of the agreement. It's often really fun. Most business owners are great people to be around and know how to use humor to diffuse situations.

anonymous123 Wrote: True that % ownership and degree of control are separate. But, they are highly correlated and control costs more. If an equity investment requires $5mm, I'd rather pay more for control or skip equity and structure as debt. (but, not in tech...I think I'd rather walk if I couldn't take control).

We're in agreement but how would you suggest structuring $5M as just debt? Assume the company is small with negative cash flow and an existing line of credit from receivables. I've seen more of a debt & equity mixture. I encourage you to give your perspective. I'm just one person with just my experiences. My way certainly isn't the only way and most likely isn't the best way. It's fun because there's always something new to learn. I've been trying to give the 30,000 foot view without getting into the details to limit confusion. I've skipped debt as financing but it's really important. In addition, many companies that I see have existing debt and stock structures that have to be fixed to move forward. I haven't talked about how best to structure your company for sale later on (C vs S vs LLC, keeping it clean, basis step-down, agreements for key employees). One big area is scalability. I don't know how may times I'm pitched an idea from an existing company that wants to grow. They give a presentation about doubling the size of this group, tripling the size of the sales team etc. They don't add in the management overhead needed for these new hires. They underestimate how long it will take to get them up to speed and how much disruption to the existing workforce training will take. They don't know how ready the existing employees are to take on management roles. Some of the smaller companies need to learn about EEOC rules as you get larger. Evaluating how a company can really scale up is a big part of determining a good vs bad investment.