Early Stage Funding: Most startups are not highly capitalized. Of course it varies by sector. You are unlikely to
find airline startups with hundreds of thousands dollars in startup funds. On the other hand, a landscaping business can start with a second-hand lawnmower and a few hand tools!
However, a young and growing business can find it tough to avoid running out of money—however big it is. Almost all founders complain that cash is an issue and many crash from its lack—you’ve surely heard the corny expression that cash is king.
You may think you can avoid the early stage funding challenge, if you get external equity investment at the outset. My observation is that, great though equity investment from friends and family (about 38% of startups), an angel investor (less than 1%) or venture capital money (less than 0.05%) may be, help from them may not be in your best interest. In any case, nearly 60% of startups are self-funded.
Funding Can Be From Cash Conservation, Too
Chances are high that without the parsimony that comes from bootstrapping the business, you’ll be profligate with spending and your burn rate will run faster than you can pull in the cash.
On the other hand, bootstrapped businesses often lack the funds to expand at the rate they want. This will hold back spending on marketing and sales or holding off on investment, including hiring, that will propel the business forward.
The first port of call for early stage funding is normally the bank. The trouble is that bank lending officers tend to be reticent about lending to new businesses if they lack both collateral and a couple of years in business. This affects especially those that are expanding rapidly (Reducing Risk to Startup Safely). Even with the support of an SBA loan guarantee.
The best form of early stage funding is your own revenue. Growing sales is probably Job #1 for all early stage ventures. Sales showing up on the income statement are great, but actual cash in the bank is even more important.
New founders are often fearful of hounding their clients for settlement within terms in case they might upset the relationship. If you taken the trouble to establish terms and conditions of business, as well as making them clear to customers at the time of the sale, then what’s so awful about getting them to keep their side of the bargain?
Do not be afraid. If you have built a good relationship with the customer from the outset, then don’t be shy about being clear about when you expect settlement of accounts receivable. Be proactive about reminders, maybe a week before due. If there appear to be issues, then raise them and resolve them early.
Your customer contact is probably not be the person who actually pays your invoices. Perhaps it’s someone in the accounts department, whom you don’t know. Ask the person who gave you the order who it is. Ask when in the month the company does a check run. Do it up front, at the time of closing the sale, every two weeks, or whatever. When you know that, you can make sure you invoice by the appropriate date. Make friends with the accounts payable person, so you don’t have to bug your direct contact.
Early Stage Funding from Cash Flow
At the outset of my first business, cash in the bank was the most significant form of funding, despite nearly running out of it in month three.
That was actually a stark lesson: there came a day when if we did not have money in the bank by the following Monday, the bank would have called in the receivers. Happily, we did have strong B2B clients. I called one of them and asked if we could be paid two-weeks early on a nice chunky invoice. We did not have to ask them as second time—and managed a settlement average of 32 days over the next ten years.
The financial underpinning was our bootstrapped start, which included an inexpensive office above a wholesale butcher, leasing not buying, and many other ways of keeping expenses low.
easier to arrange—not so many hurdles, eg credit worthiness
repayments can be flexible
can be at lower than market interest rates
lenders benefit by helping
risk of differing expectations—lenders and borrowers
risk of tax issues for both parties
mixing business and pleasure can make difficulties
must be based on a promissory note
Early Stage Funding through Convertible Debt
I suggested that angel funding may not be possible or even best for the baby business. However, convertible debt can be a possible route. Convertible debt financing is a loan from an investor (such as an angel) that has a future conversion to equity. The investor gives your startup a loan (like a bank loan), but the outstanding balance is converted to shares in your company at a future date.
It’s only really possible if you intend raising equity finance at a later date. The conversion from loan to equity happens when you do raise equity. Any equity investment in a startup is notoriously hard, because a valuation has to be agreed. There will be either no trading history, only a very short one, on which either side can establish a valuation.
Before you consider this kind of early stage funding, spend $3.99 on an ebook—Convertible Debt—a concise how-to guide for startup founders, from 1×1 Media.
Revenue Based Financing
A revenue-based loan has flexible payment terms, because, as the name implies repayments are based on revenue. Revenue-based loans are not generally available without 12-24 months trading history, and evidence of a steady monthly stream of revenue. The lender needs some assurance that you will have enough income to make your payments regularly. Interest rates may vary between 10-25%.
A revenue based loan does not involve giving up equity, avoids personal guarantees or collateral, but you need to be very careful that the interest rates are not crippling. A service fee may be required. Interest payments will go up or down in line with the business revenue.
There are a few advantages: they involve no dilution of your equity at a stage when who knows what the company is worth. Hence there’s no loss of control when quick decision making may be necessary.
There are those who will suggest factoring, but I’m not a fan, unless you are desperate for immediate cash. It involves selling your receivables (invoiced sales) to a factor at a discount. It is generally only available to B2B startups.
The reason for caution is that discount rates can be steep and since you are selling the invoices, that means that in most cases a third-party will be chasing yourcustomers, thus putting your customer relations at risk, even though you are getting money in the bank quicker than otherwise might be the case.
A better route may be to change your terms of business with shorter settlement periods or by offering discounts for early settlement.
Business Grants, Incentives and Competitions
Business grants and incentives (generally by government bodies or local government), or competitions like business plan competitions can be considered free money. However, you are unlikely to build a sustainable startup if your business plan is predicated on some of your funding being based on these sources of funding, which you may or many not succeed in banking. Incentives offered by cities tend to be time limited and can be voted off by politicians any time.
There is an excellent list of small business grants at Fundera. It also includes those sponsored by businesses. Business plan competitions are great, too, but they tend to be restricted to particular kinds of individual, like graduates of a particular college.
Other Forms of Early Stage Funding to Consider
Crowdfunding: equity crowdfunding is now permitted and flourishing. Reward (seed) crowdfunding involves financial donations from individuals in return for a product or service. There are about 19 times as many reward campaigns as for equity crowdfunding. Equity crowdfunding is exactly as its name implies. See my directory of equity crowdfunding platforms in the US.
Halve Your Startup Budget: Well organized startups will plan and organize a startup budget. Once the budget has been costed and estimated, it will almost certainly be wrong, when reality steps in. So, my advice is to attempt to reduce the numbers by half. It will ensure you only include the things that are essential. The process will ensure a parsimonious, not a profligate approach to the budget, and help to keep cash in the business.
Bank Loans (if you can get one): Under 2% of startups get bank loans at the outset. This is hardly surprising because the bank has no way of assessing their risk—unless you offer a personal guarantee, or your house as collateral. My strong advice is don’t risk your home or your family. Risk the business by all means, but not the ones you love. Avoid personal guarantees at all cost. If you do/can go this route, make sure you get an SBA loan guarantee. There are online lenders that may fit better than banks, but most will want performance data—no good for the first year startup.
Summary: Banks will seek to reassure themselves on Capacity to repay; the Capital that you have invested yourself; Collateral—guarantees you can give the lender, such as pledging an asset, personal guarantee; Conditions—what will the money be used for and what is the business climate; Character—the lender’s impression of you ability to repay (character, experience, references).
P2P Lending: Each P2P lending platform has slightly different rules, but rates are often better than banks. Have a look at Funding Circle, or Lending Club.
Gig Economy, Sharing/Access/P2P Economy, SaaS, Crowdsourcing: You don’t need to own all your assets, nor employ all the specialists that your startup needs in order to function. If you do not use a piece of equipment all day, you can find someone in the same position as you and share it (try yardclub.com). You probably don’t need a bookkeeper full time at the outset, so use an outside contractor (try xendo.com). Small tasks can be outsourced without long term commitment (try upwork.com,or fiverr.com).
Incubators, Accelerators and Coworking Spaces:
Some people confuse these three places. Briefly, incubators are like greenhouses for entrepreneurs: lots of help, introductions, networking, availability of shared or individual space and services at modest cost, with occasional events or courses. An excellent one that you could look at is TechRanchAustin, established by a friend of mine, Kevin Koym.
Accelerators are similar, but generally competitive to enter. They are much more ‘hands on’ and generally provide equity for small holdings in the startup. A first step to know more about coworking spaces, take a look at my Coworking Directory—USA.
I have strong words of advice to any budding entrepreneur seeking early stage funding.
Make very sure that the source of the funding has values compatible with your own. You want a partner, not a supplier. The source whether an individual(s) or an institution/company must be one with you are comfortable.
Sure there must be something ‘in it’ for them, but mutual compatibility is vital.
Startup Strategy is a subject much written about. Many business school professors and strategy consultants like Bain, BCG and McKinsey have built their reputations based on their own models of business strategy.
Personally, I am not a slave to one model or another. Michael Porter, and his Five Forces of Competitive Advantage, is perhaps the most widely cited authority. His hugely significant recent thinking has concerned the concept of building Shared Value. Its focus is on the connections between societal and economic progress, rather than what otherwise seems to be self-interest. This approach makes good sense for those committed to building a sustainable and beneficial business.
The best recent thinking and writing, in my opinion though, is by Richard Rumelt who has been teaching strategy
at UCLA for many years. His book is called, Good Strategy Bad Strategy: The Difference and Why It Matters. Rumelt’s model was central to my own MBA teaching on sustainable strategy. Students still learned about other approaches so that that they could have the best tools at their disposal.
Kernel of Strategy
I like Rumelt’s book because not only is he widely experienced and has worked with many companies on their strategy. He tells many strategy stories from real life and describes his own deceptively simple model to help you understand how to craft your own startup strategy.
Rumelt says the “kernel” of a strategy contains three elements: diagnosis, guiding policy, and coherent actions:
Diagnosis defines or explains the nature of the challenge. Good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical.
Guiding policy deals with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis.
Coherent actions are designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing guiding policy.
Startup strategy has some significant differences to business strategy in general. Too many entrepreneurs try to aim at positive cash flow, sustainable growth, and profitability—right from Day One. This is not a good startup strategy. Using bravado will not cut it. On the other hand, being overcautious doesn’t work either.
The beginning founder does have to be concerned with all three financial measures—cash, growth, and profit, to survive. However, initially founders must stay alive and that’s why cash in the bank is so critical. Without it, no business will survive. Chances are high that your learning curve will be steep, especially in matters of finance.
Startup Strategy often leaves out the question of how it will have the right amount of cash to keep the business running.
About a third of small businesses fail because they run out of cash. This often happens because founders are a) not measuring and forecasting cash flow and b) rushing to focus on profit too early. There are many other reasons for this.
First among them is that their product does not meet a real customer demand. The second comes from not having the right people. One of my two co-founders, for example, decided that the entrepreneurial life was not for him. So he returned to the corporate world within a few months of startup.
The third contributor to cash problems relates to cost/pricing issues. User un-friendly products and an ignorance of customer needs will also contribute to the early end of a startup.
In any case, the new business may not have the right amount of finance available. Notice that I say the right amount. It should neither too much and encourage profligacy, nor too little and create penny pinching. The startup may not be on top of income in a way that will dictate how startup strategy needs to be tweaked.
In my own main business, started in 1982, the base of our startup strategy was built upon the premise that we needed to continually refine our understanding of how our product could meet customer demand. We had three decent contracts signed up on Day One, because we had been testing the product before that. Our policy kept us very close to our customers and we learned from them. At the end of the first year, for example, we set up User Conferences.
We measured several customer related financial numbers, including order intake and sales forecasts. We did not use surveys to keep close to the customers. Our startup strategy style was to spend time with them—and always to listen attentively. In fact we built customer relationships.
Right Startup Strategy at the Right Time
In the first year or two, the startup strategy, should focus should on customers and cash to build the company’s strength (see Customer Lifetime Model). Then, when it looks as though the business will survive, the startup strategy can shift focus to growth. At this stage profits are nice, but still not necessary.
In the third stage of startup development, while not dropping the emphasis of customers, cash and growth, more effort will naturally go to profit. Think about it!
Timetable of Startup Strategy
1. Pre-Launch: Identify Best Customers
what’s your purpose
build your business model1 (how you’ll make money)
write business plan (back of napkin → 50pp + appendices)
leave your desk; test in the market
refine your value proposition2 with experience
how little money do you need, not how much
outsource routine tasks—there are 58m freelancers in America
Smart Technology: How dumb can smart technology be? Many products are described as smart, without fully explaining in what way they can be smarter than the people who use them. The recent Boeing 737 Max crashes seem to implicate the plane’s smart stall prevention software. If true, the product designed to be smarter than the pilot (user) may raise questions about many embedded software systems. The manufacturer may think they are smart, but users can be disappointed, or worse .
I experienced a more mundane example. I purchased a smart technologySony TV, convinced that it would be better than others, because it would connect directly to the internet. Indeed most TVs are now described as smart. However, assuming the smartness of the TV was a big mistake.
Amazon has decided to stop providing HD streaming on my smart technology TV, or so I was told by Amazon’s customer support agent in Costa Rica. I guess they hopedI would buy an Amazon Fire device; a miscalculation, since I bought a Roku. This was the only way to continue watching Amazon Prime, Netflix and the rest.
10 Implications for Founders
Assume that your customers are smart. Thus avoid being too clever by designing products which take over customer decision making, through using smart techology. By all means give them assistance in making good decisions through the provision of software or apps, but do not take over their steering wheel.
Take a detached view about where there are opportunities for partnership with other suppliers that may facilitate positive customer experience. This may involve generosity rather than self-interest—and make smart technology redundant.
If your innovation using smart technology gives you the potential to be exclusive, or even monopolistic, weigh your advantage against value for the customer. The cries for breaking up web behemoths, like Amazon, Facebook & co is not a future that you should risk.
Online services or apps created by startups may put the business at risk. For example, IT smart technology can enable amazing products such as remote doctoring. However, medical consulting online may result in misdiagnosis that would not have happened face-to-face.
Make sure that your offer does not simply include smart technology because it can. Maybe a watch, or an old-fashioned mechanical timer, is a better solution than an Alexa device for cooking times.
Ask whether simple is better than smart. Many products with smart technology have features that are never used. While I may be attracted by them, as an older person, I often find that the so-called smart technology features are overly complex to use.
Reflect on whether smart tech is worthwhile from a customer usability point of view. For example, does it make any sense to download an app for the functionality of a microwave oven. Reading the cooking instructions on the packet saves the extra step.
Consider whether a smart technology addition really makes the consumer’s life better in some way. For instance, my new car is a computer on wheels. When the smart tech fails by telling me something is malfunctioning, it may be that it is not actually happening. It can be that the smart technology has itself malfunctioned. I either worry unnecessarily or ignore the message that appears on the dashboard.
Decide when a well written printed user manual is more efficient than a touch screen. Often instructions on the screen are difficult to follow, or too many options are offered, and produce customer frustration.
Do not forget intuition. A user’s intuition may very well be a more effective input to decision making than an algorithm built into the smart technology artificial or machine intelligence.
Ideas to Help Founders Think Effectively About Smart Technology
As well as the many benefits of smart technology, there are risks, too. Founders would do themselves a favor by reading a lot before jumping into the field. Here are some places to start.
Inequality Immorality: Greed is seldom a motivation for starting a new enterprise. Of course, founders can be selfish, but in the sense that they are seeking self-actualization, auto-determination, personal achievement, autonomy and meeting other personal needs—as well as having just invented a better mousetrap.
Inequality immorality is built into huge differences in salaries between the top and bottom of businesses, especially among quoted companies. CEO pay for major companies in the United States rose nearly 6% in 2017. According to AFL-CIO Executive Paywatch, the average CEO of an S&P 500 Index company made $13.94 million in 2017—361 times more money than the average U.S. rank-and-file worker.
No Justification for Income Immorality
There is no justification for such a scale of inequality immorality. Most macro-economists explain it away by referring to it as a question of supply and demand. There is a growing body of opinion among, even those macro-economists, who suggest that this huge inequality immorality is both unjustified and unsustainable. One of the most vociferous of these is Joseph Stiglitz.
In 2018 book by British economist Douglas McWilliams, The Inequality Paradox: How Capitalism Can Work for Everyone, he states that, “capitalism works best when those operating it have a sense of moral purpose”. This sense of moral purpose must be lacking in an economy where corporate bosses pocket 361 times as much as the average employee.
Inequality Immorality Missing In Successful Startups
At the time Ben & Jerry’s founders sold out to Unilever, their pay ratio from top to bottom was 17 to 1. More founders are taking a position similar to Ben Cohen and Jerry Greenfield. Founders Fund, where Peter Thiel (PayPal founder) is a partner, makes the point that, “the best founders want to radically change the world for the better.” They add that, “if the entrepreneur seeks an impact beyond his own payday and can convince employees of the same, the project is much more likely to get done.” Any company that Founders Fund will consider has to be paying their CEO less than $150k.
“We need to evolve this institution of capitalism so that it is serving the interests of all people and communities, not just the interests of shareholders,” Jay Coen Gilbert, the co-founder of B Lab says in a Fortune magazine article. “We need to reform the institution of capitalism so that ‘in order to maximize profit’ is no longer the driving force and sole purpose of business.”.
Founders themselves generally don’t make a fortune. According to Brandon Evans, 50% of founders make an average of $5.61 an hour. However that’s no reason to expect others to work positively at such paltry pay rates, except maybe co-founders. What they can do is to respond to the implicit challenge of Coen Gilbert and make the changes within their own venture.
Equitable Approach to Startup Employment
Like Ben and Jerry, creators of new ventures can take their own action and frequently do. It’s not just pay, however, that needs to be based on moral principles. To be both equitable and motivating, startup employees salaries have to be matched with dignified conditions and benefits to avoid inequality immorality.
In a recent survey by Deloitte, millennial workers were asked what the primary purpose of businesses should be – 63 percent more of them said “improving society” than said “generating profit.” There is plenty of evidence that startups and relatively new ventures are behaving in ways that the multinationals (by and large) have not woken up to—yet, and before change is imposed. Here are some of them:
More than 8,000 businesses—so far predominantly disruptive private companies such as Allbirds in footwear, Lemonade in insurance, and Beta Bionics in medical devices—have already voluntarily adopted benefit corporation governance.
Many startups are finding ways to involve their employees closely in their products. For example, Airbnb gives its employees an annual stipend of $2,000 to travel and stay in an Airbnb listing anywhere in the world. Vermont based Burton Snowboards (though not exactly a new startup) gives employees season ski passes and “snow days” to hit the slopes after a big snowfall.
Pinterest provides a unique take on the parental leave policy by providing three paid months off, plus an additional month of part-time hours, as well as two counseling sessions to create a plan to re-enter the workplace
A key area concerns maternity and paternity benefits. The United States is the only developed economy that doesn’t mandate paid maternity leave. Rep Cap, a Louisiana B2B content marketing agency, considers the cost of paying for maternity leave is much more cost-effective than losing and trying to replace a vital employee.
Beauty business, Birchbox founded in 2010, offers full health, dental and vision benefits and everyone gets to own a piece of the company through equity
One of the most rewarding benefit investments both for the startup and the employee, is paid personal development. Given their scale, chances are high that learning opportunities go with the startup territory. The advances in education technology and on line learning provide huge opportunities. Innovative approaches, especially through experiential learning, can provide effective returns in maintaining engagement and increasing satisfaction.
My Own Case
Back in my own 1982 UK startup, we did not take an equitable approach to hiring from Day One. However, we progressively introduced ways to deal with inequality immorality, which incidentally, had never been intentional. We developed our people policies from an approach to business that inherently valued the concept of community. Here are some of the practices we evolved. They are in no particular order or relative merit, but may help you think about your own new venturing experience.
Distribution of 10% of pre-tax profit to the community, ultimately through a trust. Members of staff could nominate a local recipient nonprofit, where they themselves volunteered. Staff members were allocated an amount of paid time for volunteering (paid volunteering time has since become pretty common).
Staff whose job required it were provided with a car and did not have to account for milage—except that which was charged to clients when on company business.
As well as four weeks annual leave, the company closed between Christmas Eve and the first day of the new year. Every employee had their birthday as holiday (paid)—we did not view our people as resources, as in Human Resources.
We did not have a fixed founder to employee salary ratio, but we sought to empower everyone through development and each employee had to have a development plan and implement it.
Our hiring policy included all the normal procedures, and we added two things to help in building a cohesive internal community. Firstly, every candidate completed the Myers-Briggs Type Indicator, which was always discussed with them, whether they were hired on not. Secondly, shortlisted candidates were required to make a presentation to a group of existing staff members (every level was invited to attend)
After 11 years we sold the company to its thirty or so employees for a symbolic one pound sterling.
Re-Startup: Startups are new ventures that seek to meet a need through a viable business model for a product, service, process or channel. Chances of success or scalability are increased through innovation. Likewise, the re-startup venture can be built around a new product, process, service, or channel.
The innovation of the re-startup is that it can also involve doing old things in new ways. A re-start is one whose main business involves the prefix ‘re’, whether in the description of the product, process, service, or channel involved.
Most re-starts are also innovative in why they do what they do. A re-startup is almost certainly committed to sustainability.
German chemist Michael Braungart and US architect William McDonough wrote the book, Cradle to Cradle: Remaking the Way We Make Things in 2002. The term, ‘cradle to cradle’ was first used by Swiss architect, Walter R. Stahel in the 1970s, who focused on sustainability, He emphasized the importance of the holistic approach and the economic, ecologic and social advantages of the loop economy.
The term Circular Economy is another way to express the cradle-to-cradle concept of re-startup. However the circular economy, to me implies a closed circle. The alternative term, Loop Economy, sounds less restrictive and allows for fuzzy interruption from a disruptive entrepreneur, who can create a re-startup.
What are the kinds of re-startups that people have created in the loop economy? Here are a few examples that may inspire you.
Re-Cover: All Green Recycling helps clients recycle or reuse their end-of-life electronics and other assets with a no landfill policy while helping to protect the environment. Founded by Carol Jegou, a serial entrepreneur, this BCorp recovers valuable assets from electronic waste, from computers to medical equipment
Re-Cycle: Aeropowder, co-founded by Elena Dieckmann and Ryan Robinson, makes Plumo packaging from surplus poultry feathers, covered with a compostable food grade liner—to replace harmful polystyrene for packaging. They recycle something that otherwise is a waste product.
Re-Hab: Cognitive Therapy is an app from the Learning Corp, for people who are recovering from brain injury due to stroke or traumatic brain injury (TBI), or those with neurological disorders such as aphasia, dementia, and Alzheimer’s. Tens of millions of Americans suffer from some type of brain injury or neurological or speech disorder.
Re-Manufacture: Springfield ReManufacturing Corp (SRC) was established in 1983 when 13 employees of International Harvester (IH) purchased a part of the company that rebuilt truck engines, with $100,000 of their own money and $8.9 million in loans . Their original business purpose was to save 119 jobs.
RePlace: B Corp Plusfoam manufactures a performance-focused alternative to traditional foams, rubbers and plastics—an alternative with zero post-manufacturing waste. They have partnered with Patagonia to create flip-flops that are 100 percent recyclable and can be upcycled into new flip-flops at the end of their life with no reduction in performance.
Re-Purpose: Brave Soles use tires for soles on beautiful hand made shoes – and create a way to help the most vulnerable people in the process. Co-founders Christal and Florence might say that they were upcycling more than re-purposing, since they are taking something and making it better, rather than simply giving something a second life.
If you reflect upon what these example re-startups are about, you’ll realize that they are all reconceptualizing. You may wish to read about other ideas related to restart. Here are some right here on the Venture Founders website:
Startups and Sockpuppets: Founders are crazily busy and may gloss over certain risks, especially when they involve issues with which they are not familiar. The internet is a vital tool for new ventures, but now involves a great deal of shady activity. Startups and sockpuppets are not a good mix, however. But what exactly are sockpuppets, apart from Kermit, the Frog?
On the internet, a sockpuppet is an online identity used for purposes of deception. A digital sockpuppet hides the actual identity of the person running a fake account, just like an actual sockpuppet hides the hand manipulating it. The digital sockpuppet master can control many different fake identities.
I made the physical sockpuppet on the right—in just two minutes. Digital sockpuppets can be created with malicious intent in not many more minutes. Also, they can be replicated fast by ‘web brigades’, or paid commenters working through individual social media accounts. Startups and sockpuppets are not a good mix.
Sockpuppets on the Global Stage
Sockpuppets are accused of election interference in the USA, UK, France and many other long-established democracies. They are blamed for huge disinformation campaigns by Russian sockpuppets, prior to the annexation of the Crimea. Since they are also used to enhance or defame the reputations of businesses and other public persons, startups should beware sockpuppets.
LikeWar: The Weaponization of Social Media, by Peter Singer and Emerson Brooking, shows how the internet is changing war and politics. It is a very frightening book, focused largely on the political and government front. Though not much covered in the book the implications for business and startups in particular, are profound.
As the authors point out, “Like every other technology before it, the internet is not a harbinger of peace and understanding. Instead, it’s a platform for achieving the goals of whichever actor manipulates it most effectively.”
Startups and Sockpuppets—Risks
Startups rely on the internet, but can they rely on the content? There is so much data that startups can use and analyze to their benefit. However, once startups do have the capacity to analyze the data, questions that arise concern the origin of the data and reliability.
Probably the greatest risk to startups comes from reviews, whether on your own site, or outside sites like Yelp, or Amazon, or specialist sites like Trip Advisor, if you are in the travel business. Your own site may become ‘infected’, if the webmaster is not watchful for sockpuppet-written negative, or indeed, positive reviews. Once your business develops an online (or offline) reputation for good or ill, changing it it an uphill battle.
‘Shares’ and ‘likes’ can multiply the impact of both good and bad reviews. In LikeWar, the authors make the observation that, “Social media is extraordinarily powerful, but also easily accessible and pliable.” It’s the pliability that carries the risk.
Startups and Sockpuppets—Counter-measures
The main counter-measure to keep business sockpuppets at bay, is the founder’s vigilance and ensuring that his own staff or contractors responsible for the venture’s internet activity are wide awake to the potential threats. A useful tool for them is to use the Startup Data Reliability Grid.
There is an underlying skill that all founders should develop is to become first-class noticers. I can recall the earliest days of my own business and being fixated on building revenue. It was not that I had on blinders to everything else, but I knew that I had to be single minded about positive cash flow.
Startups and Sockpuppets—Implications
The biggest implication of startups and sockpuppets for business founders, is to exhibit and instill the highest standards of integrity and honesty themselves. It is as though the darker aspects of the internet taunt business founders to demonstrate their commitment to the highest standards and ethical behavior.
I suggest that you read one or two key texts on ethics issues confronting the startup. A good place to start is the Markkula Center for Applied Ethics article called, A Good Start: Ethics for Entrepreneurs. It describes eleven key steps for founders to take. A concern for ethical behavior does not require a diversion from survival— the main business in hand.
Founders of new ventures today take action. They do not wait for the rules to be changed by government, they are themselves rewriting the rules of business. Startups and sockpuppets are just one example of unethical behavior in public life. Entrepreneurs have a moral responsibility for leadership in and business and social environment—and they are taking it.
In the LikeWar book, the very last words are “You are now what you share. And through what you choose, you share who you really are.” Although the two authors are both defense experts and their message is mainly for politicians and governments, entrepreneurs will ignore the statement at their peril.
* sometimes referred to as ‘trolls,’ (hostile behavior by Internet users to make others miserable).
Spin Out Startup: the experience of three women who created their startup from the ashes of their former employer’s business seemed courageous back in 2014, when it was launched.
Brattleboro Hearing Center is a spin out startup from a bankrupt business—the Austine School for the Deaf. Many schools for the deaf have closed their doors—partly due to the development of cochlear implant surgery, and partly due to mainstreaming of students with special needs into public schools, resulting from the IDEA Act of 1975 (Individuals with Disabilities Education Act). One of them, the 100 year-old Austine School in Brattleboro, Vermont, went bust and closed it doors in 2014. However, the audiology department was still vibrant and had many adult clients in the community.
Its manager and two audiologists saw their business opportunity and seized it. Their spin out startup co-founders learned many things very quickly as new entrepreneurs. In order for their clientele to find them they placed ads in the local newspaper with pictures of their familiar faces. They made sure to mention that they were formerly known as the Austine Evaluation Center.
In the Austine days, they had been shielded from the realities of business, and though they produced a budget—an annual chore—they had no idea whether their activity was a profit or a cost center. Such things did not really concern Kim Messer, Alex Tully and Sarah Moore. What did concern them though, was their devotion to their clients, of whom I was one. Their service to the deaf and hard of hearing was what mattered. A spin out startup was the obvious way forward.
Priorities and Funding
They were unlike a startup without any customers because the spin out startup had a big list of existing customers. As a consequence, their funding requirements were not huge, though the three co-founders did invest a small amount of capital and took out a loan to finance the equipment the spin out startup needed.
Once they got their hands on the financial numbers, they realized that they had been making a significant positive contribution to the school’s coffers. Theirs had been a profitable endeavor. Now, with no support, they had to fly on their own, literally because when the school went into liquidation, they were obliged to vacate the premises. They quickly found new premises in a building belonging to another nonprofit. They re-opened for business as an S corporation, two weeks after the closure of the school.
Naturally they selected the best evaluation equipment and hearing devices, but above all their purpose was for their clients to have improved hearing. They did not describe this as ‘customer satisfaction’. It was not some kind of corporate policy—it came from their hearts. The satisfaction for them was to see lives transformed. Their spin out startup related to clients as people, not as revenue sources.
Not only did they maintain their previous clients who remained loyal, like me, as a result of the warmth and caring nature of their services, but they also attracted many new ones, now that they were free to promote themselves.
Remaining True to Values
When I asked them if they behaved differently as entrepreneurs than they had as employees, Kim answered by saying, “Yes and no. Our philosophy has not changed. We still believe in transforming lives. Especially since it’s been medically proven that cognitive abilities are impacted by hearing loss. On the other hand, it’s hard to be a successful business, without your eye on the bottom line which we never had to worry about before.”
The spin out startup split ownership equally between the three founders, since all three were vital to success—Kim the manager, and Alex and Sarah, the audiologists. They confide that there’s lots of financial management necessary now that they own their own business. “We have attended meetings around making our business successful—learning about KPI’s and stuff like that. However, it was really pretty easy to do the spin out start up. We basically consulted a lawyer to check on the right kind of business to start, we filled out the appropriate forms and ‘tada’, we were business owners.” Kim adds, “I had some experience with the financial end of things, as my husband used to own his own business, so that helped.”
Not Many Things Changed
I asked Kim if they had altered much in pricing policy and other business practices after the spin out startup, but by and large they only changed a few things, such as charging a small fee for walk-in service. Since they had already been working together for some time as a team and shared the same philosophy, the transition was fairly smooth. She commented, “As usual in life, communication is essential. Though we don’t always agree, it’s nice to have an odd number as a tie breaker.”
What has changed though, is that it’s definitely more rewarding to be your own boss, they say. “We are no longer a cog in a giant wheel that you had no say in. We are no longer overlooked. It’s much easier to implement changes that are beneficial for your clients and your business.”
The co-founders of the spin out startup stress that their big advantage was that they had already worked together (well) and had common values. Their only caution maybe, is that if they’d had a bit more business experience, they might have been quicker off the mark with the necessary paperwork to open for business. Then they might not have had to vacate the premises of the bankrupt business, which put the space on the market, only to move back later, once they were established and their previous location had new owners.
For Kim, Alex and Sarah everything coincided nicely and, if they had not acted, they would have been on the job market. So long as the Austine School existed, the team would not have seen themselves as a business, or even a business center of the company. They were not ‘intrapreneurs’. On the other hand, apart from timing and opportunity, they had the essential ingredients for starting a new venture: passion for the product, experience of delivering it, a ready market, and a proven team—with a bit of chutzpah. A spin out startup probably needs that.
A Wider Message: a Business Within a Business
I would not recommend that all those working in companies headed for bankruptcy should do a spin out startup from the ashes of the old one. Indeed, the bankruptcy of an employer and impending layoffs might be just the wrong spur to become an entrepreneur.
In fact the term ‘spin out startup’ is normally applied to two rather different situations:
Innovators within an academic institution seeking to commercialize their invention (or for the institution to realize their ‘investment’);
A big corporation that seeks to unlock the value of an embedded division or subsidiary, or to allow the parent to focus on their core activity, sometimes called a spin off.
In these two cases, and particularly in the first, there tends to be a lack of all-round business skills. This leads to a steep learning curve of those involved, or the import of people from outside who already have the missing abilities.
Strong Customer Base
On the other hand, as in the case of Brattleboro Hearing, if the customer base is intact and well-defined and the people in the ‘business within a business’ amount to a team with most or all of the relevant skills, then a spin out startup is easier to achieve. This is particularly so when the following conditions exist:
the spin out startup sells services, which are notoriously difficult to value;
the parent is facing bankruptcy and is in a weak bargaining position;
the staff would otherwise leave the business anyway;
there is no dissuasive contract, such as non-compete, in place;
Rewriting the Rules of Business: Most governments support the existing unreasonable and unfair way we organize our community social and economic affairs. On the other hand many new venture founders are making change happen, without waiting for the system to be redesigned. They are supported and goaded into action by many writers and activists. Outstanding among them is the Nobel prizewinning economist Joseph Stiglitz. His 2016 book, Rewriting the Rules of the American Economy, stresses that “Wealth begets power, which begets more wealth.”
The Stiglitz agenda for taming the top and growing the middle should suit both right and left in politics, because the ultimate beneficiaries will be all of us, rather than the present system, which favors a minute minority. “The vast majority of Americans—not just the poor—are deeply worried about the basics: getting their kids a decent education, bringing home a paycheck that can put food on the table or pay the bills, saving enough, so that one day they can retire,” he says.NN
New Entrepreneurs Leaders of Change
Too many of us abdicate responsibility and are leaving it up to politicians to ‘fix’ the problem. What’s interesting to me is that a new breed of business founders are not waiting for ‘them’, understanding that we all have to make our own future. There is actually no battle between socialism and capitalism. There is no ‘us’ and ‘them’, we are all mutually interdependent. This interdependence is why, for instance we all contribute to roads, education, defense, and policing.
New entrepreneurs are the leaders of change resulting in the rewriting of the rules of business. Politicians will catch up eventually. One example is the creation of new forms of company structure. Many States have enacted new legislation of different forms of corporate entities. The L3C is a legal form of business entity in 12 States so far that bridges the gap between nonprofit and for-profit investing by providing a structure that facilitates investments in socially beneficial, for-profit ventures by simplifying compliance with IRS rules for program-related investments, a type of investment that private foundations are allowed to make.
Outcomes, not Output
If we burden our professional workforce with insurmountable student debt burdens and, as employers, we don’t help pay for education of our people, or we fail to empower workers to participate in the decisions that impact them, we all lose. The measurement of success should not simply be about output, it should focus on outcomes as well. Piling up assets in the hands of few is a road to ruin.
New entrepreneurs tend to be much more aware of the downstream consequences of business actions that do not produce value for all stakeholders. They are better equipped to assess impact of their actions upon others. They also are aware that being concerned with mutual benefit is likely to produce better benefits for themselves, too, as they one-by-one rewrite the rules of business.
The US-based B Corporation movement is a strong force in support of purpose-driven ventures and is now operating in 60 countries. Certified B Corporations are a new kind of business that balances purpose and profit. The biggest drive is through smaller and entrepreneurial ventures, though now the movement is spreading to the corporate world (I should declare that my own company was a founder BCorp in 2012). They are required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment. This is a community of leaders, driving a global movement of people using business as a force for good.
An outstanding example of a BCorp is Rhino Foods, founded in 1981 by Anne and Ted Castle, a specialty ice cream novelty and ice cream ingredient manufacturer in Burlington, Vermont. I heartily recommend any potential new venture founders should at least look around their website to get a sense of how entrepreneurs are rewriting the rules of the economy—undercoming, rather than waiting for the politicians to come to their senses.
Inequality is a Choice
Founders of new ventures are fortunate to have much greater freedom to choose the way they lead and manage their enterprise, than established businesses, whose norms have become entrenched. Founders can simply declare that there will be a limit to the disparity between salaries at the top and bottom of the enterprise, or they can have a policy of no gender discrimination in salaries—and in doing so they are actually rewriting the rules of business.
Aristotle argued that the richest Greek should have no more than five times the wealth of the poorest person, and during the second world war, Franklin D Roosevelt proposed a maximum income of $25,000 (about $365,000 in today’s money) with a 100% tax on all income above that. Politicians have done very little to intervene since then, though Obama introduced the idea that big companies should publish their pay ratios. Progressive income tax policies are not vote catchers.
Greed puts the capitalist system in danger and is not a necessary ingredient of entrepreneurship. Indeed, chances are high that greedy founders will trip themselves up and find themselves alone. Pursuing the interests of all partners in the progress of the venture will pay off better, as well as contributing to the common good.
Economy for the Common Good
More and more businesses in Europe and Latin America are adopting the Common Good Matrix, version 5.0 of which is shown here:
It is interesting to know that many founders build their ventures on the basis of the underlying ethical stance of the Common Good Matrix, without formally using it to evaluate the performance of their enterprise. For those who do want to build their business to embody this ethos, there is lots of help available (follow the link), including a balance sheet and more. The Common Good Matrix is one of a number of proposals for systemic change developed at Economy for the Common Good, based in Austria and now expanding across the world—and contributes to rewriting the rules of business.
The ‘undercoming’ of the system by action at the corporation level, like the BCorp or the Common Good Balance Sheet are underpinned by other organizations and nonprofits like the Next System Project, an initiative of The Democracy Collaborative aimed at bold thinking and action to address the systemic challenges the United States faces now and in coming decades.
Systemic change is also impacted by direct business action and also by nonprofits like The B Team—a nonprofit initiative formed by a global group of business leaders to catalyze a better way of doing business, for the wellbeing of people and the planet. As they say, “Civil Society alone cannot solve the tasks at hand and many governments are unwilling or unable to act. While there are myriad reasons we’ve arrived at this juncture, much of the blame rests with the principles and practices of ‘business as usual’.” These leaders, inspired by the BCorp movement, are committed to rewriting the rules of business.
These organizations are among many that see the deep and fundamental issues identified by Joseph Stiglitz and many others, and the need for us all to be committed to deep change towards inclusion and interdependence in explicit ways—creating an economy for the common good. However systemic change will not happen without each entrepreneur making progressive changes that they can within their own enterprises.
To help you consider your own entrepreneurial leadership and strategy, you may find it useful to read some other pages of this website:
Founder Compassion: You will have heard that having a focussed passion for delivering benefit is a paramount quality for successful entrepreneurs, but not about doing so compassionately.
Developing a compassionate approach to business may seem like strange advice for creating and developing your new venture. However, to attract both colleagues and customers, you will do better through compassion than command and control. New entrepreneurs exhibit a tremendous capacity for being aware of the world around them. It may even have been part of what drove them originally to want to start a venture, having spotted an opportunity that others had missed.
Commanding and controlling types often exhibit detached impatience with others, as well as prejudice and discrimination. Founder compassion results in greater commitment from colleagues and permeates the startup’s culture, which in turn will engender better results1, being awake to issues that confront not only their colleagues, but also customers—and greater humanity.
Entrepreneurial success is built through team efforts, which in turn depends on commitment. Even a solopreneur depends on a virtual team of people providing support. Leading a cohesive and effective team requires shared responsibility and goals, through mutual encouragement.
Without compassion a founder will be blind to the needs of others, so narcissist business founders don’t get very far, since they lack empathy, or even awareness of others. The more a company grows, the more it depends on collaboration. Self-esteem is great, but everyone in the company can’t be above average. Too many inflated egos will tend to clash, with conflict also leading to negative results.
Empathy Leads to Founder Compassion
Empathy is very important to founders, since they must understand the people that surround them and upon whom they depend. Empathy involves seeing the world from the perspective of the ‘other’ and fostering a vision of a better world for all.
Founders whose only goal is profit, especially for themselves, are notorious losers; selfishness and entrepreneurship don’t go together well (I am not talking about revenue, the lifeblood of a business). Obsession with success as measured by profit, and never getting enough of it, is likely to occlude the ability to learn—from mistakes as well as successes. Entrepreneurs should stay learners, and chances are high that through empathy, will learn from others.
Empathy also leads to compassion, which motivates people to go out of their way to help the physical, mental, or emotional pains of others. However, it starts with self-compassion, which is especially important for founders, given their frequent propensity to feel they are doing it all on their own.
Self-compassion Yields More Than Self-esteem
Self-esteem, you might think, is a necessary condition to transform an idea into a business, because you appreciate the opportunity better than other people. However, without other people, your dream will never see reality and overblown self-esteem will blind you to the contributions of others.
Self-compassion helps the founder acknowledge personal shortcomings and enables being nice to self, alleviating the naturally arising fear and isolation when plans are thwarted. Personally, I always neglected self-compassion, even though I felt I had founder compassion—and the neglect led to an enormous amount of personal suffering. Even after ten years of being in business and with 30 colleagues, I felt huge pressure to be the ‘big provider’, making the most sales of anyone in the company, never cutting myself any slack. Not something I even repeated.
When the founder is self-compassionate and individual frailty is accepted, chances are high that an appreciation of the wider society around her will follow and enable acting in a much more mutually beneficial way. Founder self-compassion involves an awareness of personal pain, but it does not stop there. Just as with compassion for others, it results in a desire to change. Kristen Neff 2 says, “Unlike self-criticism, which asks if you’re good enough, self-compassion asks what’s good for you?”
Founder Compassion is Good Business
What’s good for you as a founder will also be good for the venture, too. Kristen’s research is relatively recent, but the concept is not new. Even in the nineteenth century, Leo Tolstoy said in his Calendar of Wisdom, “If you see that some aspect of your society is bad, and you want to improve it, there is only one way to do so: you have to improve people. And in order to improve people, you begin with only one thing: you can become better yourself.”
Kristen’s research results question whether self-compassion necessarily leads directly to being more compassionate towards others. However, as a veteran entrepreneur, I have noticed that introverted founders (Richard Branson, Bill Gates and Warren Buffet, are examples and the links will tell you more) tend towards compassion, as can be seen by their behaviors.
A last thought from the Dalai Lama, “If you want others to be happy, practice compassion. If you want to be happy, practice compassion.”
Founder Compassion is Viral
Founder Compassion is viral, because it is so public and information travels fast in the social networking age. People learn very quickly about those companies who practice compassion, and since the message is pretty compelling more and more founders behave that way naturally. Government and the institutions did not mandate it, or even lead the way.
We hear a lot about hacks and other bad things that happen in this instant communicating world, but the good things have a viral life too. So we have good piled on good, as for instance CauseBox—who deliver hand-curated socially-conscious products for women four times a year. Each product has a story that makes the world better and they tell it with each delivery.
Further Reading Concerning Founder Compassion
Other Insights and Reflections will give you related, but different, ideas around what it takes to lead a startup with founder compassion:
I I saw this in my own startup, where people sought to join the company, not only on account of what we did and salaries we paid, but also because the inclusive culture was attractive and motivating.
2 Author of Self-Compassion: stop beating yourself up and leave insecurity behind (William Morrow, 2011).She is a pioneering researcher into self-compassion and teaches at the University of Texas at Austin. You can test how self-compassionate you are on her website: http://www.selfcompassion.org.
“Entrepreneurship is the ability to create and build something from practically nothing,” says my hero, the late Jeffry Timmons.
He says that, both in the best founders’ reference book, New Venture Creation (‘both epic in scale and exceedingly practical’, says Inc magazine), as well as in his short gem of a book, The Entrepreneurial Mind.
For anyone contemplating a startup, I recommend The Entrepreneurial Mind as an essential read. At under four bucks, a second-hand copy from abebooks.com might be your very best initial startup investment. The book was published in 1989, and apart from a few dated references, it is equally valid 30 years later.
Jeffry was an outstanding academic and teacher of new venture creation, but he knew it from the inside, not just the classroom. He was an early investor and active participant in Venture Founders, Inc, a Boston-based venture capital company—the one whose name my own business now has. I first met him as a participant in a seminar for startup hopefuls in 1981. We worked three long weekends and learned a huge amount about the startup process.
As you sit dreaming and scheming about your amazingly unbeatable business model, there’s a tendency to get caught up in wonders of what you’re going to offer a startled world. Jeffry brings you back to reality and the nitty-gritty of what is really involved from a personal point of view.
He says that one of the principal aims of the book is, “to expose you in depth and in breadth to the nature, peculiarities, and realities of the entrepreneur and the entrepreneurial role. At a more practical and personal level it is aimed at helping you to evaluate thoroughly your attraction to entrepreneurship and the fit between you and the entrepreneurial role and its characteristics.”