Guidebolt

Start-ups

Revised 2018.01.22

Ideation

Prepare the idea carefully. Some ideas try to solve a problem that does not exist. Some ideas already exist now. Some ideas have already been tried before. Some problems have already been solved in a different way. Some solutions are only possible after certain requirements have matured.

Example: Flying cars cannot enter the mainstream market until a breakthrough in self-driving/autopilot technology combined with either low-power aerial propulsion or high-capacity batteries/fuels.

Cost and risk are huge factors that must be evaluated closely.

Example: In concept, solar panels can help homeowners save money on their entire energy bill every month. In practice, whether homeowners save any money at all is dependent on the lifespan of the solar panel, its performance degradation over time, its average performance in the local climate, and the cost of the entire system (purchase, installation, maintenance, insurance). Additionally, an uninsured system bears the financial and operational risk of equipment failure due to malfunctions and weather damage. With a non-grid-tied system, homeowner activity is limited by the system's average power generation over the long-term and its immediate energy capacity in the short-term.

Investors, Fundraising

High-growth start-ups are popularly funded by venture capital investors (VC) and angel investors. These 2 investor types are generally reserved for early-stage businesses that have a trajectory toward an IPO on the public stockmarket or an acquisition by a wealthy company. Accordingly, the businesses that qualify must be headed toward incredible revenue and profit margins. VC firms are known to be ruthless negotiators who try to take large equity stakes in early-stage companies in need of cash. Angel investors are appreciated for their willingness to accept lower yield, sometimes even just graciously expecting to break even. So it is imperative to both avoid getting exploited and avoid meeting generosity with failure. My single key recommendation around fundraising is that you must get as much traction as possible with your own money. It's good for your negotiating position, good for reducing the risk that you'll let your investors down, and good for pushing yourself with a much-needed sense of urgency.

Example: WhatsApp Case Study | Video by Valuetainment

Overall, I see 2 major mistakes happen time and time again from the tendencies and expectations of entrepreneurs and investors. First, entrepreneurs have a hard time balancing their path of growth and their path to profit. New entrepreneurs have a tendency to lean toward making profit, while investors want growth, understandably and often wisely. When companies focus too much on growth, they commit sunk cost into new regions and markets that will not produce a return until much later. This may force the company to be more desperate for cash in the short-term while increasing their total risk. When companies focus too much on profit, they give up on their first-mover advantage, including their early timing for easy market share. This may force the company out of the market as competitors budge in spaciously. Balance is essential. Second, new entrepreneurs have a tendency to waste a lot of money, celebrating their influx of cash and rushed by their pressure to grow. Know that securing investment is indeed a milestone worthy of celebration but by no means is it an excuse to slow down; you can take it easy after you mature the company, achieve sustained profits, and help your investors exit along the way. The value of an experienced advisor can be instrumental in maintaining financial prudence and realism.

Small businesses need to be funded in a more grassroots manner. You always start by investing your own money. Once you have traction you can raise funds from family, friends, private investors, and/or pre-orders. Small business fundraising usually comes as loans because loans have a clear payment schedule and rate of return for the risk assumed by the investor. Small business equity is substantially more risky as the path to return-on-investment and annual yield is precariously dependent on the long-term future of the business. Even private investors who are interested in the long-term upside of equity will often request convertible notes that are loans with the option to convert into equity at a pre-determined ratio.

You really have to consider the perspective of the investor. Generally, they want your business to succeed so they can make money while facilitating a new enterprise that creates jobs and generates value. Specifically, the only way they will be able to make money is if there is a clear exit plan. As an entrepreneur, if you want to develop a good relationship with your investors, you have to think about how you will facilitate a strong financial exit for them while building your business healthily at the same time. Likewise, good investors will try to do the same in kind for you.